Gas Drilling 101

Fort Worth League of Neighborhoods
         Educational Event
         October 23, 2007
Agenda
    Gas Drilling Basics
•
    Lease Considerations
•
    Financial Terms and Royalties
•
    Tips for Neighborhoods...
Disclaimers
• To lease, or not to lease, is an individual
  decision.
• The FWLNA is only providing information
  and is n...
Gas Drilling Basics

Ed Ireland, Director of the Barnett
 Shale Energy Education Council
The Barnett Shale
 A layer about 600 feet thick which was deposited 300-320 million
 years ago when this area of the world...
Gas Drilling Issues
    Bonus
•
    Royalty
•
    Drill Site Location
•
    Surface Usage
•
    Transportation Costs
•
   ...
Facts to Consider
• Process takes a long time
• Difficult to get real information from
  leasing agents
• A lease is a leg...
“Landman or Broker”
    Not the operator of the well
•
    Paid if leases are signed
•
    Not used to “urban” leases
•
  ...
Leasing Contacts
    Four Sevens Energy       Western Production
•                        •
    Colt Exploration         C...
Definitions
  1 mcf = 1 thousand standard cubic feet
•
  1 mmcf = 1 million standard cubic feet
•
  1 bcf    = 1 billion s...
Drilling Terms
• Drill site - A 2 to 4 acre area for drilling wells.
  Ultimately surface equipment is normally
  located ...
Side View of Horizontal Well
                                          Water Sands
               Casing Cemented to Surfa...
Top View of Horizontal Wells
              Surface Hole
              Locations




Bottom Hole                  Bottom Ho...
Drilling Flow Process
                                                               GAS COMPRESSOR
                      ...
COMPRESSOR
            SEPARATORS




                   WET GAS
H2O TANKS          METERS




            Gas Well Surfac...
Water Storage tank @ 100 yards
Compressors
• The two most common applications for Compressors.
  Gas Compressors are used to                      Gas Com...
Relevant Facts
• Drilling Time - 20 to 30 days per well
• Fracture Stimulation Time - 4 to 10 days per
  lateral
• Flowbac...
Flowback
• Over 100,000 Barrels of Fresh Water Pumped
  During Stimulation Process
• Initial water is nearly fresh and as ...
Water
• Fresh water zones are isolated from wellbore by cement and three
  strings of pipe. Producing gas zones are over a...
Lease Considerations
Quality of Life Issues
• No drilling within 600 ft. of homes
• Noise restrictions to 5 db above ambient
• Restriction on T...
“What you are signing”
    The common lease states - quot;Lessor hereby warrants and agrees to
•
    defend title conveyed...
“Other language is out there”
 For example
• Common language used to address the
  aforementioned slide/situation that rem...
Show me the MONEY

James Huling, Kiamachi Energy Corp
Financial Terms
• Bonus - Cash paid to the mineral owner for signing a lease. The
  amounts have increased over the last y...
Financial Terms
• Severance Taxes - All production is taxed by the state between
  2.5 to 7%.
• Ad Val. Taxes (Property Ta...
Estimate of Royalty
Several factors go into estimating the amount of
  royalty you can expect to receive. Some of the
  fa...
BASIS FOR “THE MONEY”
• Used industry published financial data that is
  subject to Sarbanes-Oxley Act.
• Estimates from L...
CHK main website: http://chkenergy.com/
Page 15 of the August 2007 presentation: http://phx.corporate-ir.net/phoenix.zhtml...
Quicksilver main website: http://www.qrinc.com/
Page 14 of the June 2007 presentation: http://www.qrinc.com/investor_relat...
WHERE’S THE MONEY?


