NATURAL GAS 101 - · PDF fileNATURAL GAS 101 OIPA -Natural Gas Committee ... The Industry is Cyclical –Major Events ... – Supply and Demand for crude oil and natural gas are balancing

OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION

NATURAL GAS 101

OIPA - Natural Gas CommitteeChairman: David D. Le Norman

May 18, 2016

An introduction to the current, energy macro environment with a primer on natural gas processing, marketing, contracts for the independent producer.


• Introduction to Natural Gas 101– David Le Norman, CEO & President Templar/Le Norman Operating

• Current, Macro, Energy-Economic Environment– Steve Agee, PHD, Dean of the Meinders School of Business at Oklahoma City

University

• Processing, Wellhead to Tailgate To End Products and the MLP Structure– Ryan Lewellyn, CEO Tall Oak Midstream

• Marketing Your Products– Mark Edge, Manager & Co-Founder – Ancova Energy

• Wind Coalition and the Current Legislative Environment– Blu Hulsey, VP Government Relations & Regulatory Affairs, Continental Resources

• Natural Gas 102 (OIPA Annual Meeting)– Panel Discussion

2


Moderator: David Le Norman, CEO, Le Norman Operating; OIPA Board of Director & serves as OIPA's Natural Gas Committee Chairman: Mr. Le Norman has over 30 years of experience in the oil industry ranging from working in field operations as a roustabout, pumper, and as a rig hand on a workover rig. Over 20 years of that experience was as a Petroleum Engineer in various engineering, business development, and management positions for Texaco prior to founding Le Norman Energy in 1995. Since that time Mr. Le Norman has founded Le Norman Partners, Crusader Energy Corporation, Crusader Energy II, LLC, Crusader Energy III, Knight Energy Group, LLC, White River Energy LLC, TLP Energy LLC, and Templar Energy, LLC and also served as a Senior Vice President with Patina Oil & Gas. He holds a B.S. in Petroleum Engineering from the University of Wyoming, master’s work in Chemical Engineering at Oklahoma State University and a

M.B.A. from Oklahoma City University. Mr. Le Norman also serves on the Board of OIPA, Chairman of OIPA Natural Gas Committee and on the Board of OERB.

Steve Agee, Dean, OCU Meinders School of Business: Dr. Agee is an economist specializing in oil and natural gas exploration and production, electric power generation, energy policy, banking, monetary policy, and macroeconomic theory. Having served in the private sector for thirty years as Founder, President and COO of oil and natural gas exploration and production companies, Dr. Agee has the unique combination of academic and private industry experience. Dean Agee is also founder, President and COO of Agee Energy, LLC, a private oil and natural gas company in downtown Oklahoma City.

Ryan Lewellyn, President & CEO, Tall Oak Midstream: Mr. Lewellyn’s leadership guides the execution of Tall Oak Midstream’s distinctive vision. Mr. Lewellyn formed Tall Oak Midstream I in early 2014. His efforts drove the remarkable growth of the company which culminated in the $1.55 billion sale of substantially all of its Oklahoma assets to a subsidiary of EnLink Midstream Partners, LP (NYSE: ENLK) and EnLink Midstream LLC (NYSE: ENLC). The transaction closed in January 2016, just two years after Tall Oak I was formed. At closing, Tall Oak I assets included the STACK Natural Gas System, the STACK Crude Oil System and the CNOW Natural Gas System. The total footprint included more than 500 miles of pipeline in various phases of operation and construction, multiple compressor stations and 175 MMcf/d in processing capacity.

3


Mark Edge, Managing Partner & Co-Founder, Ancova Energy: Mr. Edge brings over 30 years of industry experience to Ancova, serving in various roles at Texas O&G Corporation, Delhi Gas Pipeline, Finlay Energy, JMA Energy, and 15 years at Chesapeake Energy where he most recently held the position as Vice President of Gas Sales and Commercial Services. From his tenure as the commercial lead for the second largest producer of natural gas and the most active driller in the U.S., he wasat the forefront of the shale revolution growing CHK's marketing group into one of the top 10 gas marketers in North America.Working for the first mover in most of the major shale plays, he played a critical role as part of the organic buildout of the midstream infrastructure that services takeaway from the most prominent basins. In addition, Mr. Edge has been on deal teams for over $30 billion in midstream and upstream acquisitions and divestitures.

Blu Hulsey, Rep. for Windfall Coalition; Vice President of Government Relations & Regulatory Affairs, Continental Resources: Mr. Hulsey is responsible for advising corporate leadership and implementing strategy to influence government and regulatory actions. Mr. Hulsey is a registered lobbyist in North Dakota, Montana and Oklahoma. Prior to joining Continental Resources, Mr. Hulsey served as the City Manager for the Cities of Bixby and Skiatook, Oklahoma. He also served as Council for the Senate Environment and Public Works Committee for Senator Inhofe in Washington, DC and as a field representative in the Senator's Tulsa office.

