GAS IMBALANCES

1. GASIMBALANCES  CRAIG LOSEKE

2. TYPES OF GAS IMBALANCES Transportation (Pipeline) Purchaser-Producer Producer-Producer (Well-head)

3. DEFINITION OF PRODUCER IMBALANCE The extent to which one or more owners of a property have sold a quantity of gas which is more or less than their gross working interest share of total gas available for sale.

4. CAUSES OF PRODUCER IMBALANCES JOA - Taking production in-kind Split-stream pipeline connections Contract negotiations Owners unwilling to sell Nomination process (Spot Market)

5. COMPONENTS OF GAS BALANCING STATEMENTS Production month Operator name Property name Owners w/ WI% Entitlement Owners current sales Purchasers Current month imbalance Cumulative imbalance Pressure base Disclaimer

6. SOURCES OF GAS BALANCING INFORMATION Pipeline/Gathering allocations Purchaser allocations Gas plant allocations Central Point allocations Ownership listing w/ WI%

7. MISCELLANEOUS GAS BALANCING STATEMENT ISSUES MCF v. MMBTU Irrigation/Lease use gas Check meters Unitized gas sales/gas imbalances Suspense/Unassigned/Unallocated gas

8. VERIFICATION/RECONCILIATION OF IMBALANCES Verify your entitled volume - check ownership percentage and arithmetically check the computation of entitlement. Test the total production deliveries shown in the gas imbalance statement against other reports that portray the total production. Confirm that your sales as shown on the gas imbalance statement represent volumes taken and paid to you by your purchaser. Confirm that cumulative imbalances roll correctly.

9. METHODS OF ACCOUNTING AND REPORTING GAS IMBALACNES Sales Method Entitlement Method Combination

10. ACCOUNTING FOR GAS IMBALANCES - VARIOUS ISSUES Payment of royalties Payment of production taxes Pricing DD&A Matching principle - operating expenses Sales in-excess of remaining reserves Federal income taxes Management reporting - reserves, cash flow

11. MANAGINGGASIMBALANCES

12. FOUR WAYS TO RESOLVE GAS IMBALANCES 1) Balancing in-kind 2) Periodic Cash Balancing 3) Cash Balancing at depletion 4) Negotiated Settlements (typically volume exchanges)

13. WHAT GOVERNS THE RESOLUTION OF GAS IMBALANCES? Joint Operating Agreement (GBA) Common Law (Court Cases)

14. IN-KIND BALANCING PROVISIONS Underproduced owner gives written request Percentage reduction of overproduced owner Allocation of make-up based on ownership Seasonal limitation Production beyond ultimately recoverable reserves

15. NOMINATION AND ALLOCATION PROCESS Operator provides make-up decimal to owner Working interest owner obtains purchaser Purchaser/Owner nominates to operator and pipeline Operator confirms nominations to pipeline Pipeline allocates production

16. CASH BALANCING METHODOLOGY First-in, First-out (“FIFO”) Last Sales Method LIFO, Weighted Average, etc. Settlement is net of taxes but not necessarily net of royalties

17. REASONS MANAGING GAS IMBALANCES IS IMPORTANT Time Value of Money! Uncertainty of resolving imbalance Cost to collect

18. PAYOUT The point in time as defined in the agreement, when the revenue received, net of taxes and royalties, equals the capital and operating costs expended plus penalty, if applicable for the project or operation

19. TWO TYPES OF PAYOUTS Farmout Agreements Non-consent Provisions

20. FARMOUTPAYOUTS

21. FARMOUT ARRANGEMENT- KEY TERMS Farmout/Farmin - a sharing arrangement in which oil and gas operating rights (working interest) are transferred to another party for such other party to develop all or part of the acreage at its sole costs, risk and expense Farmor - the party transferring the acreage to the Farmee for development Farmee - the party receiving the acreage assignment and assuming the risk of developing the acreage

22. KEY PROVISIONS OF A FARMOUT AGREEMENT Farmor has right to audit farmee Method of calculating payout should be described in detail Farmee shall furnish payout statement Notice of payout to be sent by farmee (election?) Effective date of payout

23. MISCELLANEOUS FARMOUT/FARMIN ISSUES Use NRI % that Farmor delivered Use Farmee’s gas price Entitlement vs. Sales (gas balancing)

24. NON-CONSENTPAYOUTS

25. NON-CONSENT ARRANGEMENT - KEY TERMS Consenting owner - a working interest owner who elects to participate in a project or operation Non-consenting owner - a working interest owner, signatory to the operating agreement, who has elected not to participate in a project or operation Carried interest - the working interest of an owner or lessee who does not participate in the development of the property and assumes no liability for its share of development costs and possibly operating costs.

26. KEY PROVISIONS OF JOA - OPERATIONS BY LESS THAN ALL PARTIES Operator sends notice of proposed operation Owners make election regarding operation Consenting owners make election regarding carrying non-consenting owners interest Method of calculating payout - including but not limited to penalty for drilling, equipment and operating expenses Audit rights

27. KEY PROVISIONS OF JOA - OPERATIONS BY LESS THAN ALL PARTIES (CONTINUED) Operator to send payout statement Notice of payout Effective date of payout

28. MISCELLANEOUS NON-CONSENT ISSUES Operator typically calculates payout for all consenting owners - each consenting owner has the option to prepare their own payout statement Operator uses their sales price Operator may use entitlement or sales (gas balancing?) Each non-consenting owners NRI % should be used

29. REPORTING/ACCOUTING ISSUES RELATED TO PAYOUTS Assets Revenues & Operating Expense DD&A Management Reporting - reserves, cash flow Federal income tax