    +/- $50 per month
(before federal income tax) over
        a 20 year period
Don’t Forget NA Bonuses
• Energy companies do fell its important to
  invest in the neighborhoods they are
  drilling.
• M...
Tips for Neighborhoods
SUMMARY
• An average urban lot can expect to receive somewhere between
  $30-$50 per month in royalties based on published...
Neighborhood Top 10 List
1.   Stay Together & Act as Group
2.   Do not get in a hurry, offers do go up
3.   Understand all...
Neighborhood Top 10 List
8. Get the FACTS
9. Communicate
      E-mail
  –
      Phone
  –
      Meetings
  –
      Flyers
...
Gas Drilling Resources
• Barnett Shale           • Drillsite Broadcast
  Newsletter              • Barnet Shale
• Barnett ...
Gas Drilling Resources
• FWLNA Website                 • Royalty $ Tool
  – New Section for                 – Calculate yo...
Urban Gas Drilling in Fort
        Worth
   Wendy Davis, Councilperson
          District 9
Closing Thoughts
• The Fort Worth Gas Drilling Ordinances do
  not factor zoning into permitting process.
• In the state o...
Special Thanks for Help on
        this Presentation



Wendy Davis, Councilperson for District 9
Ed Ireland, Director BSE...
Forth Worth League of Neighborhoods - Gas Well Driling101
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Forth Worth League of Neighborhoods - Gas Well Driling101

