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The Changing Dynamics of Oklahoma Energy and the Oklahoma Corporation Commission

OKLAHOMA CITY ASSOCIATION OF PETROLEUM LANDMEN. DANA MURPHY CHAIR, OKLAHOMA CORPORATION COMMISSION. The Changing Dynamics of Oklahoma Energy and the Oklahoma Corporation Commission

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The Changing Dynamics of Oklahoma Energy and the Oklahoma Corporation Commission

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  1. OKLAHOMA CITY ASSOCIATION OF PETROLEUM LANDMEN DANA MURPHY CHAIR, OKLAHOMA CORPORATION COMMISSION The Changing Dynamics of Oklahoma Energy and the Oklahoma Corporation Commission Oklahoma's leadership in energy production and regulation is key to the State's future. Innovation, creativity, and collaboration are essential for Oklahoma to maintain its leadership position and keep pace with changes occurring in the energy sector.

  2. The Agency was established by the Oklahoma Constitution at statehood (1907) 3 Commissioners, elected statewide, head the agency About 450 Employees, 2 main offices, 4 field offices The Oklahoma Corporation Commission (OCC) has regulatory powers over: Transportation Oil and Gas Petroleum storage tanks Public Utilities OCAPL 11/07/2011

  3. Legal Framework and Institutional SettingBasis of Authority and Powers • The Authority and Powers of the Oklahoma Corporation Commission derive from the 1907 Oklahoma Constitution (Article IX, Sections 1-48) • OCC powers are strong and apply to many significant areas and industries with high economic impact, but Federal preemptions and mandates have reduced the scope of some Commission activities (e.g. railroads, pipelines) • Article IX, Section 18 • The Commission shall have the power and authority and be charged with the duty of supervising, regulating and controlling all transportation and transmission companies doing business in this State, in all matters relating to the performance of their public duties and their charges therefore, and of correcting abuses and preventing unjust discrimination and extortion by such companies • Article IX, Section 19 • OCC has powers and authority of a court of record, to administer oaths, to compel the attendance of witnesses, and the production of papers, to punish for contempt any person guilty of disrespectful or disorderly conduct • Article IX, Section 20 • Appeals go directly to Supreme Court OCAPL 11/07/2011

  4. OKLAHOMA CORPORATION COMMISSIONJurisdiction (2011) • 8 Electric utility companies • 8 Gas utility companies • 381 Telephone companies • 10 Water companies • 25 Cotton gins • 2,945 Oil & Gas Well Operators • 237 Natural Gas Pipeline Operators and 20 Hazardous Liquid Pipeline Operators with more than 40,000 miles of pipeline under Commission Jurisdiction • 24 Railroads with over 4,100 public at-grade crossings • 7,473 for-hire and private motor carriers licensed to operate in interstate and intrastate commerce • 12,128 Active Petroleum Storage Tanks • 1,737 Owners of 2,919 Active Retail Fueling Stations(tank inspections, pump calibrations, antifreeze & fuel quality) OCAPL 11/07/2011

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  6. Oil and Gas Division OCAPL 11/07/2011

  7. Oil and Gas Division District Offices OCAPL 11/07/2011

  8. The Oklahoma Experience: March 26, 1930 - Wild Mary Sudik well blow out 20,000 barrels oil & 200 million cubic feet gas dailyOklahoma City subsequently imposed safety and spacing regulations OCAPL 11/07/2011

  9. Oklahoma Oil and Gas (O&G) Industry • Active wells (2011): 65,000 Natural gas 115,000 Oil 10,500 Injection/disposal 190,500 Total active wells • ~350,000 plugged and abandoned wells • ~495,000 wells drilled in Oklahoma history • ~2,945 active operators of oil and gas wells (10/2011) • ~40,000 miles of gathering/transmission pipelines OCAPL 11/07/2011

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  11. * Data for 1961-1966 is Estimated OCAPL 11/07/2011