4


Macro Gas Environment – Tough Market

Gas market remains oversupplied– Mild winter weather leaves storage

near record highs– Stubborn steady production even as rig

count drops– Marcellus prolific production profile

dominates the landscape

5

Sources: Citi Research, Goldman Sachs Research, EIA, Bloomberg, Quantum Energy Partners


Gas Market – “Silver Lining”

Optimism for the future, supply should tighten

– Capital barrier for new service entry for new pipeline and facilities

– Stressed balance sheets not supportive increasing rig count

– LNG exports increasing– Power demand increasing– Mexico exports increasing– Production is declining due to the drop in

rig utilization across the board with few exceptions, the biggest being the Marcellus

– Regulatory hurdles are discouraging development of infrastructure as well as new drilling activity

6

Sources: Citi Research, Goldman Sachs Research, EIA, Bloomberg, Quantum Energy Partners


U.S. Natural Gas Exports to Mexico

– Mexican pipeline investments and new gas-fired power plants (online ~2020), to increase infrastructure and demand for US natural gas

– Pipeline exports to Mexico should reach 5.0 Bcfpd by 2020

– 2015 US Exports = 2.9 Bcfpd(Feb’16 – 3.4 Bcfpd)

– Mexico relies on gas for ~60% of its power generation

7

Sources: Goldman Sachs Research, EIA


Industry Summary – Reasons for Optimism

Service providers have been crushed– Producer activity will be difficult to ramp – Pricing power switch to service companies

Companies are bottom line focused– Capital efficiency is under the microscope– Production and reserve growth are not the

quarter on quarter drivers– Proof of sustainability of margin is key

Cost of debt capital will increase and be harder to secure

– Must raise equity dollars– Alternative Currency (e.g. drillco type deals)– Non-Traditional Sources of debt will displace

heavily regulated, traditional banking institutions

Bankruptcies and restructurings– There will be winners and losers– End of the cycle – remaining players will be

stronger and far less leveraged– Mergers will take place– Monetization(s) associated with portfolio

optimization will take place

Product Prices will Increase over Time as

the Cost of Doing Business Rises and

Upstream Players will not be anxious to add

leverage in the New Normal as Supply and

Demand Balance

8


We have been here before …

The Industry is Cyclical – Major Events– 1982 – 1986 Supply Driven Downturn – OPEC Market Share– 1998 – 1999 Demand Driven Downturn – Asian Flu– 2008 – 2009 Demand Driven Downturn – Financial Crisis– 2014 – Current Supply Driven Downturn – OPEC Market Share

OPEC spare capacity and control are waning– Decreased from 16 mmbbls/day to 1.5 mmbbls/day currently– Break-even prices for OPEC average ~$100/bbl with built in social programs– Unstable Countries in OPEC are buckling – Iraq, Venezuela, Nigeria, Iran, Libya

Optimism returns after a heavy dose of reality– Equity markets are opening– M&A CAL 2016 should increase– Industry has contracted by ~ 100,000 jobs from the Peak (-16%)– US is exporting crude oil– Supply and Demand for crude oil and natural gas are balancing– OPEC was successful holding market share and removing long cycle projects from the

future production landscape while crippling our service sector

9


Oklahoma Independent Petroleum Association500 NE 4th Street Oklahoma City, OK 73104

405-942-2334 • 1-800-838-OIPAwww.oipa.com

NATURALGAS 101

OKLAHOMA INDEPENDENTPETROLEUM ASSOCIATION

Steven C. Agee, Ph.D.Dean and Professor of EconomicsMeinders School of Business

It was the best of times…

It was the worst of times…

Charles Dickens

A Tale of Two Cities (1859)

Or, perhaps we should say:

It was the worst of times (2016),

It was the best of times (2017)!

Main Themes of Presentation• Principle themes we discuss with students in Master of Science in Energy

Managemento The Nature of Grand Energy Transitions

o Composition of World Energy Resources

o Composition of U.S. Energy Resources

o Absolute vs. Relative Size of Resources

• Questions of interest relating to the energy industry:o So, what WILL the price of oil be in 2016, 2017, and beyond?

o How about natural gas prices?

o The recent assertions about wind and it’s impact on natural gas!

o Dare we raise politics into our discussion of energy and the economy?

• Your Questions!

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2011

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U.S. Primary Energy Consumption Estimates by Source 1775-2013

Petroleum Coal Natural Gas Hydroelectric Power Nuclear Electric Power Wood Other Renewable Energy

Source: U.S. Energy Information Administration and Steven C. Agee Economic Research and Policy Institute

Important Facts Affecting Energy Markets

Did you know?• By 2025, the world’s population will be 8 billion people.• By 2040, the world’s population will be 9 billion people.• By 2025, the world’s middle-class will rise from 2 billion to 4

billion.• By 2040, 75% of the world’s population will reside in Asia Pacific &

Africa• Post 2030, what country will have the largest population; China or

India?• By 2025, 80% of the world’s consumption of energy will still come

from hydrocarbons.• 70% of power-related carbon emissions will come from developing

countries.

Chart 2. Special Question - On average across the fields in which you are active, what price is currently needed for drilling to be profitable for oil, and what do you

expect the WTI price to be at the end of 2016 and 2017?

