2006 new albany shale update

1. 2006 New Albany Shale update Bob Cluff The Discovery Group Inc. Denver, Colorado Presentation to IOGA Annual meeting Evansville, Indiana 2 March 2006

2. Outline Why the sudden buzz? How does the New Albany compare to other shale gas plays? Why is the action in Indiana and Kentucky instead of Illinois? What�s in this for me?

3. The Buzz What has changed���� Gas prices rose dramatically Technology advanced in the Barnett play Better reserves than ever expected Result: a huge interest in �resource plays� built up in Denver, Calgary, Tulsa, Ft Worth & Houston

5. Some conversions 1 BCF = 1,000 MMCF = 1,000,000 MCF ~6 MCF:BO on BTU basis Currently 5 to 7 MCF per bbl on wellhead $ basis historically closer to 8 to 10:1 For back of the envelope economics, a 40 MBO oil well is worth about the same as a 250 MMCF gas well

6. Resource plays Tight gas sands, coal bed methane, and shale gas all considered �resource plays� Repeatable, predictable & blanket-like �Gas Factory� model for development Thought to be primarily engineering driven as opposed to geology driven

7. Southern margin shale plays

8. Southern PZ margin

9. Resource players EnCana, Devon, Chesapeake, Anadarko, Southwestern Energy, Vintage, & others Shell, ExxonMobil are watching or currently testing the water BP, ConocoPhillips, & Chevron appear to be sitting it out (for now) Shale gas is the hottest thing going in 2006!

10. Technology advances Huge water fracs Work in Barnett as well or better than gel fracs Substantially lower total cost Open up enormous drainage areas to well bore Horizontal wells Can now drill, steer, & frac a horizontal well in shale; shale is competent and stays open Almost 2X deliverability of vertical well

11. Barnett water frac HUGE water fracs with a light sand load >1,000,000 gallons H2O + 50,000 # sd Object is not to place a conductive sand pack in the fracture, but rather to open up a very large area of natural fractures (joints) Sand might be acting like an abrasive to improve natural asperities Fm is so tight (nanodarcies) that ANY fracture will be orders of magnitude better

12. Barnett Shale- the big hitter Started slow, fewer than 100 wells in first 15 years Late 1990�s, figured out GIP was much greater than previously thought 1999 discovered water fracs ~2002 figured out how to drill and frac horizontal shale wells

14. Barnett vs. New Albany

15. Barnettstructure

16. New Albanystructure

17. Lower Barnett thickness

19. Barnettmaturity(% Ro)

20. New Albanymaturity(% Ro)

21. New Albany RhoB vs TOC

22. Barnett Shale type curve

23. New Albany (Corydon area)type curve

24. Why so much activity on the east side of the basin? Historic NAS production has all been in Indiana and Kentucky Biggest are Shrewsbury, Corydon, Laconia Lots of small fields in IN reef trend, e.g. Loogootee, with high reported gas rates Several small fields south of Pennyrile fault zone in KY

25. Thick section of black shale in Kentucky High maturies to the west, approach the Barnett analog in places Extensive faulting might mean better fracturing & higher perm Open acreage, reasonable terms Major pipelines cross the area

26. And why not Illinois? Shawneetown N.F. blocks out a large prospective area More problems with HBP lands & shallow production- hard to build large blocks Less attractive lease terms Fewer shows, less encouragement from historic activity, only one small gas field discovered

27. 2005 activity

28. New Albany reserves & reserve expectations Corydon-Laconia 0.1 to 0.3 BCF/well Maple Branch unknown, probably similar to Corydon Shrewsbury unknown, but small Daviess Cty, IN 0.5 BCF/well?? Union-Crittenden Cty, KY 0.6-1.0 BCF/well Horizontal wells are a wildcard- generally hope to get about 2X vertical well reserves or better

29. What�s in it for me? If you are in the southern part of the basin, you�ve got mature New Albany under you Gas is probably there in significant quantities Opinion: the NA is fully saturated with gas Deliverability is the big question/risk Lots of historically tight tests of the shale Current testing not far enough along

30. What should you do? Adopt a wait, watch, & learn approach Partner up with other local operators and drill a �science well� to test your area Objectives are to prove up gas content & get data to map GIP determine fracture & stress orientations for horizontal drilling test deliverablity with modern gas shale frac provide an economic baseline to evaluate vertical well performance

31. Coring program Full diameter core Lithology & fracture description Sample on site for gas desorption Lab protocol includes porosity, bulk density, TOC, maturity, minerology, & methane adsorption isotherms

32. Logging program �Triple combo� of resistivity, density, neutron, & a spectral gamma ray Dipole sonic for stress and frac design Imaging logs to determine fracture density and orientation NMR & other specialty logs have not proven very useful

33. Completion If you have a lot of gas in place, Then frac the bejeepers out of it (per Kent Bowker) �Proof of concept� well gives you the backup you will need to promote your position to a larger independent

34. The future Future of the New Albany play is still uncertain Deliverability & reserves are unknown Activity in 2006 will be more big acreage plays, drilling & completion of �science wells�, and horizontal wells to test the play It will probably take 50 to 100 wells before we really know if it will work