When You Think WESTERN LANDS & ENERGY, Think Fulbright.TM

August 27, 2008Montana Petroleum Association

OIL & GAS UPDATE

Ken Wonstolen

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Natural Gas Production and Consumption

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1960 1970 1980 1990 2000 2010 2020 2030

(trill

ion

cubi

c fe

et)

Consumption

Production

History Projections

21%

20.5 Tcf

26.1 Tcf

16%Net Imports

Natural Gas Projections from EIA and Six Others: March 28, 2007Source: Annual Energy Outlook 2007

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Greatest Natural Gas Reserves by Country, 2006

Rank CountryProved Reserves

(trillion cu ft)1 Russia 1,680

2 Iran 971

3 Qatar 911

4 Saudi Arabia 241

5 United Arab Emirates 214

6 United States 193

7 Nigeria 185

8 Algeria 161

9 Venezuela 151

10 Iraq 112

11 Indonesia 98

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Let’s discuss your cost of natural gas.

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North American Gas Production

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•Last year – 50% of the natural gas consumed in the US came from wells drilled in the prior 40 months

•2 years ago – 50% of the natural gas consumed in the US came from wells drilled in the prior 48 months

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Since 2001, Incremental Rockies Volumes Have Averaged 446 MMcfd

Average446 MMcfd

421455

322

450 441

584

2001 2002 2003 2004 2005 2006

Changes in Gross Withdrawals

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What does it take to drill a well? Can you get a lease? Is the geology and terrain favorable? Can you get to market? What will it all cost? Can you get a drilling rig? How about a surface use agreement? What permits are required? How long will it take? Will the rig still be available?

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Legislation – the hangover from 2007 HB 1180 – production measurement HB 1252 – accommodation SB 237 – surface development HB 1298 – wildlife protection HB 1341 – COGCC reform and rulemaking

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Production Measurement &

Sales Reconciliation COGCC rulemaking completed April 1, 2008 Requires measurement and metering in accordance

with industry technical standards (API, GPA, etc.) Requires measurement prior to production leaving

the lease or production unit boundary Requires regular meter calibration, and gas quality

determination Sales reconciliation issue deferred

● Mcf MMBtu● Drip, shrink, lease use, NGLs, flaring, downstream sales● Correlation with tax reporting

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Accommodating the surface owner Codifies Gerrity v. Magness, 946 P.2d 913 (Colo. 1997); see

Getty Oil v. Jones, 420 S.W.2d 627 (Texas 1971) Minimize intrusion and damage to the extent an alternative

location or means of operation is technically feasible, economically practicable and reasonably available

Parties free to contract, and statute not to be construed to abrogate or impair a contractual provision that “expressly provides for the use of the surface … or that releases the operator from liability for use of the surface

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Surface Development Developers must notify mineral owners/lessees of

impending “applications for development” CRS 25-65.5-101 et seq.

In the Greater Wattenberg Area, “qualifying surface developments” require for local approval:● No objection;● Surface use agreement; or● Designation of specified “oil and gas operations areas;”

and,● Escrow of directional drilling costs ($87,500/well)

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The New COGCC Director of Department of Natural Resources Director of Dept. of Public Health & Environment Three with oil and gas experience, inc. degrees Local government official Experience in environmental or wildlife protection Experience in soil and land reclamation Agricultural producer who is royalty owner

Balance production with protection

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COGCC Rulemaking HBs 1298 & 1341 require a “timely and efficient”

APD review procedure, providing an opportunity for comment by CDPHE and CDOW

New regulations on protecting public health, wildlife and wildlife habitat are authorized

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Proposed regulation Draft regulation issued March 31, 2008 Approximately 40 pages of single-spaced text Affects every aspect of oil and gas operations and

regulation “Oil and gas locations” require Form 2A, and are

subject to approval – doesn’t apply to gathering systems or gas storage

Applies to wells, ancillary facilities and may involve consultation with CDPHE, CDOW, local government (LGD)

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Proposed regulation, continued Form 2A subject to “completeness” review

● Photos, including reclamation “reference area”● List of all equipment to drill, complete and operate● Scaled drawing of visible improvements w/i 400 feet● Topo map showing surface water and riparian areas w/i 1000 feet● USGS topo map showing 3 mile radius and access from public road● Designation of land use and basis for reclamation● Construction layout, cross-section plot for slopes>10%● NRCS soil map unit description● Wellbore trajectory (multi-well pad)● Impact mitigation plan● Wildlife survey and protection plan● Presumptive conditions of approval

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Proposed regulation, continued Timeframe for approval, including “completeness”

review, vary● 40 days if covered by Comprehensive Drilling Plan● 60 days if no LGD, CDPHE, CDOW consultation● 70 days if consultation is required● Concurrent surface owner consultation ● Public and adjacent landowner comment period● Ten day appeal period to Director● Operator may apply for hearing

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New environmental regulations Surface water drinking water supply areas

● Exclusion zone 300’ wide on permanent and intermittent streams● 5 miles upstream of public water system intake● Performance standards, baseline investigation, monitoring

Bradenhead monitoring during well stimulation Inventory of chemicals maintained and made available on

COGCC request. Proprietary formulations provided in response to spill or medical emergency, subject to confidentiality

Extensive requirements for CBM development VOC, odor and dust controls New pit permitting and design standards New E&P waste management rules Stormwater management requirements.

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New wildlife rules Wildlife survey for species of concern Transportation planning Mosquito control (West Nile) Bear control Equipment disinfection Timing limitations up to 90 days! (15 species) Restricted surface occupancy! (16 species, riparian

areas) Variance = consultation Reduced well pad density, or CDP

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Proposed regulation, continued Memoranda of Agreement with local governments;

state “floor” + local “ceiling” Pollution Prevention/Compliance Checklist and

annual certification Geographic Area Plans Financial assurance/bonding increases Increased penalties for violations

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The road behind and ahead … Party status – 86 parties, 34 industry COGCC prehearing statement Party prehearing statements >10,000 pages Party rebuttal statements > 4,000 pages Public comment hearings Testimonial hearings – 12 hours for industry Deliberations underway Legislative Review!

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When You Think WESTERN LANDS & ENERGY,Think Fulbright.

TM

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