Oil

Coal Fields Of Pennsylvania

Valuation Issues in the Marcellus Shale Play

Geology I Pennsylvania GeologyGeology I Pennsylvania GeologyGrabbing the LeaseGrabbing the Lease

The Gas Industry’s Footprints The Gas Industry’s Footprints What’s a person to Do?What’s a person to Do?

Boom & BustBoom & Bust

Current Boom & Bust• The Marcellus has been identified since the mid

1920’s. At 5000 feet in depth, it was unavailable to the drilling techniques at the time. When technology advanced significantly to economically drill to this depth, conventional (vertical bore) wells extracted gas only in the immediate area; horizontal (unconventional) techniques were adopted to extract product from a narrow band of gas bearing shale.

• An overview of Pennsylvania’s Second Petroleum An overview of Pennsylvania’s Second Petroleum RushRush

Geology I: What’s underground

• Oil (Western PA: Quaker State, Pennzoil, Kendall-Still shipping PA crude!)

• Shallow Gas and mid range gas (conventional)• Soft Coal(Bituminous) West PA,• Hard Coal (Anthracite) Eastern PA• Shale Gas (Marcellus, Utica)

Legal Possession of the Lease

Fee Simple DeedMineral (Non-Coal) Deed

Non-Participating Royalty InterestRoyalty Interest

Acquiring Leasehold

Bonus Money: An inducement to transfer the rights from the lessee to a lessor for a undisclosed sum of money

NOT an indicator of the market value of gas rights being sought!

Bonus Money ≠ Value

Bonus Money is the inducement paid to a landowner to do something based on the amount of value given to him/her by the landman. The acquisition of lands by companies is dependant issues such as::– Unitization needs– Check-checkmate other lessees– Acquire blocks for future trade off

BONUS MONEY ≠ VALUE

PRICE ≠ VALUE

VIP Definitions• Differences Between Conventional/Unconventional Drilling• Long before interest grew in developing Appalachian shale formations, there was a healthy

oil and gas industry in Pennsylvania. The world’s first commercial oil well was drilled near Titusville, Venango County, in 1859. An estimated 350,000 oil and gas wells have been drilled in Pennsylvania over the years, with about 70,000 currently in production; by contrast, an estimated 6,100 unconventional wells have been drilled in Pennsylvania since 2008.

• Conventional oil and gas wells can be found in parks and on public land, along highways, even in residential neighborhoods. A 2008 study showed the conventional industry supported more than 27,000 jobs and generated more than $7 billion in annual economic activity – much of it in the state’s rural areas, supporting local businesses with revenue, farmers with royalty income and workers with excellent wages.

• An important distinction of the conventional industry focuses on the cost to develop those wells, their reduced production and the smaller return on investment they usually achieve, in comparison to shale wells. This translates into reduced profitability from these wells, and the influence that oil and natural gas commodity prices and other market forces have on their viability. If either the cost to drill these wells increases, or if the cost of oil and gas decreases, to certain levels, conventional wells become less viable.

VIP DEFINITIONS 2• A well pad cleared for a conventional oil or natural gas well is

smaller than that of a deep well and requires a smaller drilling rig to drill vertically and reach the targeted formation. It typically takes less than two weeks to drill these wells, with a few additional days required to stimulate and complete the well. Since the number of fractures into the rock are fewer than those of a horizontal well, the scope of the well stimulation operation is not as significant and does not require as much equipment or water.

• Conventional wells in Pennsylvania are also not limited to just producing natural gas. These vertical, wells can produce oil, natural gas and both forms of energy. There are many uses for “Pennsylvania Grade” crude oil due to its high quality, including refining into gasoline, motor oil, lubricants and white oil. It is also further processed and used in cosmetics and topical ointments

Conventional vs. Unconventional• Conventional: straight down • Unconventional: Twists-turns

Fracking IThe Compressor

Truck

Fracking SiteProcess

Well Site: 2H

Gas Interstate-Intrastate Lines

Abandoned Wells: PADeveloped in the 1940s, the process of

hydraulic fracturing has become increasingly important in oil/gas

drilling. It comes in handy with "tight" reservoirs -- where the rocks

containing the oil/gas don’t have large pores. This means that the oil flow

from the rocks is weak, and drilling a simple well into the rock won’t get

much of the oil out. To help stimulate the well and drive out the trapped oil, drillers employ hydraulic fracturing. In this process,

they inject water combined with chemicals into the well with enough

pressure to create fractures in the rock formations -- fractures that can extend

hundreds of feet long. To keep the fractures from closing again, drillers send down a proppant, which is a mixture of fluids, sand and pellets.

These fractures allow oil to flow more freely from the rock.

According to the American Petroleum Institute, in the United States alone,

hydraulic fracturing has helped pump an extra 7 billion barrels of oil from

the ground.

Average & Median Values

Number of Sales/DOM

LEASE FLOW CHART

Bonus Money Ups and Down

Royalty Calculator

Schematic Flow of Gas