OIL & GAS DEVELOPMENT AND UNITIZATION LAWS IN VARIOUS STATES

1. OIL & GAS DEVELOPMENT AND UNITIZATION LAWS IN VARIOUS STATES MARCH 2010

2. INTRODUCTION RULE OF CAPTURE VS CORRELATIVE RIGHTS

3. RULE OF CAPTURE • LANDOWNER MAY PRODUCE OIL & GAS UNDER HIS PROPERTY WITHOUT REGARD WHETHER HE DRAINS HIS NEIGHBOR’S PROPERTY AS WELL • NO LEGAL LIABILITY UNLESS WASTE RESOURCE OR DAMAGE RESERVOIR

4. CORRELATIVE RIGHTS • EACH OWNER IN A COMMON OIL AND GAS POOL IS AFFORDED AN OPPORTUNITY TO RECOVER HIS JUST & EQUITABLE SHARE OF RESERVES • GOAL IS TO LIMIT UNCOMPENSATED DRAINAGE, BUT NOT AN ABSOLUTE RIGHT – MUST EXERCISE RIGHT TO DRILL TO CLAIM CORRELATIVE RIGHT

5. PETROLEUM GEOLOGY, MINERAL INTERESTS AND REGULATION

6. PETROLEUM TRAP ELEMENTS • PETROLEUM SOURCE ROCK • MIGRATIONAL PATHWAY • POROUS FORMATION ROCK • SEALING IMPERMEABLE CAPROCK OR BED

13. JURISDICTION OF CONSERVATION AGENCIES TO REGULATE OIL AND GAS DEVELOPMENT

14. COMMON OIL AND GAS REGULATORY TERMS • MEANING OF “POOL” FOR REGULATORY PURPOSES Underground reservoir containing an interconnected common accumulation of crude oil and/or natural gas in pressure communication

15. COMMON OIL AND GAS REGULATORY TERMS • CONCEPT OF A “DRILLING UNIT” Maximum area from which one well can efficiently and economically drain the recoverable oil and gas reserves in a given reservoir

18. EFFECT OF UNITIZATION ON MINERAL RIGHTS • CREATES A LEGAL FICTION THAT OPERATIONS OR PRODUCTION ANYWHERE ON THE UNIT IS AS IF ON EACH AND EVERY LEASE IN THE UNIT • NOT A CROSS ASSIGNMENT – EACH LESSEE STILL OWNS AND REMAINS RESPONSIBLE TO HIS OWN LESSOR • MUST BE UNIT OPER’NS OR PROD’N

19. COMPARISON OF OIL AND GAS DEVELOPMENT REGULATORY STRUCTURES IN FIVE STATES

20. OKLAHOMA WELL SPACING AND POOLING LAW • CREATE DRILLING & SPACING UNITS • LOCATION EXCEPTIONS • INCREASED DENSITY WELLS • FORCED POOLINGS

21. OKLAHOMA WELL SPACING GENERAL STATEWIDE RULE

23. OKLAHOMA WELL SPACING DRILLING AND SPACING UNITS

24. DRILLING & SPACING UNIT GENERAL REQUIREMENTS • APPROXIMATELY SQUARE OR RECTANGULAR AND USUALLY OF UNIFORM SIZE ACROSS SAME POOL • COMBINATION RESERVOIRS MAY HAVE NON-UNIFORM SIZE UNITS • < 40 ACRES FOR OIL WELLS < 4,000’ • < 80 ACRES FOR OIL WELLS BETWEEN 4,000’ AND 9,990’

25. OKLAHOMA OFF-CENTER SETBACK / ACREAGE SIZE RULE FOR SPACING UNITS

27. DRILLING & SPACING UNIT GENERAL REQUIREMENTS • > 160 ACRE UNIT HOLDS LEASE ACREAGE OUTSIDE OF UNIT FOR ONLY 90 DAYS AFTER END OF TERM • TOTAL UNIT ACRES LIMITED TO 640 ACRES WITH 10% TOLERANCE • NO REQUIREMENT UNIT BE SHOWN UNDERLAIN ENTIRELY BY PAY FOR FULL ALLOWABLE

28. OKLAHOMA LOCATION EXCEPTION

30. OKLAHOMA INCREASED DENSITY WELL

32. OKLAHOMA FORCED POOLING IN DRILLING AND SPACING UNITS

35. OKLAHOMA FIELD-WIDE POOLING

37. KANSAS WELL SPACING AND FIELD-WIDE POOLING LAW • General Spacing and Oil Unit Rules • Well Spacing and Basic Proration Orders –UNIT ACREAGE TO BE SHOWN REASONABLY PRODUCTIVE • Location Exceptions -- YES • NO General Compulsory Pooling Law • Field-wide Pooling - YES

39. KANSAS BASIC PRORATION ORDER MODEL

40. LOCATION EXCEPTIONS METHODS • STANDARD ADMINISTRATIVE APPLICATION • BPO “SLIDING SCALE” WITHOUT APPLICATION BPO STANDARD GAS WELL SETBACK -> 1250’ WELL LOCATION TO W/IN 330’ OF UNIT LINE DIVIDE DISTANCE FROM LINE BY 1250’, THEN MULTIPLY QUOTIENT BY INITIAL RATE TO DETERMINE PENALTY ON PRODUCTION SUBJECT TO STATEWIDE OVERAGE RULE

41. LOCATION EXCEPTION METHODS

42. ALTERNATE TRACT UNITS • Novel feature of large gas field BPOs in Kansas - ATUs • Combine adjoining tracts from existing units to form new 640-acre ATU – either 4 X 160 acres or 2 X 320 acres • One ATU well drilled as near center of ATU as practical • Existing units contributing tracts share in ATU production • Does not affect allocation from unit wells in existing units • Effort to drill in “corners” and along boundary lines not drained by existing production • Fairer to competing interests than standard location exceptions

43. ALTERNATE TRACT UNIT (4 X 160 ACRES)

44. ALTERNATE TRACT UNIT (2 X 320 ACRES)

45. LOUISIANA WELL SPACING AND POOLING LAW • Unitization – Drilling and Production Units • Field-wide “(Reservoirwide”) Units • Unitization and Equity among Unit Interests • Well Spacing • Limited Location Exceptions • Replacement (“Substitute Unit”) Wells • Increased Density (“Alternate Unit”) Wells

48. LOUISIANA GENERAL SPACING RULE

50. TEXAS WELL SPACING AND POOLING LAW • Well Spacing and Density (Acreage Requirement) • Compulsory Pooling in Texas -- Rare • Voluntary Field-wide Unitization Statute w/o Compulsory Pooling Provision by Vote or Otherwise