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OCAPL 2011 Shale Reservoir Development Act Multi-Unit Horizontal Wells in Oklahoma March 7, 2016

Learn about the 2011 Shale Reservoir Development Act in Oklahoma, which allows for the development of shale reservoirs through multi-unit horizontal wells. This comprehensive legislation harmonizes oil and gas laws with advanced drilling techniques, promoting efficient and responsible resource extraction.

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OCAPL 2011 Shale Reservoir Development Act Multi-Unit Horizontal Wells in Oklahoma March 7, 2016

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  1. OCAPL2011 Shale Reservoir Development ActMulti-Unit Horizontal Wells in OklahomaMarch 7, 2016

  2. Woodford Horizontal WellsJune 30, 2005

  3. Woodford Horizontal WellJune 30, 2011

  4. Largest Spacing Unit 640 acres spacing unit is not big enough 640 acre spacing unit 18 www.devonenergy.com

  5. 1280 Acre Spacing LegislationTechnology to drill 10,000’ 18 2008 Newfield 2009 Continental 10,000’ Lateral 19 330’ 165’

  6. 1280 Acre SpacingMineral Owners Objection 3,500’ Lateral 18 19 330’ 165’

  7. 1280 Acre SpacingMineral Owners Objection 3,500’ Lateral 18 19 330’ 165’

  8. Multiunit Drilling Sections 18 & 19-3N-11E Coal County

  9. Multiunit Drilling Sections 18 & 19-3N-11E Coal County

  10. Short Lateral in Section 19 18 19 Fault Mississippian Mississippian Woodford Woodford Hunton Hunton

  11. Multiunit Drilling – Stranded ReservesSections 18 & 19-3N-11E Coal County

  12. Multiunit Drilling First Mutiunit well spud 10/31/2010

  13. Single Well 73% of Drilling Cost NYSE: DVN www.devonenergy.com

  14. Two Single Wells2 x Drilling Cost 73% of Drilling Cost 73% of Drilling Cost NYSE: DVN www.devonenergy.com

  15. Multiunit Horizontal Well1.3 x Drilling Cost 63% of Drilling Cost NYSE: DVN www.devonenergy.com

  16. Multiunit Horizontal WellAdditional Reserves 2 Sections 10,560’ www.devonenergy.com

  17. Multiunit Horizontal WellOff Unit Surface Location NYSE: DVN www.devonenergy.com

  18. House Bill 1909 In August 2010, Commissioner Murphy assembled a group of stakeholders to come up with a solution to fully develop the Shale Reservoirs. The group found that the OCC was constrained in its ability to adequately protect the correlative rights, prevent of waste and promote the full development of these Oklahoma resources because of the limitations placed upon it by the existing statutory scheme. Advances in horizontal drilling techniques for wells drilled and completed in shale reservoirs (i.e., Woodford) advanced beyond the historical statutory spacing scheme, in particular with laterals exceeding 5,280 feet in length. Beginning in August 2010, the working group met eight (8) times, usually for three (3) hours per meeting, with the participants collectively investing hundreds of hours in discussing, drafting and re-drafting the Act.

  19. 2011 Shale Reservoir Development ActHouse Bill 1909 – April 13, 2011

  20. 2011 Shale Reservoir Development Act • The Act is not the same 1,280-acre drilling and spacing unit bills that royalty owners have opposed in prior years. • The Act is a comprehensive piece of legislation to promote development of shale reservoirs and is limited to shale reservoirs. • Aid in preventing waste and protecting the correlative rights of the owners of oil and gas rights. • Harmonize Oklahoma’s historical oil and gas law with the expanding technology of drilling and completing horizontal wells in shale reservoirs, including the use of horizontal laterals of over one mile long.

  21. 2011 Shale Reservoir Development Act • Mineral Owner Organizations supported the Act • Coalition of Oklahoma Surface and Mineral Owners (COSMO) • OK-NARO (National Association of Royalty Owners) • Oklahoma Mineral Owners Association (OMOA) • Farmers Royalty Company (one of Oklahoma’s oldest, largest and most active royalty companies) • The Act creates two new tools for the development of the Shale Reservoir • Multiunit Horizontal Wells (similar to Arkansas approach) • A new hybrid Unitization (similar to enhanced or secondary recovery units)

  22. 2011 Shale Reservoir Development Act • Allows drilling of horizontal wells in shale reservoirs across existing unit boundaries (i.e., across two or more existing 640-acre units). These wells are called “multiunit horizontal wells.” • The drilling & production costs, the oil and gas production and the sales proceeds will be allocated to each of the affected units in a manner to protect the correlative rights of parties in each unit. • The default allocation is a proration between the units based upon the feet of perforations in each of the units.

  23. 2011 Shale Reservoir Development Act The portion of the completed horizontal lateral in each unit will be treated as a separate well for that unit. The application and notice of hearing must be served on all owners who have a right to share in proceeds from the affected units.

  24. 2011 Shale Reservoir Development ActDefinitions • Shale Reservoir – a common source of supply which is a shale formation that is so designated by the Oklahoma Corporation Commission through rule or order and shall include any associated common source of supply. • Associated Common Source of Supply – a common source of supply which is immediately adjoining the shale common source of supply which is inadvertently encountered in the drilling of the lateral of a multiunit horizontal well.