Chart 3. Special Question - What is your view on the U.S. oil production outlook for 2016?

Chart 1. Drilling/Business Activity Index vs. a Quarter Ago

U.S. shale gas leads growth in total gas production through 2040 to reach half of U.S. outputU.S. dry natural gas productiontrillion cubic feet

Source: EIA, Annual Energy Outlook 2014 Reference case

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Associated with oilCoalbed methane

Tight gas

Shale gas

AlaskaNon-associated offshore

Non-associated onshore

ProjectionsHistory 2012

billion cubic feet per day

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2005 2012 2020 2025 2030 2035 2040

U.S. dry gas consumptiontrillion cubic feet

Source: EIA, Annual Energy Outlook 2014 Reference case

ProjectionsHistory

Industrial*

Electricpower

Commercial

Residential

Transportation**

11.2

4.1

1.7

11.0

3.6

9.1

4.2

0.7

8.5

2.9

*Includes combined heat-and-power and lease and plant fuel**Includes pipeline fuel

U.S. natural gas consumption growth is driven by electric power, industrial, and transportation use

Renewable energy and nuclear power are the fastest growing source of world energy consumption out to 2040world energy consumption by fuelquadrillion Btu

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Liquids(including biofuels)

Renewables(excluding biofuels)

Natural gas

Coal

Nuclear

History Projections2010

34%

28%

22%

11%

5%

28%

27%

23%

7%

15%

share of world total

Source: EIA, International Energy Outlook 2013

Questions?

Steven C. Agee, Ph.D.

Dean and Professor of Economics

Meinders School of Business

Oklahoma City University

[email protected]

NATURALGAS 101



MAY 18, 2016

www.talloakmidstream.com

Natural Gas Midstream

2CONFIDENTIAL INFORMATION

Midstream Scope of Services

1 2

6

3 4 5

Condensate Compression Processing Plant

Gathering

Fractionation Facilities

Pipelines End Users

End Users

Natural Gas Storage

Natural Gas Transportation Pipelines

Dry Natural Gas

Natural Gas Liquids

GAS GATHERING AND COMPRESSION


Natural Gas Basics

CONFIDENTIAL INFORMATION 4

Raw natural gas primarily consists of Methane Gas

• Heavier hydrocarbons can make up to approximately 25% of the gas stream

o Ethane (C2), Propane (C3), Normal Butane (C4), Iso-butane (C4) and Pentane (C5) are usually referred to as NGLs

o Example: Ethane makes up roughly 65% of the liquids in the gas stream, Propane : 22%, Butanes : 10%, Pentane : 4%


Natural Gas Basics

Other components of the gas stream may include:

• Acid gases (inerts) are also contained in the gas stream

o Carbon Dioxide (CO2), Hydrogen Sulfide (H2S) all have to be treated and captured before the gas can be sold

o A gas that contains H2S is often referred to as sour gas

• Nitrogen, Helium

• Water

• Liquid Hydrocarbons – natural gas condensate and small amounts of crude oil

• Anything used upstream to treat or produce gas from wells (sand, soap, biocide, scavenger, etc.)

Gathering and Compression Basics


Raw natural gas is gathered in small diameter pipelines composed of steel or plastic (poly),

at the wellhead and delivered to compressor stations

• Pipe size and material differs based on the pressure needed at the wellhead

• Steel pipe can operate under higher pressures, and has a longer life but material and installation are more expensive

• Poly pipe operates at lower pressures; material and installation costs are typically lower

Field Compression services are charged a fixed fee, typically at a $/mmBTU per stage

• Compression facilities are large multi acre sites that contain equipment to separate bulk liquids, remove water, and boost pressures

• Compressor stations are needed for midstream companies to move gas from low pressure “gathering” systems to higher pressure transmission lines

GAS PROCESSING


Processing Basics


Natural gas is processed so that it meets quality regulations and to make a useful and

marketable product

• Processing of natural gas extracts valuable liquids (NGLs) from the methane

o Those liquids include ethane, propane, butane

o Methane is then sold to downstream residue takeaways to be burned in your home

Plant technology determines at what level NGLs are recovered; the colder a gas stream

gets the more NGLs recovered

• “Lean Oil” plants (Least Efficient)

o Processing system that uses lean oil to absorb NGLs

• Refrigeration plants (More Efficient)

o Uses propane to chill the gas to remove more NGLs

• Cryogenic/turbo expansion (Most Efficient, Most expensive)

o Common technology found in modern processing plants

Key Terms and Definitions


Compression Fuel

• Field compression burns the raw fuel within the pipeline as fuel

• Most compressors use 2% of an mmBTU per stage of compression

o Example, 1000 mmBTU at the inlet of a 3-stage compressor with 940 mmBTU at the discharge of the station

(60 mmBTU used to fuel compressor engines)

Plant Fuel

• Plant compression and process equipment burn a stream of the residue gas as fuel

• Plant compression is more efficient because it utilizes a leaner burning fuel

Condensate

• NGLs that condense in the pipeline to a liquid and fall out in the transportation of gas

• Condensate is removed from the pipeline by separation equipment at the inlet of facilities or plants, and the liquids are collected and stored in on-site tanks

• Condensate is trucked away and priced at a discount to WTI

Loss and Un-accounted for gas (L&U):

• L&U occurs on all gas gathering systems due to measurement error, blowdowns, purging, leaks, etc. L&U typically increases as a system ages.

