IPAMS Lunch & Learn Facing Uncertainties in the O&G Business December 18, 2007 Denver, CO

1. IPAMS Lunch & LearnFacing Uncertainties in the O&G Business December 18, 2007Denver, CO Presented by: Jay Still

2. COGA Organization COGA BOD Jay Still - Chairman COGA Executive Committee Meg Collins COGA President Jill McClure COGA VP Administration Company GA Reps Outside Legal Council – Ken Wonstolen COGA Lobbyist – Jim Cole Regional Reps Lobbyist Company Legal Council COGA Conference Marketing / Membership Business Administration 300+ Member Companies 38 Board Members 10 Executive Board Members 85% CO Production and annual capital invested

3. Domestic Natural Gas Production 1980 – 2006

4. Lower 48 Projected Natural Gas Production (Tcf) Rocky Mountains Gulf Coast Mid-Continent Southwest Northwest West Coast 1990 1995 2000 2007 2015 2005 2010 * Source: Dept. of Energy, EIA; Released: January 2005 Focus on the Rocky Mountains

5. Uranium 0.007 Coal 0.8 Minerals 1.5 1.2 Oil CO2(0.200) 8.1 Natural Gas 2005 ($ Billions) Distribution of Colorado Mineral & Energy Value

6. Denver/Julesburg Basin (Conventional) 520 MMcf/d 41% 7-yr production growth 20 Rigs Piceance Basin (Tight Sand) 1,100 MMcf/d 341% 7-yr production growth 60 Rigs Denver Raton Basin (CBM) 320 MMcf/d 61% 7-yr production growth 0 Rigs (Colorado) San Juan Basin (CBM) 1,200 MMcf/d 94% 7-yr production growth 15 Rigs Gas Prone Area Oil Prone Area Source: Colorado Oil and Gas Commission Primary Colorado Oil and Gas Basins

7. 2007 Oil & Gas Economic Impact Analysis • Total economic output: $22.9 billion or 6.1% of the total gross state product (GSP) • Tax revenue earned by state and local governments (production and equipment): $640.5 million • Total employment (direct, indirect and induced): 70,000 workers • Average earnings per worker due to oil and gas activities: $60,881 • Personal income taxes paid to State government:$117.5 million • Total business and personal income taxes paid to state and local governments:$870.5 million • Total private mineral royalties and lease payments: $808 million

8. Coal Hydro 750% or 19%/yr Nuclear Natural Gas Oil World Energy Consumption

9. Rocky Mountain States Resource Potential

10. Coalbed Methane • Vance v. Simpson – District 7 Water Court • Holding – A coalbed methane operator is diverting water and putting it to a beneficial use when it dewaters a coal seam to free the natural gas • Status – on appeal to Colorado Supreme Court • Implications – doctrine of prior appropriation “first in time, first in right” • A CBM Operator will need to obtain a well permit • What type of water is being diverted – tributary, nontributary, not nontributary • Application to State Engineer’s Office • Determine water source • Is the water source over appropriated • Over appropriation = no well permit • Step Two - augmentation plan filed with water court • How will the applicant introduce new water into the watershed • Expensive and lengthy process • Legislative Action • Legislation expected regardless of Colorado Supreme Court Decision • Balance between senior water rights and CBM operators • Basin wide approach vs. well by well • Industry Efforts • Colorado School of Mines Study

11. COGCC RULEMAKING PURSUANT TO HOUSE BILLS 1298 & 1341 • House Bills 1298 and 1341 – passed in 2007 Legislative Session • HB 1298 – COGCC directed to develop a notice and consultation process with DOW to minimize adverse impacts to wildlife and habitat • HB 1341 – changes the mission and composition of the COGCC • Oil and gas production must be balanced, consistent with the public health, safety and welfare, including the environment and wildlife • COGGCC membership increases from 5 to 9 • 3 with technical understanding and/or experience in the industry • 1 environmental or wildlife • 1 agricultural background and royalty owner • 1 with soil conservation or reclamation • 1 local government • Executive Director of DNR • Executive Director of CDPHE • COGCC to promulgate rules, in consultation with CDPHE • To establish a timely and efficient procedure for review of APDs • General Assembly, acting by bill, shall review the rules promulgated and reserves the right to alter or repeal

