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.
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
• 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
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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.
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OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
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Sources: Goldman Sachs Research, EIA
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
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OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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 ASSOCIATION
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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1775
179
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1815
1835
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1870
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1910
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1951
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2011
2013
Qu
ad
rill
ion
Btu
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
0
5
10
15
20
25
30
35
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
0
50
100
150
200
250
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
NATURALGAS 101
OKLAHOMA INDEPENDENTPETROLEUM ASSOCIATION
OKLAHOMA INDEPENDENT PETROLEUM ASSOCIATION
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
www.talloakmidstream.com
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%
CONFIDENTIAL INFORMATION 5
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
CONFIDENTIAL INFORMATION 6
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
www.talloakmidstream.com
Processing Basics
CONFIDENTIAL INFORMATION 8
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
CONFIDENTIAL INFORMATION 9
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
CONFIDENTIAL INFORMATION 10
NGL AND RESIDUE NETBACK
www.talloakmidstream.com
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
CONFIDENTIAL INFORMATION 12
NATURAL GAS MIDSTREAM MLP OVERVIEW
www.talloakmidstream.com
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?
CONFIDENTIAL INFORMATION 14
TALL OAK INTRODUCTION
MAY 18, 2016
www.talloakmidstream.com
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
www.talloakmidstream.com
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
www.talloakmidstream.com
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]
NATURALGAS 101
OKLAHOMA INDEPENDENTPETROLEUM ASSOCIATION
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
NATURALGAS 101
OKLAHOMA INDEPENDENTPETROLEUM ASSOCIATION
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 →
NATURALGAS 101
OKLAHOMA INDEPENDENTPETROLEUM ASSOCIATION