Key Terms and Definitions


NGL AND RESIDUE NETBACK


Once processed the NGLs are trucked or piped away from the processing facility

NGL netback values vary based on a commodity component and location component

• Commodity component is the value of the product itself

o NGL prices are published based on which hub the product is traded (Conway, KS or Mt. Belvieu, TX)

• Location component is the cost to get the NGLs to market

o Transportation and Fractionation costs to get the NGLs from the plant to the hub

Residue gas is recompressed at the tailgate of the plant and sold to residue takeaway pipes

• Residue natural gas is priced and traded and different locations around the country as a commodity

• Realized residue netbacks are based on the pipeline connected to the tailgate of the plant

• There are over 30 market hubs in the US with the principal known as Henry Hub, located in Louisiana

NGL and Residue Netback Basics


NATURAL GAS MIDSTREAM MLP OVERVIEW


A master limited partnership (MLP) is a limited partnership that is publicly traded. There are two types of partners:

• The limited partner (LP) - provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow

• The general partner (GP) - responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture

Advantages:• Combines the tax benefits of a limited partnership with the liquidity of a publicly traded company

• The partnership does not pay taxes at the Corporate level

o Taxes are paid at the unitholder level based upon allocation of net income

Limitations:• The partnership must derive most (~90%) of its cash flows from “Qualifying Income”

o Includes: Real estate, natural resources, energy infrastructure and commodities

• Must be publicly traded

• Required (and incentivized) to distribute all of its “available cash” to its unitholders

MLPs trade based upon a distribution yield (a multiple of cash flow) making them extremely sensitive to cash flow volatility and thus relatively risk-adverse

All Midstream Businesses are capital intensive with significant investments often required years before substantial cash flows are realized

What is a MLP?


TALL OAK INTRODUCTION

MAY 18, 2016


Carlos P. EvansChief Commercial

Officer

Experienced Management Team• More than 13 years of experience in the energy sector

• Prior to forming Tall Oak, Mr. Lewellyn served as managing director of DCP Midstream’s Mid-Continent business unit

• Prior to joining DCP, Mr. Lewellyn held various operations and leadership positions with FirstEnergy

• Mr. Lewellyn earned an undergraduate degree in business from Virginia Tech University and a Master of Business Administration from Penn State University

• More than 12 years of experience in the midstream and downstream sectors of the oil and gas industry

• Prior to joining Tall Oak Mr. Larison worked at Chesapeake Energy Marketing where he helped manage and administer the technical aspects of various gas gathering contracts.

• Prior to joining Chesapeake in 2007, he served in various process engineering roles at Chevron Phillips beginning in 2003

• Mr. Larison earned a Bachelor of Science degree in chemical engineering from Oklahoma State University

• More than 11 years of experience in the energy sector

• Prior to helping lead the formation of Tall Oak, Mr. Evans served as manager of gas sales for Chesapeake Energy

• Mr. Evans held various positions with Chesapeake Energy Marketing, including manager of the commercial gas business unit to gas scheduling

• Mr. Evans holds a Bachelor of Science degree in finance from the University of Central Oklahoma.

• More than 38 years of domestic and international energy experience

• Prior to joining Tall Oak, he led the formation of RiverRock Energy, a private-equity-sponsored midstream firm, and served as its CEO

• Mr. Schmidt also served as Senior Vice President of Commercial Operations at Energy Transfer Partners, Vice President –Business Development with NuStar Energy and various commercial and management roles for Koch Industries, Inc. (1977-2000)

• Mr. Schmidt earned a Bachelor of Science degree in business administration from Fort Hays State University

• More than 18 years of experience in the energy sector

• Prior to forming Tall Oak, Mr. Myers was treasurer of OGE Energy Corp where he ran corporate finance and development for OGE and its subsidiaries OG&E and Enogex, LLC

• Prior to joining OGE in 2005, Max spent eight years with Westar Energy as director of finance and corporate development

• Max has an undergraduate degree in business and geology and a Master of Business Administration degree, both from the University of Kansas

• More than 15 years of industry experience in both the legal and finance fields

• Previously, Mr. Williams held various leadership positions with Enable Midstream Partners. During the first half of his tenure with Enable, he served as an attorney; in the latter half of his time with Enable, Mr. Williams led the finance team charged with economic evaluation of all commercial transactions

• Mr. Williams received his undergraduate degree from Northeastern State University in Tahlequah, Oklahoma, and his law degree from the University of Arkansas

Ryan D. LewellynChief Executive

Officer

Lindel R. LarisonChief Operating

Officer

www.talloakmidstream.com 16

Max J. MyersChief Financial Officer

Gregory R. SchmidtVP – Crude Business

Development

Additionally, Tall Oak has over 30 engineering, commercial and finance professionals dedicated to developing and operating the assets