  1. 1. Gas Drilling 101 Fort Worth League of Neighborhoods Educational Event October 23, 2007
  2. 2. Agenda Gas Drilling Basics • Lease Considerations • Financial Terms and Royalties • Tips for Neighborhoods • Resources •
  3. 3. Disclaimers • To lease, or not to lease, is an individual decision. • The FWLNA is only providing information and is not making any recommendations. • The information being presented may, in no way, be construed as legal advice. • The FWLNA is not in the oil and gas business or receiving any funds from the industry.
  4. 4. Gas Drilling Basics Ed Ireland, Director of the Barnett Shale Energy Education Council
  5. 5. The Barnett Shale A layer about 600 feet thick which was deposited 300-320 million years ago when this area of the world was part of an ocean. Small organisms were imbedded in the mud and were trapped as the mud hardened to rock. The organic material decomposed and produced methane (natural gas). It has been there for these hundreds of millions of years waiting for engineers to develop a technology to extract economically. • 1980 - Discovered as potentially economic resource • 1995 - Significant research made to make resource economic through stimulations and testing of horizontal wells. • 2002 - Horizontal drilling & fracturing becomes mainstream for development. • Currently there are over 6,000 gas wells in the Barnett shale and 580 active in the city of Fort Worth.
  6. 6. Gas Drilling Issues Bonus • Royalty • Drill Site Location • Surface Usage • Transportation Costs • Post Production Expenses • Pooling • Mortgage, Insurance, Property Taxes •
  7. 7. Facts to Consider • Process takes a long time • Difficult to get real information from leasing agents • A lease is a legally binding document • The fine print is there for a reason • The terms are important as well as price • Urban leasing is different from rural
  8. 8. “Landman or Broker” Not the operator of the well • Paid if leases are signed • Not used to “urban” leases • Think they have a right to drill • Known to use high pressure tactics • – Hurry or you will be left out – Often confuse the issue – Promise more than they can deliver
  9. 9. Leasing Contacts Four Sevens Energy Western Production • • Colt Exploration Continental • • Turner Drilling PFM • • Paloma Davis • • Dale Resources Holland • • Fort Worth Energy Mitchell • •
  10. 10. Definitions 1 mcf = 1 thousand standard cubic feet • 1 mmcf = 1 million standard cubic feet • 1 bcf = 1 billion standard cubic feet • 1 tcf = 1 trillion standard cubic feet • Standard cubic foot = The volume of one cubic foot • of gas at 60° F and 14.7 psia. • Engineers estimate there are 30 tcf of natural gas in the Barnett Shale • shale covers an area of over 5000 square miles, including Fort Worth.
  11. 11. Drilling Terms • Drill site - A 2 to 4 acre area for drilling wells. Ultimately surface equipment is normally located at the site. • Lateral - horizontal drilling up to +/- 5000 feet from the drill site. • 8 to 12 wells with single laterals may be drilled from a drill site.
  12. 12. Side View of Horizontal Well Water Sands Casing Cemented to Surface Steel Surface Casing Set Below Water Sands Steel Production Casing Cemented in Place Steel Production Casing Barnett Shale Cemented in Place 7,000’ Deep Normally < 5,000’ in Length
  13. 13. Top View of Horizontal Wells Surface Hole Locations Bottom Hole Bottom Hole Locations Locations
  14. 14. Drilling Flow Process GAS COMPRESSOR C M SEP WATER DEHYDRATION SEPARATED WET GAS UNIT GAS PRESSURE IS FROM GAS METER INCREASED THRU THRU COMPRESSOR SEPARATOR ON SITE H2O TANKS GAS IS DEHYDRATED TO REMOVE WATER TO PIPELINE SPECS M DRY GAS GAS IS PROCESSED FOR METER RESIDENTIAL & COMMERCIAL USE WATER TRUCKED TO SALT WATER DISPOSAL WELL GAS PROCESSING PLANT
  15. 15. COMPRESSOR SEPARATORS WET GAS H2O TANKS METERS Gas Well Surface Site
  16. 16. Water Storage tank @ 100 yards
  17. 17. Compressors • The two most common applications for Compressors. Gas Compressors are used to Gas Compressors are used to gas increase line pressure from the lift water from wells. In this well to gathering or distribution application compressors run 24 lines. In this application hours per day and for shorter compressors run 24 hours per day periods (<2 months) and for long periods (20 years?) Gas is injected at 700 – Compressor increases 900 PSIG between the from pressure from 400 tubing and production PSIG to 900 PSIG C casing to lift water. Line C Gas flows Compressor Pressure is Line 900 PSIG increases 400 PSIG Pressure is After pressure to Before 400 PSIG Compressor 900 PSIG Compressor Before Compressor
  18. 18. Relevant Facts • Drilling Time - 20 to 30 days per well • Fracture Stimulation Time - 4 to 10 days per lateral • Flowback Time – Approximately 21 Days • Gas production - Over 20 years
  19. 19. Flowback • Over 100,000 Barrels of Fresh Water Pumped During Stimulation Process • Initial water is nearly fresh and as load is recovered water becomes more saline. • Flowback Time – Approximately 21 Days - During Flowback which is usually 21 days a water truck will haul water from the drill site every 15 to 30 minutes around the clock
  20. 20. Water • Fresh water zones are isolated from wellbore by cement and three strings of pipe. Producing gas zones are over a mile below the fresh water intervals. Risk of contamination is low. • Water pumped into wells is generally less than 15 PPM Cl- (fresh) and is from various sources. • All produced water is trucked off of location and is disposed of in a commercially permitted salt water disposal well. • No commercial disposal wells currently exist within the City of Fort Worth. Locations are outside the city. • Water injected into disposal wells is placed into brackish or saline zones well below fresh water intervals. • Barnett Shale water usage accounts for 1 to 2%of resource supply.
  21. 21. Lease Considerations
  22. 22. Quality of Life Issues • No drilling within 600 ft. of homes • Noise restrictions to 5 db above ambient • Restriction on Truck Traffic through neighborhoods • No eminent domain use (drill site or gas lines)