  12. Intents to Drill 2011 is estimated at 15% above 2010 OCAPL 11/07/2011

  13. Completions and Drill Type(Oct. 2010 – Apr. 2011) OCAPL 11/07/2011

  14. Average Oil and Gas Price(2010 – 2011) Source: Oil - Average bulletin price posted by Conoco Phillips, Sunoco, Valero, and Plains All American Pipeline. Gas - Henry Hub Natural Gas Spot. OCAPL 11/07/2011

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  16. The Woodford Shale—located in south-central Oklahoma • The formation—Devonian-age shale • Covers an area of nearly 11,000 square miles • Average thickness of 120 ft to 220 ft • Estimated depth of production—between 6,000 ft and 11,000 feet Sources: U.S. Department of Energy, Office of Fossil Energy, National Energy Technology Laboratory, Modern Shale Gas Development in the United States: A Primer. The primer is available at: http://www.netl.doe.gov/technologies/oil-gas/publications/epreports/shale_gas_primer_2009.pdf  Geologic Provinces of Oklahoma. Oklahoma Geological Survey, 2011. The map is available at: http://www.ogs.ou.edu/geolmapping/Geologic_Provinces_OF5-95.pdf OCAPL 11/07/2011

  17. House Bill 1909Shale Reservoir Development Act HB 1909 provides two new tools for development of shale reservoirs:  • Tool 1 - Allows drilling of horizontal wells in shale reservoirs across existing unit boundaries, with the costs, production and proceeds allocated to each of the affected units   • Tool 2 - Creates a new type of unit for horizontal shale development (a hybrid which incorporates portions of existing legal authority for drilling and spacing units and enhanced recovery units) • The new unit hybrid would be comprised of 2 governmental sections (i.e., 1,280 acres), but could be expanded up to 4 governmental sections under certain circumstances. • Creation of the new hybrid unit requires approval by 63% of working interest owners and 63% of the royalty owners in the proposed unit. (Analogous to the required approval for existing enhanced recovery units.) • To utilize either of these new tools, the applicant is required to submit a proposed plan of development for approval by the OCC and provide notice to all affected owners. • Modifies Section 87.1 of Title 52 to clarify the ability to utilize irregular shaped units (e.g., 640-acre unit that is 1/2 mile wide by 2 miles long). • Modifies Section 287.1 of Title 52 to clarify that enhanced recovery units are not available for primary production (confirming a recent ruling by the OCC). • HB 1909 passed the House on March 17, 2011, by an 87-0 vote and the Senate by a 45-0 vote on April 6, 2011. It was signed by the Governor on April 13, 2011. OCAPL 11/07/2011

  18. Multiunit Horizontal WellAssociated Common Source of Supply 18 19 Fault Mississippi Woodford Mississippi Woodford Hunton Hunton OCAPL 11/07/2011

  19. Multiunit Horizontal WellAssociated Common Source of Supply 18 19 Mississippi Woodford Hunton OCAPL 11/07/2011

  20. Multiunit Horizontal Well The Act treats the lateral in each section as a separate well. Example 6-1H(7) Well Example 6-1H(6) Well Section 7 Section 6 Shale Reservoir 4,500 feet 4,000 feet 8,500 feet Total Completion Interval 100,000 mcf produced from Example 6-1H 52,941 mcf from Example 6-1H(7) – 100,000 mcf X 4,500/8,500 = 52,941 mcf 47,059 mcf from Example 6-1H(6) – 100,000 mcf X 4,000/8,500 = 47,059 mcf OCAPL 11/07/2011