Tyson WilliamsGeneral Counsel and

Director of FP&A

Past Project - Tall Oak I - Midstream Gas Assets

www.talloakmidstream.com 17

Tall Oak I Construction Milestones: (18 months)

• Over 400 miles of HP and LP gathering pipe

• 6 compressor stations

• 2 processing plants totaling 175MMcfd throughput

Past Projects, Crude Gathering System – Phase I & II

18

Phase I (Green)• Construct CDP facilities,

approx. 35 miles of pipegathering laterals to Chocorigin station, andtrunklines from Choc andDover to Plains, SXL andPhillips 66 interconnections

Phase II (Blue)• Construct pipeline well-

head gathering facilities toAbita, Mustang, Choc andDover stations

• New build mainline toCushing

System designed for crudeoil and condensate qualitysegregations and batchpipeline operations


Current Projects – Eagle Chief & TOM II

19www.talloakmidstream.com

Overview• Assumed operations of Eagle

Chief assets September 2015

• Eagle Chief provides crude oil and produced water pipeline gathering, salt water disposal services, and crude oil marketing in the Anadarko Basin’s Alfalfa, Blaine, Major and Woods counties in Oklahoma

• The system consists of approx. 600 miles of natural gas, crude oil and produced water pipe gathering lines and associated compression and processing assets

• Associated assets include newly constructed Carmen cryogenic processing plant with 70 MMcf/D capacity, Eagle Chief processing plant with 30 MMcf/D capacity and four active compressor stations with 8 units and ~ 10,000 aggregate horsepower

• Eagle Chief’s Magic Circle facility includes an active SWD well permitted for up to 5,000 barrels per day and crude oil truck loading facilities

How to Contact Us


Office Address

Tall Oak Midstream, LLC2575 Kelley Pointe, Suite 340Edmond, OK 73013405-888-5585

20

Commercial Contacts:

Carlos Evans Ryan LewellynChief Commercial Officer Chief Executive Officer(O) 405-285-7382 (O) 405-285-7375(C) 405-239-0201 (C) [email protected] [email protected]

Greg Schmidt Keith TaylorVP Business Development – Crude Director Business Development - Crude(O) 405-696-4689 (O) 405-696-4692(C) 214-529-5482 (C) [email protected] [email protected]

Rhett Stall Blake BurgerVP Commercial Development Director Commercial Development(O) 405-888-5272 (O) 918-728-4404(C) 214-236-4324 [email protected]@talloakmidstream.com

Financial Contact: Technical Contact:Max Myers Lindel LarisonChief Financial Officer Chief Operating Officer(o) 405-285-7378 (o) 405-285-7380(c) 405-556-1368 (c) [email protected] [email protected]

mailto:[email protected]








NATURALGAS 101


Gas Contracts 101

1

Introduction to Gas Contracts

Gas contracts 101:

I. Types of contracts

II. Service fees

III. Processing terms and markets

IV. Residue terms and markets

V. Dedications and commitments

VI. Midstream performance language

VII. Other important contractual issues

2

Contract Structures

Types of Gas Contracts:

Wellhead purchase

Gas Gathering contracts

Gas Processing & treating contracts

Residue transportation

NGL transportation and fractionation

Marketing contracts (NAESB)

3

Fee Structures

Types of Midstream Fees:

Percent-of-proceeds (POP %)

Fixed fees

• Gathering, compression, processing treating, downstream, etc.

Tiered rates

• Volume based, aggregate volume, gas quality based, etc.

Commodity fees

• NGL recoveries, drip condensate, fixed fuels

Marketing fees

Hidden margins

• Settlement issues, accounting tricks

4

Gas Processing

Processing terms and markets:

Processing fees

Fixed vs actual recoveries

• C2 (Ethane) C3 (Propane) IC4 (Iso butane) NC4 (normal butane) IC5 (Iso Pentane) NC5 (normal pentane) C6+ (Hexanes plus)

Plant fuel

• Fuel Caps, treating fuel, etc.

NGL markets and T&F rates

• Conway, Mont Belvieu, others

NGL take-in-kind

• Actual TIK and fake-in-kind (public company reserve booking issues)

5

Residue (C1 Methane)

Residue Terms and Markets:

Market accessibility

• Which pipes? Redundancy?

Transportation

• Firm transportation, interruptible, selling to markets with transport

Index pricing

• Basis differentials

Marketing fees

6

Producer Commitments

Dedication and Commitments:

Acreage dedications

Minimum Volume commitments

Revenue commitments

Cost-of-service commitments

7

Midstream Commitments

Performance Commitments:

Well-connect timing guarantees

Line pressure targets and penalties

Runtime guarantees

Curtailment release language

Capacity priority levels

8

Other Contractual Items

Contractual Concerns:

Gas Lift

Condensate

Accounting settlement procedures

Contract compliance and auditing

9

Ancova Energy LLC

Producer Focused Value Creation with Tangible Results

Ancova Energy was founded in 2014 and is headquartered in downtown Oklahoma City. The company provides commercial consulting and energy marketing services E&P companies.

