Division of Oil and Gas Indiana Oil and Gas Association January 29, 2008 – Princeton, IN

1. Division of Oil and GasIndiana Oil and Gas AssociationJanuary 29, 2008 – Princeton, IN Our Mission: To encourage the responsible development of Indiana’s oil and natural gas resources in a manner that is protective of human health and safety, and the environment. HORIZONTAL WELL DRILLING IN INDIANA “Horizontal Wells in a Vertical World”

2. Presentation Outline Horizontal Well Drilling In Indiana “Horizontal Wells in a Vertical World” • The evolution of horizontal well permitting and spacing • Horizontal well completions 1997 thru 2007 • The way we used to do things (in a vertical world) • Reinterpretation of rules • Why are we changing now? • Remain consistent with existing drilling unit rules • It’s time to change our rules • Specific spacing requirements for horizontal wells • Do we need special spacing rules for New Albany Shale?

3. Horizontal Well History

4. “Vertical World” Spacing Rules The term “drilling unit” is not defined in our rules. Other terms frequently used might be “communitization”, “pooling”, “unitization”, “unitized area”, etc.

5. Dealing with Horizontal Wells • Before August-2006 • Every horizontal well spacing greater than 40 acres required an informal hearing • Proliferation of GST permits • Since August-2006 • Horizontal wells consisting of contiguous 40-acre quarter, quarter sections could be approved without informal hearing • Unit sizes of 80 to 160 acres very common • Larger sizes have been approved upon request for units of 320 to 640 acres with a single lateral drainhole • Continued proliferation of GST permits • Recent concerns • Units too large: forced pooling of 40-acre tracts, lease issues regarding unitization clauses, inconsistencies of unit sizes in relation to horizontal drainhole lengths, sizing not consistent with existing rules, challenges when converting GST’s to production wells, confusion between “drilling unit” and “production unit”, lack of sufficient site-specific data to establish just how much acreage can be efficiently and economically drained from a single well • Should spacing continue to be ignored altogether for GST’s?: GST’s drilled on different trajectory than approved

6. Solving the Concerns • Get back to “Basics” • Be consistent in our use of terms • Follow our existing rules

7. Begin Use of Consistent Terminology • Drilling Unit An area allotted to a well by regulations which shall take into account the amount of acreage which can be efficiently and economically drained by a single well from a specified formation. • Communitization or Pooling (of a “Drilling Unit”)The combining or accumulation of smaller tracts of land, the sum total acreage of which are required by state regulations to establish a legal drilling unit upon which an operator may be granted a well permit. • Unitization (or “Production Unit”) The combining of multiple wells to produce from a specified reservoir by either a single operator or through joint operations to maximize recovery among separate operators within a common reservoir.

8. Determining Drilling Unit Sizes and Spacing for Horizontal Wells Drilling units for horizontal wells (gas wells >1,000’) shall include only those ¼, ¼ sections through which any portion of the horizontal drainhole is to be completed. Spacing (for NAS wells): No portion of the horizontal section shall be located within 330’ of the outside boundary of any adjacent ¼, ¼ section unless the adjacent ¼, ¼ section is leased in its entirety by the applicant, or a written waiver is obtained from the owner or owners of the oil and gas rights to the adjacent ¼, ¼ section.

9. New Albany Shale Wells • Drilling units for horizontal wells in the New Albany Shale (NAS) shall include only those ¼, ¼ sections through which any portion of the horizontal section is to be completed. • Spacing for horizontal NAS wells, including geological or structure test wells, shall be as follows: No portion of the horizontal section shall be located within 330’ of the boundary of any adjacent ¼, ¼ section unless the adjacent ¼, ¼ section is leased in its entirety by the applicant, or a written waiver is obtained from the owner or owners of the oil and gas rights to the adjacent ¼, ¼ section. Additionally, no portion of the horizontal section of a NAS well shall be located closer than 1,320’ to any other well producing or capable of producing from the NAS. • Variances to the above will require the submittal of a request for variance and the scheduling of an informal hearing. The variance request must be accompanied by specific regional or geological data demonstrating that the alternate unit size represents the largest area that can be efficiently and economically drained from a single well. • For all NAS wells, including geological or structure test wells, the drilling unit boundary shall be clearly shown on the survey plat accompanying the permit application. In addition to showing this boundary (established as outlined above), the survey plat shall also show the boundaries of all acreage which is owned or otherwise leased by the operator. • Operators must indicate that they own or control the oil and gas rights in and under all lands within the drilling unit before a permit for a NAS gas well is approved. • For NAS geological and structure test permits, operators need to demonstrate that they own or control all lands under which the proposed horizontal section(s) are to be drilled and at least 75% of the lands within the boundaries of the drilling unit (established as above). • Where unleased acreage exists within the drilling unit boundary for a proposed gas well, and the permittee has leased at least 75% of the acreage within the drilling unit boundary, the operator may file a petition for the forced pooling of the unleased acreage into the proposed drilling unit and obtain approval of the forced pooling prior to permit approval.

10. Example Drilling Unit Scenarios Horizontal Well Spacing Scenarios Note that these examples are only showing how the specific Drilling Unit boundary should be determined. Some of the examples shown do not meet the spacing requirements.

11. Application Form Changes • Statement of ownership or control of oil and gas within entire drilling unit • Specific well survey information required View Amended Application Form

12. It’s Time to Develop Horizontal Spacing Rules • Drilling Unit Size • 10 or 20 acres for oil wells • 40 acres for gas wells • 160 acres? • Special pool-wide spacing? • Spacing Requirements • 330’, 660’ or ?