12. COGCC RULEMAKING PURSUANT TO HOUSE BILLS 1298 & 1341 cont… • General Assembly may, acting by bill, extend the deadline to promulgate rules until July 1, 2008 • These rules must not go into effect prior to legislative review • Rulemaking • COGA preliminary comments sent to Department of Natural Resources • COGA comments are tough but fair • Statutory directive exceeded with respect to achieving a timely and efficient process for APD • New Form 34 • Pre-filing consultation • Open-ended, multi-stage procedure • Duplicative in nature • Expands permits process to “oil and gas operations” • Gathering lines, pipelines, marketing • Preview draft unworkable and will result in: • Permitting delays, debates and appeals over conditions of approval • Increased costs to industry and state agencies • Reduced oil and gas activity in Colorado

13. COGCC RULEMAKING PURSUANT TO HOUSE BILLS 1298 & 1341 cont… • Other Concerns • Comprehensive Development Plans and Geographic Area Plans • CDPHE/DOW consultation rule rather than the exception • Where surface density thresholds exceed 1 well pad per 160 acres • New administrative standing for adjacent landowners • Impact on small operators • Complex, uncertain procedure which disrupts continuity and predictability of drilling, production and leasing in Colorado • Oil and gas industry is cost sensitive and capital intensive • Solutions • Rule changes must be informed by sound scientific data • COGA is committed to working with the COGCC on these issues

14. Odor Management • Production activities in areas of the Piceance Basin are generating numerous odor complaints • This problem will be a focus of the upcoming COGCC rulemaking to implement HB 1341. Under the “preview draft” of the rulemaking proposal, new setbacks and control measures would be required for gycol dehydrators, produced water pits and tanks, and gas flares within ½ mile of occupied structures • These controls may be incorporated into a new air quality permit for oil and gas facilities • Expect increased enforcement directed at oil and gas facilities based on the State’s existing odor limits

15. Air Toxics • Groups such as the Oil and Gas Accountability Project, the Natural Resources Defense Council and the Endocrine Disruption Exchange are alleging that oil and gas activities -- especially produced water disposal and flowback operations associated with fracing – generate exposure to toxic compounds • Allegations were recently made to a congressional oversight hearing by four witnesses from Colorado • Exposure to oil and gas emissions is being blamed for everything from nose bleeds to cancer to psychological disorders, such as “multiple accent syndrome.” • Pursuant to the HB 1341 rulemaking, COGCC is planning to enter into a memorandum of understanding with CDPHE to initiate new studies regarding the potential direct and cumulative impacts of oil and gas activities on public health and air quality • This may include toxicology and epidemiology studies. COGA has assembled its own task force to examine this issue, and has retained expert assistance • An early outcome of the rulemaking in this area is likely to be a requirement for disclosure of all chemicals employed in every phase of oil and gas development, notably frac fluids

16. Severance Tax

17. Severance Tax • COGA does not support a severance tax increase • TABOR implications - any tax increase must be put to a vote of the people • Colorado’s tax structure is locally focused • Allows local governments to collect dollars that go back to communities impacted by oil and gas production • Colorado’s tax policy is uniform and equitable • Operators pay state severance tax, state income tax, state sales tax and local property tax • Colorado cannot be compared to other states • Different tax structures and royalty payments. • Critical Issue – How is the current money being spent • A severance tax increase cannot be considered until the State determines the proper distribution of severance and FML revenues • Senator Chris Romer “Its been like Santa Claus leaving a gift under every kids tree” • Senator Josh Penry “This program has funded more than its fair share of rec centers and other dubious projects”