  23. 23. “What you are signing” The common lease states - quot;Lessor hereby warrants and agrees to • defend title conveyed to Lessee hereunder ...quot; If you do not clearly own the interest, this means you are responsible • to defend the interest. By signing the lease you assume the liability to defend the title should another possible owner come forward or should subordination of your current mortgage be required prior to payment of royalties. Most deeds to property in older neighborhoods make no mention of • mineral rights. Generally, unless mineral interests are withheld in conveyance the mineral interest is conveyed with the surface. According to a real estate agent in our neighborhood, agents are • asking sellers to prove they own the mineral rights and put that in the new deed as to whether the mineral rights go with the surface ownership or stay with the seller. The estimated cost for an attorney to document and prove ownership • of the seller's mineral rights may be $1000-2000.
  24. 24. “Other language is out there” For example • Common language used to address the aforementioned slide/situation that removes the liability from the Lessor or Home owner – quot;Lessor makes no warranty of title to the leased premises whatsoever.“ • For more information on Leases, see the FWLNA Website for “Leasing 101 – What to know before you sign your lease.”
  25. 25. Show me the MONEY James Huling, Kiamachi Energy Corp
  26. 26. Financial Terms • Bonus - Cash paid to the mineral owner for signing a lease. The amounts have increased over the last year from $500 per lot to $10,000 – $12,000 per acre and usually based on surface acreage. • Royalty - A percentage of gross sales of gas produced. Most recent offers are 25% proportionately reduced your percentage of acreage within the unit. • Subordination- Many mortgage companies require this agreement before they will allow the energy company to
  27. 27. Financial Terms • Severance Taxes - All production is taxed by the state between 2.5 to 7%. • Ad Val. Taxes (Property Taxes) – County taxes billed every year and normally run 2.5% of revenue. • Federal income tax – Your bonus, and revenue from royalty are subject to federal income taxes.
  28. 28. Estimate of Royalty Several factors go into estimating the amount of royalty you can expect to receive. Some of the factors include: • Estimated recoverable gas and production profile per well. • Amount of acreage included in production unit. How many acres are pooled together per well. • Gas price • Gas quality • Taxes
  29. 29. BASIS FOR “THE MONEY” • Used industry published financial data that is subject to Sarbanes-Oxley Act. • Estimates from Landmen or Brokers are usually higher and may be optimistic. • Developed mathematical equation to fit published performance. • Made economic projection based on expected performance • Adapted economic projection to simple spreadsheet for a more simplistic model
  30. 30. CHK main website: http://chkenergy.com/ Page 15 of the August 2007 presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=104617&p=irol-presentations
  31. 31. Quicksilver main website: http://www.qrinc.com/ Page 14 of the June 2007 presentation: http://www.qrinc.com/investor_relations/presentations.shtml
  32. 32. WHERE’S THE MONEY? +/- $50 per month (before federal income tax) over a 20 year period
  33. 33. Don’t Forget NA Bonuses • Energy companies do fell its important to invest in the neighborhoods they are drilling. • Many NA’s have been able to negotiate donations as high as $75,000 to be used for playgrounds, schools, community centers or other quality of life improvements. • Make sure this is part of your negotiation.
  34. 34. Tips for Neighborhoods
  35. 35. SUMMARY • An average urban lot can expect to receive somewhere between $30-$50 per month in royalties based on published production rates. • In the state of Texas mineral rights take precedence of surface rights. Make sure surface use restrictions are “iron-clad” to insure your property is not disturbed. • Restrictions need to be in the lease. Ordinances may not be punitive enough to insure compliance. • Ordinances and regulations can be modified through legislative change. • The League of Neighborhoods recommends not supporting a lease that does not insure the quality of life in your neighborhood. • Neighborhood’s that stick together have successfully obtained leases that protect their neighborhood. • Neighborhood’s that stick together have negotiated terms that are far more financially advantageous (higher bonus and royalty as well as lower deductions and favorable language.)
  36. 36. Neighborhood Top 10 List 1. Stay Together & Act as Group 2. Do not get in a hurry, offers do go up 3. Understand all the parties involved 4. Talk to other neighborhood associations 5. Do not give legal advice 6. Do not be intimidated 7. Consider safety and quality of life issues
  37. 37. Neighborhood Top 10 List 8. Get the FACTS 9. Communicate E-mail – Phone – Meetings – Flyers – 10.Obtain legal assistance
  38. 38. Gas Drilling Resources • Barnett Shale • Drillsite Broadcast Newsletter • Barnet Shale • Barnett Shale Blog by Education Agency Fort Worth Star Telegram • FWCanDo.org
  39. 39. Gas Drilling Resources • FWLNA Website • Royalty $ Tool – New Section for – Calculate your royalty Resources for your lease – Includes Gas Drilling • Lease Rates 101 & Leasing 101 Comparison Chart – Compare your offer to those others have received FWLNA has formally requested that the Mayor and Council reconvene the gas drilling task force and conduct an analysis of the situation to date. A time out to make sure our ordinance is working effectively and efficiently.
  40. 40. Urban Gas Drilling in Fort Worth Wendy Davis, Councilperson District 9
  41. 41. Closing Thoughts • The Fort Worth Gas Drilling Ordinances do not factor zoning into permitting process. • In the state of Texas mineral rights take precedence of surface rights. If you do not own the minerals you can not stop the development of minerals. • Neighborhoods sticking together are the only means currently available to push drilling and operations to desired surface locations.
  42. 42. Special Thanks for Help on this Presentation Wendy Davis, Councilperson for District 9 Ed Ireland, Director BSEEC James Huling, Kiamichi Energy Corp Bill Hall, Mayor of Park City Sarah Fullenwider, Attorney for City of Fort Worth

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