  25. Multiunit Horizontal WellAssociated Common Source of Supply 18 19 Mississippi Woodford Hunton

  26. 2011 Shale Reservoir Development ActPooling • Pooling – The Commission may require the owners to pool their interests in each affected unit as to the development involving the multiunit horizontal well. • Prior Pooling – If the Commission has previously pooled the interest of owners in an affected unit in which a multiunit horizontal well is proposed, the Commission may amend the pooling order to the extent necessary to have the pooling order cover the development involving the multiunit horizontal well.

  27. 2011 Shale Reservoir Development ActDefinitions • Allocation Factor – the percentage of costs, production or proceeds allocated to a unit affected by a multiunit horizontal well. The allocation factor for each affected unit shall be determined by dividing the length of the completion interval located within the affected unit by the entire length of the completion interval in the subject multiunit horizontal well.

  28. Allocation Factor #1 #2 5,000’ / 9,000’ 55.56% 5,000’ / 8,000’ 62.50% 5,000’ 18 5,000’ Fault 3,000’ 4,000’ 19 3,000’ / 8,000’ 37.50% 4,000’ / 9,000’ 44.44%

  29. Multiunit Horizontal WellWell Proposal • Location of the well in both sections. • Proposed depth. • Proposed number feet of perforated lateral in each section. • Options in lieu of participation. • AFE www.devonenergy.com

  30. Multiunit SpacingFiled separate for each section Space 640 acres 28 Space 640 acres 33 330’ 165’

  31. Multiunit PoolingFiled separate for each section Pool 640 acres 28 Pool 640 acres 33 330’ 165’

  32. Multiunit Location ExceptionFiled separate for each section No closer than 150’ FNL No closer than 0’ FSL 28 No closer than 0’ FNL 33 330’ No closer than 150’ FSL 165’

  33. Multiunit Horizontal WellApplication www.devonenergy.com

  34. Multiunit Horizontal WellApplication • Applicant anticipates that approximately 50% of the completion interval of such multiunit horizontal well will be located in Section 28 and approximately 50% of such completion interval will be located in Section 33, with the cost of an the production and proceeds from such multiunit horizontal to be allocated between the affected units. www.devonenergy.com

  35. Multiunit Horizontal WellApplication • Participants pay drilling and completion costs based upon the proposed allocation. • After well is drilled the allocation is adjusted based upon the actual number of perforated lateral in each section. www.devonenergy.com

  36. Multiunit Horizontal WellFinal Order www.devonenergy.com

  37. Multiunit Horizontal WellPerforations www.devonenergy.com

  38. Multiunit Horizontal WellAllocation www.devonenergy.com

  39. Multiunit Horizontal WellAllocation 49.376% 50.624% NYSE: DVN www.devonenergy.com

  40. 5,000’ Lateral vs. 10,000’ Lateral • 5,000’ • Lateral Well • 12,000’ Vertical - $2,500,000 • 5,000’ Horizontal - $1,000,000 • 5,000’ Completion - $3,500,000 • __________ • $7,000,000 • 10,000’ • Lateral Well • 12,000’ Vertical - $2,500,000 • 5,000’ Horizontal - $1,000,000 • 5,000’ Horizontal - $500,000 • 10,000’Completion - $5,500,000 • __________ • $9,500,000

  41. Jacobs / AnnalouSingle vs Multi-Unit Economics • 2 Single Units • CAPEX = $14,000,000 • F&D = 7.15 $/BOE • ROR = 15% • NPV = $1,459,000 • 1 Multi-Unit • CAPEX = $9,200,000 • F&D Cost = 5.21 $/BOE • ROR = 28% • NPV = $4,232,000 www.devonenergy.com

  42. Multiunit Horizontal Well Applications From April 2011 to February 2016 thirty nine operators have filed 912 Multiunit applications. www.devonenergy.com

  43. Newfield’s 27 Section UnitizationFiled 2009 – Denied 2011

  44. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs • Is a hybrid concept between a drilling and spacing unit and a unitization (secondary recovery). • Each unit shall be two governmental sections. • 1280 acre unitization • OCC may expand to four sections if necessary to prevent waste, to protect correlative rights and will result in increased recovery of substantially more oil and gas.

  45. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs • Application of hearing must be served on all owners who have a right to share in proceeds from the affected units. • Legal description of the land covered. • Name and depth of each shale reservoir, including any associated common source of supply. • Log of a representative well completed in the applicable shale reservoir. • Plan of development – Proposed allocation factors and timing and sequence of drilling. www.devonenergy.com

  46. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs Existing Production – OCC may adjust the sharing of future costs incurred in connection with and future production and proceeds from any existing well or wells. www.devonenergy.com

  47. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs 18 19 330’ 165’

  48. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs • Drilling patterns and setbacks for the unit, including the permitted well location tolerances for the permitted wells within the unit. • No Location Exceptions, Increased Density, Separate Allowable Applications. • Well by well elections for working interest owners. • Consent of owners - No Unitization Order shall become effective without the written consent of sixty three percent (63%) of the working interest owners and sixty three percent (63%) of the royalty owners.

  49. 2011 Shale Reservoir Development ActHorizontal Well Unitization for Shale Reservoirs 18 17 63% Working Interest & Royalty Owner Approval 19 20

  50. Proposed LegislationMultiunit wells in other formations • 2013, 2014, 2015 - Proposed legislation that would allow the use of multiunit horizontal wells in “targeted reservoirs”, not just shale reservoirs. • Targeted reservoirs is any common source of supply which has been determined by the OCC that is appropriately suited for development through a multiunit horizontal well. • 2016? www.devonenergy.com

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