Ancova's background is working in the commercial function for exploration and production companies and the company's focus is on creating upstream value. By having a producer centric view of the industry we are better able to create value for our clients because we understand the value drivers of E&P development.

The company’s officers have brought over 10,000 operated wells to sales and has been

the commercial lead on deal teams for over $35 billion in upstream and midstream A&D transactions.

Our team has facilitated the deals and planning for thousands of miles of pipe, over 4 Bcf/d in cryogenic processing facilities, 10 Bcf/d in downstream residue takeaway buildouts, and various other large scale oil and NGL infrastructure projects.

Ancova's management has experience working in almost every major basin in the U.S., including Anadarko, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, Permian, Rockies, Utica, and Woodford plays.

10

A Turnkey Solution

Commercial Consulting

Contract Negotiations

A&D Deal Team Consulting

Due Diligence

Joint Venture Structuring

Commercial Strategy

Development

Energy Marketing

Natural Gas

Crude Oil

NGLs

Non-Op TIK

Contract Administration

Tax Remittance

Revenue Accounting11

Production Management

Capacity and field

pressure management

Spud-to-sales planning

Scheduling and Volume

Control

Gas Balancing

Financial and Risk

Management

Hedging

Basis Risk Management

Netback Optimization

Analysis

M&A Financial Modeling

Contract Compliance

Client Engagement

Ancova provides first look consultations in order to determine what level of service is required and if there are opportunities for us to create value

Our standard master services agreement is obligation free and establishes the confidentiality provisions that we are bound to while outlining what the process will be if the client decides to move forward with a work order

See below for our contact information if you are interested in setting up a call or meeting to discuss in more detail: www.AncovaEnergy.com

Mark Edge Max GagliardiManaging Partner Managing Partner405-205-6459 [email protected] [email protected]

12

http://www.ancovaenergy.com/



NATURALGAS 101


May 17, 2016

The History of the Wind Tax Credit

Federal Production Tax Credit (1992)

• Wind companies receive a 2.3-cent per kWh subsidy (adjusted annually

with inflation)

• In December 2015, the federal production tax credit was extended for

another 5 years until December 31, 2019

• No maximum rebate

Oklahoma Zero Emission Tax Credit

• Enacted in 2001 by former Sen. Kevin Easley with estimated cost of

$2 million through an additional 0.5-cent per kWh subsidy – the wind

industry has dramatically expanded their take from the State through a

cafeteria-like plate of incentives to reach a $316 million expense to

Oklahoma in 2016. 2

There are currently 4 wind tax credits/exemptions:

1. 10-year zero emission tax credit is 0.5-cent per kWh generated

(The 10-year wind tax credit is refundable in cash for 85% of face value) –

Ends in 2020/Payout 2030

2. 5-year ad valorem tax exemption for wind infrastructure buildout which has

failed to deliver increased property valuations due to calculated

depreciation before the 5-year exemption sunsets – Ends in 2017/Payout

2022

3. 15-year investment tax credit is based on up to 2% of the cost of the

qualified depreciable property – Ends in 2017/Payout to 2032

4. Wind facilities qualify for the Manufacturers Sales Tax Exemption

Current Oklahoma State Wind Subsidies

3

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

2014 2015 2016* 2017* 2018*

State Coffers Pay Ad Valorem Tax Exemption for Wind Industry

$50.0+ M

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

2008 2009 2010 2011 2012 2013 2014 2015* 2016* 2017* 2018*

Zero Emission Tax Credit for Wind

$133.8 M

$253.8 M

Source: Based on OTC Data, SPP interconnect filings *Estimated 4

$42.9 M

$2.7 M $3.2 M $3.6 M $3.1 M

$54.4 M $58.0 M $64.0 M $88.2 M

The Oklahoma Giveaways #1 and #2

$28.8 M

$38.2 M $44.9 M

$50.0+ M

The Oklahoma Giveaway #3 – Investment Tax Credit in Wind Companies’ Back Pocket

• Investment tax credit based up to 2% of the cost of qualified

depreciable property

• May be claimed for 5 years based upon the initial expenditure

• May be carried forward for up to 15 years

• Expires January 1, 2017 / Potential payout to 2032

• Oklahoma wind producers are not currently cashing in these investment

tax credits, but will likely choose to do so as soon as they are actually

required to pay Oklahoma state taxes, making this credit a long-term

liability

• Estimated to be between $150 - $200 million

5

• $2 million cost per turbine

• 4.5% state sales tax

• $2 million x 4.5% = $90,000 sales tax exemption per turbine*

• Approximately 2,800 installed turbines in 2015:

- 2,800 x $90,000 = $252 million total exemptions to date

• 740 new turbines planned for 2016 (as of Feb 2016):

- 740 x $90,000 = $67 million exemptions in 2016 (note new interconnect filings

suggest up to 980 new turbines and $88 million exemptions)

• Possible 3,152 new turbines** in 2017 based on FERC interconnect filings:

- 3,152 x $90,000 = $284 million possible exemptions in 2017

The Oklahoma Giveaway #4 – Manufacturers Sales Tax Exemption for Wind

6 *Oklahoma Tax Commission **6,304MW capacity (including deferred 2014-15 projects listed as "Executed / On Schedule" by SPP) / 2MW avg. capacity per turbine = 3,152 turbines

