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OIL & GAS UPDATE Ken Wonstolen

OIL & GAS UPDATE Ken Wonstolen. August 27, 2008 Montana Petroleum Association. 26.1 Tcf. Net Imports. 21%. 16%. 20.5 Tcf. Natural Gas Production and Consumption. Projections. History. Consumption. Production. Source: Annual Energy Outlook 2007.

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OIL & GAS UPDATE Ken Wonstolen

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  1. OIL & GAS UPDATEKen Wonstolen August 27, 2008Montana Petroleum Association

  2. 26.1 Tcf Net Imports 21% 16% 20.5 Tcf Natural Gas Production and Consumption Projections History Consumption Production Source:Annual Energy Outlook 2007 Natural Gas Projections from EIA and Six Others: March 28, 2007

  3. Greatest Natural Gas Reserves by Country, 2006

  4. Let’s discuss your cost of natural gas.

  5. North American Gas Production

  6. Last year – 50% of the natural gas consumed in the US came from wells drilled in the prior 40 months • 2 years ago – 50% of the natural gas consumed in the US came from wells drilled in the prior 48 months

  7. Since 2001, Incremental Rockies Volumes Have Averaged 446 MMcfd Average 446 MMcfd Changes in Gross Withdrawals

  8. What does it take to drill a well? • Can you get a lease? • Is the geology and terrain favorable? • Can you get to market? • What will it all cost? • Can you get a drilling rig? • How about a surface use agreement? • What permits are required? • How long will it take? • Will the rig still be available?

  9. Legislation – the hangover from 2007 • HB 1180 – production measurement • HB 1252 – accommodation • SB 237 – surface development • HB 1298 – wildlife protection • HB 1341 – COGCC reform and rulemaking

  10. Production Measurement & Sales Reconciliation • COGCC rulemaking completed April 1, 2008 • Requires measurement and metering in accordance with industry technical standards (API, GPA, etc.) • Requires measurement prior to production leaving the lease or production unit boundary • Requires regular meter calibration, and gas quality determination • Sales reconciliation issue deferred • Mcf MMBtu • Drip, shrink, lease use, NGLs, flaring, downstream sales • Correlation with tax reporting

  11. Accommodating the surface owner • Codifies Gerrity v. Magness, 946 P.2d 913 (Colo. 1997); see Getty Oil v. Jones, 420 S.W.2d 627 (Texas 1971) • Minimize intrusion and damage to the extent an alternative location or means of operation is technically feasible, economically practicable and reasonably available • Parties free to contract, and statute not to be construed to abrogate or impair a contractual provision that “expressly provides for the use of the surface … or that releases the operator from liability for use of the surface

  12. Surface Development • Developers must notify mineral owners/lessees of impending “applications for development” CRS 25-65.5-101 et seq. • In the Greater Wattenberg Area, “qualifying surface developments” require for local approval: • No objection; • Surface use agreement; or • Designation of specified “oil and gas operations areas;” and, • Escrow of directional drilling costs ($87,500/well)

  13. The New COGCC • Director of Department of Natural Resources • Director of Dept. of Public Health & Environment • Three with oil and gas experience, inc. degrees • Local government official • Experience in environmental or wildlife protection • Experience in soil and land reclamation • Agricultural producer who is royalty owner • Balance production with protection

  14. COGCC Rulemaking • HBs 1298 & 1341 require a “timely and efficient” APD review procedure, providing an opportunity for comment by CDPHE and CDOW • New regulations on protecting public health, wildlife and wildlife habitat are authorized

  15. Proposed regulation • Draft regulation issued March 31, 2008 • Approximately 40 pages of single-spaced text • Affects every aspect of oil and gas operations and regulation • “Oil and gas locations” require Form 2A, and are subject to approval – doesn’t apply to gathering systems or gas storage • Applies to wells, ancillary facilities and may involve consultation with CDPHE, CDOW, local government (LGD)

  16. Proposed regulation, continued • Form 2A subject to “completeness” review • Photos, including reclamation “reference area” • List of all equipment to drill, complete and operate • Scaled drawing of visible improvements w/i 400 feet • Topo map showing surface water and riparian areas w/i 1000 feet • USGS topo map showing 3 mile radius and access from public road • Designation of land use and basis for reclamation • Construction layout, cross-section plot for slopes>10% • NRCS soil map unit description • Wellbore trajectory (multi-well pad) • Impact mitigation plan • Wildlife survey and protection plan • Presumptive conditions of approval

  17. Proposed regulation, continued • Timeframe for approval, including “completeness” review, vary • 40 days if covered by Comprehensive Drilling Plan • 60 days if no LGD, CDPHE, CDOW consultation • 70 days if consultation is required • Concurrent surface owner consultation • Public and adjacent landowner comment period • Ten day appeal period to Director • Operator may apply for hearing

  18. New environmental regulations • Surface water drinking water supply areas • Exclusion zone 300’ wide on permanent and intermittent streams • 5 miles upstream of public water system intake • Performance standards, baseline investigation, monitoring • Bradenhead monitoring during well stimulation • Inventory of chemicals maintained and made available on COGCC request. Proprietary formulations provided in response to spill or medical emergency, subject to confidentiality • Extensive requirements for CBM development • VOC, odor and dust controls • New pit permitting and design standards • New E&P waste management rules • Stormwater management requirements.

  19. New wildlife rules • Wildlife survey for species of concern • Transportation planning • Mosquito control (West Nile) • Bear control • Equipment disinfection • Timing limitations up to 90 days! (15 species) • Restricted surface occupancy! (16 species, riparian areas) • Variance = consultation • Reduced well pad density, or CDP

  20. Proposed regulation, continued • Memoranda of Agreement with local governments; state “floor” + local “ceiling” • Pollution Prevention/Compliance Checklist and annual certification • Geographic Area Plans • Financial assurance/bonding increases • Increased penalties for violations

  21. The road behind and ahead … • Party status – 86 parties, 34 industry • COGCC prehearing statement • Party prehearing statements >10,000 pages • Party rebuttal statements > 4,000 pages • Public comment hearings • Testimonial hearings – 12 hours for industry • Deliberations underway • Legislative Review!

  22. When You ThinkWESTERN LANDS & ENERGY,Think Fulbright.TM HOUSTON • NEW YORK • WASHINGTON, D.C. • AUSTIN • DALLAS • DENVER • LOS ANGELES • MINNEAPOLIS SAN ANTONIO • ST. LOUIS • BEIJING • DUBAI • HONG KONG • LONDON • MUNICH • RIYADH www.fulbright.com•866-FULBRIGHT [866-385-2744]

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