  21. Total Sales for Cross-unit Horizontal Well = $1,000 But, what if Operator only owns Unit 1 and WI #2 owns Unit 2 only, with the Operator selling 100% of the gas for itself and not for WI#2. In order to carryout the PRSA Concept, we have to make some adjustments. Example of Royalty Payments with a Multiunit Horizontal Well PRSA Concept - All RO share proportionately in all sales. Easy application if operator sells 100% of gas for ALL WI Unit 1 Allocation Factor = 60% Sales Allocated to Unit 1 $1,000 X 60% = $600.00 Royalty Share (PRSA 570.2(9)) = 18.75% ------------ Royalty Proceeds = $112.50 (PRSA 579.2(8)) “Wellbore royalty interest ” shall mean, for each separate multi-unit horizontal well, the sum of resulting products of each affected unit’s royalty share  for that unit, as defined by the PRSA, multiplied by that unit’s allocation factor for production and proceeds.   Unit 1 Unit 2 Royalty Share 18.75% 15.00% Allocation Factor X 60% X 40% ----------- ---------- Wellbore Royalty .1125 + .06 = .1725 Interest “Wellbore royalty proceeds” shall mean the proceeds or other revenue derived from or attributable to any production of oil and gas from the multi-unit horizontal well multiplied by the wellbore royalty interest. Total Sales $1,000.00 Wellbore Royalty Interest X .1725 -------------- Wellbore Royalty Proceeds $172.50 “Unit’s royalty contribution factor” shall mean the royalty share for an affected unit, as defined by PRSA, multiplied by that unit’s allocation factor, then divided by the total wellbore royalty interest. Unit 1 Unit 2 Royalty Share 18.75% 15.00% Allocation Factor X 60% X 40% ----------- ---------- .1125 .06 Wellbore Royalty ÷.1725 ÷.1725 Interest ----------- --------- Unit’s royalty .65217391 .34782609 contribution factor Unit 2 Allocation Factor = 40% Sales Allocated to Unit 2 $1,000 X 40% = $400.00 Royalty Share (PRSA 570.2(9)) = 15.00% ------------ Royalty Proceeds = $ 60.00 (PRSA 579.2(8)) Royalty Proceeds Unit 1 = $112.50 Royalty Proceeds Unit 2 = $ 60.00 ------------ Total Royalty Proceeds = $172.50 • A(5) - The wellbore royalty proceeds for a multi-unit horizontal well shall be allocated to each affected unit by multiplying the unit’s royalty contribution factor by the wellbore royalty proceeds, with the resulting product being the royalty proceeds for that unit. • Royalty Proceeds for: Unit 1Unit 2 • Contr. Factor .65217391 .34782609 • Royalty proceeds X $172.50 X $172.50 • ----------- ---------- • $112.50 $60.00 The Royalty Proceeds for each Unit is then multiplied by a Royalty Owner’s proportionate royalty decimal in that Unit. The Royalty Owner’s decimal does NOT change for each Multiunit Horizontal Well drilled in the Unit, only the allocation of production to each Unit changes from well to well.

  22. Multiunit Wells andHorizontal Well Unitizations • Factors to be considered: • Geology • Technology • Cost • Potential untapped reserves • Reduced footprint OCAPL 11/07/2011

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  24. OGE’s Smart Grid • Smart meters currently being deployed system wide through 2012 • Online consumer web portal at www.myogepower.com • 410,000 meters have been deployed as of October 3, 2011 • The technology has resulted in fewer truck rolls, faster connection, improved system reliability, reduced outages, and enhanced customer control • Project cost is $357 million • $130 million covered by a grant from Department of Energy OCAPL 11/07/2011

  25. PSO’s gridSMART • Public Service Company of Oklahoma's pilot program in Owasso • 13,500 smart meters installed • Includes a comprehensive set of technologies and programs • Advanced Metering Infrastructure (AMI) • Home Area Network / Consumer Programs • Grid Management Technologies • Currently, data from the pilot is being gathered and analyzed for planning of the next phase • Pilot program has reduced truck rolls, outage duration, and frequency • Project cost is approximately $17.5 million • $8.75 million of low cost financing through the Oklahoma Department of Commerce OCAPL 11/07/2011

  26. SOUTHWEST POWER POOL Transmission and Operating Region 370,000 square miles service territory 6,101 substations 859 generating plants 1,500 MW wholesale demand response (market footprint) 400 MW retail demand response (Regional Entity footprint) 63 GW generating capacity 48,930 miles of transmission SPP has members in nine states: Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, and Texas OCAPL 11/07/2011

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