Oklahoma’s Subsidized Wind Power is Going to Out-of-State and Foreign Companies

93% of wind companies doing business and receiving the wind subsidy in

Oklahoma are out of state and foreign owned

• Oklahoma ranks 4th in the nation for

installed wind capacity

• But only 7% of the wind company

ownership is Oklahoma-based

• 37% are foreign companies

• 56% are U.S., but out-of-state companies

7

• 63% of Oklahoma’s wind capacity is tied to out-of-state sales contracts

• The term “carpet baggers” is truly applicable to these companies. They don’t live

here, don’t vote here, and don’t contribute to Oklahoma communities or economy

8

• Since 2003, nearly 2,800 wind turbines have been constructed in 21

counties with over 5 million kilowatts of capacity

• In just the two years from 2016-17, that capacity is expected to double*

The Oklahoma Giveaway is Soaring to New Heights

9 Source: U.S. Energy Information Administration

Sen. Kevin Easley Projections in 2001

2014-15 Estimated Payouts

2016-18 Estimated Payouts

*Source: SPP Interconnect Filings, Project Websites

0.7 2.0

58.0 64.0

88.2

133.8

253.8

-

3,000

6,000

9,000

12,000

15,000

18,000

-

50.0

100.0

150.0

200.0

250.0

300.0

2004 2005 … 2014 2015 2016 2017 2018

Inst

alle

d C

apac

ity

(MW

)

$ M

illio

n

Estimated Zero Emissions Tax Credits

A Tsunami of Proposed Wind Turbines is on the Horizon

10

Why This All Must End Now

11

0

10

20

30

40

50

60

0

2,000

4,000

6,000

8,000

10,000

12,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *2016

Nu

mb

er o

f A

pp

licat

ion

s

Cap

acit

y (M

W)

Size MW

# Apps.

Industrial Wind: The New Oklahoma Land Rush

Active Southwest Power Pool (SPP) Grid Connection Requests Filed by Year

*2016: Full year estimate based on first 4 months' applications (Jan-Apr: Seventeen requests filed totaling 3,975 MW) Source: https://studies.spp.org/SPPGeneration/GI_ActiveRequests.cfm accessed 5/3/16

Wind Production Must be Taxed

• Unlike the oil and natural gas that wind is displacing, Oklahoma

does not impose a production tax on wind

• Oklahoma must level the energy playing field. The government

should not be picking winners and losers

• Production tax should be in parity with all forms of energy

produced in Oklahoma

• Assess gross production tax, similar to that of oil and natural gas

for education in Oklahoma – calculates to be $74 million for 2016

• Other states tax wind production

12

1,445

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

-

200

400

600

800

1,000

1,200

1,400

1,600

Hen

ry H

ub

Nat

ura

l Gas

Sp

ot

Pric

e ($

/MM

Btu

)

Tho

usa

nd

Meg

awat

t H

ou

rs p

er M

ont

h

Oklahoma Wind Generation Erodes Natural Gas Price

Oklahoma Wind Generation

Avg 2015 Generation - 18%

OK Renewables Target - 15%

Avg Henry Hub Price

Expected to double from 2015 level in next 2 years

Surpassed renewable

state target in 2015

Subsidized Wind is Displacing Natural Gas, Oklahoma’s No. 1 Source of Tax Revenue, to the Tune of $42 Million a Year

Source: EIA

$1.63 Oklahoma spot

price as of March 1, 2016

13

Share of Energy Production in Oklahoma From Coal, Wind and Natural Gas

Source: EIA Actuals through 2015 and Windfall Coalition Estimates Using SPP Generator Connect Applications

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MW

h

Net Generation from Coal, Natural Gas and Wind in Oklahoma

Natural Gas Wind Coal

14

Oklahoma’s Giveaway Amplifies the Budget Crisis

15

Oklahoma currently has a $1.3 billion budget shortfall

• It is popular to blame low oil and natural gas commodity prices but at least $800 million

of the $1.3 billion has nothing to do with oil and gas

• An unbudgeted $200 million or more is projected to be given to wind subsidies in 2016

– Oklahoma had to borrow money to pay October 2015 wind subsidies, which offset all

corporate income taxes (Source: Oklahoma Secretary of Finance, Administration and

Information Technology)

• This is in addition to $42 million in lost natural gas production tax as well as forced

unemployment in the natural gas sector

• Oklahoma does not specify a limit on wind subsidies – this $200 million is projected to

grow with no cap

• Unfunded, unlimited, unfounded, unbudgeted, unaccountable, unconscionable –

unintended consequences of unregulated, non-taxed subsidy

$978,167,008.46

$896,683,202.33

$715,072,537.36

$860,108,106.18

$697,846,701.04

$0.00

$200,000,000.00

$400,000,000.00

$600,000,000.00

$800,000,000.00

$1,000,000,000.00

$1,200,000,000.00

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Source: OTC Data

Oklahoma Gross Production Taxes FY 2011 - FY 2015

16

Delta =

$280,320,307.42

Jan-07 155,000

Mar-15 473,000 Jan-06

4.412

Jun-15 7.036

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Gas

Pro

du

ctio

n (B

cf/d

ay)

Cru

de

Oil

Pro

du

ctio

n (B

PD)

Crude Oil: 205% Increase Natural Gas: 59% Increase

20

5%

Incr

ease

59

% In

crea

se

Source: U.S. Energy Information Administration. From peak levels to Jan 2016, EIA reports a decline of 14% in oil production to 405,000 BPD and a decline of 2% in gas production to 6.813 Bcf/day.

