Oil Coal Fields Of Pennsylvania Valuation Issues in

Oil

Coal Fields Of Pennsylvania

Valuation Issues in the Marcellus Shale Play Geology I Pennsylvania Geology Grabbing the Lease The Gas Industry’s Footprints What’s a person to Do? Boom & Bust

Current Boom & Bust • The Marcellus has been identified since the mid 1920’s. At 5000 feet in depth, it was unavailable to the drilling techniques at the time. When technology advanced significantly to economically drill to this depth, conventional (vertical bore) wells extracted gas only in the immediate area; horizontal (unconventional) techniques were adopted to extract product from a narrow band of gas bearing shale. • An overview of Pennsylvania’s Second Petroleum Rush

Geology I: What’s underground • Oil (Western PA: Quaker State, Pennzoil, Kendall-Still shipping PA crude!) • Shallow Gas and mid range gas (conventional) • Soft Coal(Bituminous) West PA, • Hard Coal (Anthracite) Eastern PA • Shale Gas (Marcellus, Utica)

Legal Possession of the Lease Fee Simple Deed Mineral (Non-Coal) Deed Non-Participating Royalty Interest

Acquiring Leasehold Bonus Money: An inducement to transfer the rights from the lessee to a lessor for a undisclosed sum of money NOT an indicator of the market value of gas rights being sought!

Bonus Money ≠ Value Bonus Money is the inducement paid to a landowner to do something based on the amount of value given to him/her by the landman. The acquisition of lands by companies is dependant issues such as: : – Unitization needs – Check-checkmate other lessees – Acquire blocks for future trade off

BONUS MONEY ≠ VALUE PRICE ≠ VALUE

VIP Definitions • • Differences Between Conventional/Unconventional Drilling Long before interest grew in developing Appalachian shale formations, there was a healthy oil and gas industry in Pennsylvania. The world’s first commercial oil well was drilled near Titusville, Venango County, in 1859. An estimated 350, 000 oil and gas wells have been drilled in Pennsylvania over the years, with about 70, 000 currently in production; by contrast, an estimated 6, 100 unconventional wells have been drilled in Pennsylvania since 2008. Conventional oil and gas wells can be found in parks and on public land, along highways, even in residential neighborhoods. A 2008 study showed the conventional industry supported more than 27, 000 jobs and generated more than $7 billion in annual economic activity – much of it in the state’s rural areas, supporting local businesses with revenue, farmers with royalty income and workers with excellent wages. An important distinction of the conventional industry focuses on the cost to develop those wells, their reduced production and the smaller return on investment they usually achieve, in comparison to shale wells. This translates into reduced profitability from these wells, and the influence that oil and natural gas commodity prices and other market forces have on their viability. If either the cost to drill these wells increases, or if the cost of oil and gas decreases, to certain levels, conventional wells become less viable.

VIP DEFINITIONS 2 • A well pad cleared for a conventional oil or natural gas well is smaller than that of a deep well and requires a smaller drilling rig to drill vertically and reach the targeted formation. It typically takes less than two weeks to drill these wells, with a few additional days required to stimulate and complete the well. Since the number of fractures into the rock are fewer than those of a horizontal well, the scope of the well stimulation operation is not as significant and does not require as much equipment or water. • Conventional wells in Pennsylvania are also not limited to just producing natural gas. These vertical, wells can produce oil, natural gas and both forms of energy. There are many uses for “Pennsylvania Grade” crude oil due to its high quality, including refining into gasoline, motor oil, lubricants and white oil. It is also further processed and used in cosmetics and topical ointments

Conventional vs. Unconventional • Conventional: straight down • Unconventional: Twists-turns

Fracking I The Compressor Truck

Fracking Site Process

Well Site: 2 H

Gas Interstate-Intrastate Lines

hydraulic fracturing. In this process, they inject water combined with chemicals into the well with enough pressure to create fractures in the rock formations -- fractures that can extend hundreds of feet long. To keep the fractures from closing again, drillers send down a proppant, which is a mixture of fluids, sand pellets. These fractures allow oil to flow more freely from the rock. According to the American Petroleum

Average & Median Values 250000 200000 150000 SALES DOM SALE AVE 100000 MEDIAN 50000 0 2005 -2006 -2007 -2008 -2009 -2010 -2011 -2012 -2013

Number of Sales/DOM 1200 1000 800 SALES 600 DOM 400 2005 -2006 -2007 -2008 -2009 -2010 -2011 -2012 -2013

LEASE FLOW CHART

Bonus Money Ups and Down

Royalty Calculator

Schematic Flow of Gas