18. Severance Tax • Severance Tax Interim Committee – Senate Joint Resolution 07-042 • Three bills proposed • Concerning the distribution to governments of the state revenues derived from mineral extraction within the state. • Technical cleanup on use of DOLA funds  • Concerning appropriation operation account monies to the Colorado Division of parks and the Colorado Division of Wildlife   • Adds the Divisions of Parks and Wildlife to the guaranteed money from the Operating Account. • Concerning an option for payment of severance tax liability for mitigation of mineral impacts. • This is a “pay it forward” bill to allow companies that owe severance tax to get a tax credit against their severance liability for helping to fund a local project.  • Federal Mineral Leasing Redistribution Bill • FML $$ expected to increase • Proposed bill is a work in progress • Caps distribution for current recipients at 2007 levels with inflation adjustment • Expected to include bonding for local government and higher education • Remainder to go in a permanent trust fund • COGA has always been engaged on these issues and will continue to do so

19. Regional Haze • Oil and gas controls are not on the docket for the upcoming Colorado air quality control commission hearing later this week (12/20-21). • The hearing will ratify “best available retrofit” controls on a limited set of older major stationary sources • The division is asking the commission to approve its “long term strategy” for the next round of emission reductions designed to achieve natural visibility conditions in Colorado's “class one” national parks, monuments and wildlife areas • This next round will include examination and imposition of “presumptive controls” on oil and gas “area sources” – well site engines, tanks, piping, drilling rigs, dehydrators – and compressor engines • COGA and IPAMS, in joint filings, is asking that: • Consideration of such controls be deferred until the completion of the IPAMS/WRAP (Western Regional Air Partnership) “phase III” oil and gas emission inventory in late 2008 • Imposition of controls be evaluated with respect to actual visibility improvements. the division is opposing both of these requests.

20. Ozone • Denver was recently designated as a “nonattainment area” for the EPA ozone standard (based on one reading, at one monitor, of one part per billion above the standard) • Colorado must revise its “state implementation plan” (SIP) to incorporate a plan to come back into compliance. This task will be greatly complicated if, as expected, EPA lowers the ozone standard next spring. • Producers in the Wattenberg field have already spent approximately $30 million to install over 2500 emission control units (mostly flares) without any appreciable effect on ozone levels • This is largely due to the fact that the volatile organic compounds emitted from condensate tanks do not readily convert to ozone • These controls have, in effect, rolled back emissions from the wattenberg field to 1973 levels • A coalition of local governments (Denver and Boulder) have allied with environmental groups to advocate for raising the emission control level from 75% to 95%, along with replacement of pneumatic valves with “low/no bleed” devices, and institution of “green completion” practices • Industry will be supplying updated emission inventory under the wrap phase III project in time for the data to be incorporated into the modeling (source attribution, sensitivity) that will inform the rulemaking, scheduled for the fall of 2008 • COGA and affected producers are participating in the discussion of control strategies in a stakeholder process under the regional air quality council (RAQC)

21. Other • Regional Air Quality • The industry can expect that pending federal resource management plans will include a requirement for analysis, including modeling, of cumulative impacts on regional airsheds • COGCC is proposing similar cumulative impact analysis for specific fields such as the Piceance and Denver Julesberg basins • Sage Grouse Listing under endangered species • Re-assessment of oil and gas properties/equipment values • Roan Plateau

22. Conclusions • The industry lead by COGA is stakeholder and is here at the table to work constructive solutions • We care about: • The Environment • Wildlife • Public Health • Safety • What lays in front of the industry is uncertainty • Businesses need to know the rules to operate under • We are charged to protect our investors and investments • Policy needs to be based on real science and fact, not political gamesmanship & minority opinion

23. Contact Information Jay Still Executive Vice President – Western Division Pioneer Natural Resources 1401 17th Street, Ste 1200 Denver, CO 80202 303-298-8100