Oklahoma's Field Production of Crude Oil and Natural Gas

Why Wind Companies Take Advantage of Oklahoma Taxpayers

• Oklahoma does not cap wind subsidies

• The Oklahoma zero emission tax credit is paid on production

instead of sales and is not monitored or regulated

Incentive/Credit 1. Texas 2. California* 3. Iowa 4. Oklahoma

Zero Emission Tax Credit ~$20 M* $

Ad Valorem Tax Exemption $ $ $

Investment Tax Credit $ $ $

Manufacturers Sales Tax Exemption $ $ $

No Cap on Subsidies $ $

Paid on Production vs. Sales $

Subject to Regulation Yes Yes Yes No

$$$ $$ $$$ $$$$$$

18

Source: Database of State Incentives for Renewables & Efficiency *Renewable mandate of 33% *363 MW capped X = retracted

X

X

Global Natural Progression Away From Wind Subsidies • Europe is eliminating their wind subsidies

• European wind companies have planted their flags in Oklahoma

Spain’s subsidized green energy initiative was a failure. Economists found that each wind job cost taxpayers $1.3 million – and for every 4 jobs created, 9 jobs were lost. Source: Economist Dr. Gabriel Calzada Álvarez, King Juan Carlos University in Madrid

I wonder how long it will take Okies to react to this invasion?

19

Oklahoma’s Giveaway During a Budget Crisis and Solutions

2016 Cost Solution

Cash Subsidies $133 million Remove Subsidies

Exemptions $67 million Remove Exemptions

Lost Gas Tax Revenue $42 million Impose Wind Production Tax

Total Cost $242 million

20

Recommended Gross Production Tax*

$74 million

• 7% on existing production capacity • 2% per year for the first 36 months, then 7% per

year thereafter on new production capacity

*Unadjusted for growth and assuming $.04 per kWh sales price

2016 Total $316 million at current rates of wind production

Unfunded Liability of Investment Tax Credit

Estimated at up to $150 million over the life of the ITC

Oklahoma Legislators Must Take Immediate Action to Address Oklahoma’s $1.3 Billion Budget Shortfall

Eliminate now the 4 current subsidies for the wind industry

1. Zero emission tax credit

2. Ad valorem tax exemption

3. Investment tax credit

4. Manufacturers sales tax exemption

Assess gross production tax on wind-generated power in parity

with oil and gas production for education

Establish wind industry regulation for this growing industry

21

Have You Got One of These in Your Back Yard Yet?

22

23

A Decade of Death by a Thousand Cuts

24

A Decade of Death by a Thousand Cuts

25

CLR Global Supply and Demand Forecast

• World demand up 1.3 MM Bpd

• SUV/truck sales at a record high

• Global strategic stockpile build ~500K Bpd

• Horizontal decline rates are 3-4x higher than vertical rates

• Conventional decline rates accelerating

• Significant project deferments (Woodmac: $380bn, IHS: $1.8tr)

• 1% swing = $35/bbl price change

(2.0)

(1.0)

-

1.0

2.0

92.0

93.0

94.0

95.0

96.0

97.0

98.0

3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

S/D

Bal

ance

(MM

BP

D)

Sup

ply

an

d D

eman

d (M

M B

PD

)

EIA Global Petroleum Supply and Demand Forecast

S/D Balance Global Supply Global Demand

(2.0)

(1.0)

-

1.0

2.0

84.0

89.0

94.0

99.0

3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17S/

D B

alan

ce (M

M B

PD

)

Sup

ply

an

d D

eman

d (M

M B

PD

) CLR Global Petroleum Supply and Demand Forecast

S/D Balance Global Supply Global Demand

Cannot Replace Supply Overnight: The Bakken Example

History Suggests Small Changes in Balance Lead to Large Swings in Price

Source: EIA, CLR forecast of supply/demand balance

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

25.00

50.00

75.00

100.00

125.00Q

1 2

006

Q1

200

7

Q1

200

8

Q1

200

9

Q1

201

0

Q1

201

1

Q1

201

2

Q1

201

3

Q1

201

4

Q1

201

5

Q1

201

6

Q1

201

7

Imb

alan

ce a

s %

of D

eman

d

Oil

Pri

ce ($

/bb

l)

Imbalance as % of Demand Brent Spot Price Imbalance Trend

Price reversal when imbalance began to decrease, not when market became balanced

Stable prices when market in balance

History suggests rebound of ~$35 per 1% swing in S/D balance

Forecast →

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