PENNSYLVANIA GEOLOGY & ECONOMICS PA LAND TRUST ASSOCIATION NATURAL GAS CONFERENCE Thursday, June 19, 2008 GEOLOGY 101: THE BASICS *! THREE ROCK TYPES SEDIMENTARY, IGNEOUS, METAMORPHIC *! WEATHERING & EROSION *! HEAT, PRESSURE, & TIME *! LAW OF SUPERPOSITION *! LAW OF HORIZONTALITY *! LAW OF LATERAL CONTINUITY GEOLOGY 101: THE BASICS GEOLOGY 101: THE BASICS Beneath PA-Turnpike, Near Bedford GEOLOGY 101: THE BASICS Beneath PA-Turnpike, Near Bedford GEOLOGY 101: SEDIMENTARY ROCKS *! COMPACTION, CEMENTATION, & LITHIFICATION *! POROSITY *! PERMEABILITY *! RESERVOIR REQUIREMENTS GEOLOGY 101: PETROLEUM *! KNOWN AS HYDROCARBONS *! FORMATION BIOGENIC vs. THERMOGENIC vs. ABIOGENIC *! OIL & NATURAL GAS DEPTH, PRESSURE, TEMPERATURE, ORIGINAL MATERIALS GEOLOGY 101: CREATING A GAS FIELD *! SOURCE, RESERVOIR, & TRAP *! STRATIGRAPHIC vs. STRUCTURAL PENNSYLVANIA OIL & GAS FIELDS Oil Field Natural Gas Storage Field Natural Gas Field PENNSYLVANIA DOCUMENTED OIL & GAS WELLS Total Wells Represented Above: 135,322 POTENTIAL MARCELLUS SHALE "Fields" GROSSLY GENERALIZED THICKNESS CARTOON DEP ISSUED WELL PERMITS - 2007 DEP ISSUED WELL PERMITS ­ thru APRIL 2008 THE THREE DISTINCT PHASES OF NATURAL GAS DEVELOPMENT *! LEASING & ACQUISITION *! EXPLORATION & SCIENCE *! DEVELOPMENT & RETURN Sediment Core Michaux State Forest TRACT 285 #1 WELL TD: 19,365' PLUGGED TO: 13,120' RISK & NATURAL GAS RESERVE ESTIMATES *! RESERVES, CONTINGENT RESOURCES, PROSPECTIVE RESOURCES *! PROVED, PROBABLE, POSSIBLE *! SANDSTONES, SILTSTONES, LIMESTONES, DOLOMITES *! ORGANIC SHALES - MARCELLUS *! ENGELDER & LASH ­ 168 > 500 Tcf: 50 Tcf Tech Recv. *! USGS ­ 20 > 50 Tcf: 2 Tcf Tech Recv. *! YOU DECIDE..... MARKETING THE NATURL GAS RESOURCE *! EAST COAST NATURAL GAS MARKET *! PIPELINE INFRASTRUCTURE ­ Gathering, Marketing, Transmission *! CAPTURE, COMPRESSION, CAPACITY *! CURRENT NEEDS ! NON-TRADITIONAL AREAS VALUING THE NATURAL GAS RESOURCE *! LEASING ECONOMICS ! Bonus, Royalty, Manpower *! EXPLORATION / DEVELOPMENT ECONOMICS D&C Costs, Equipment, Infrastructure *! ENERGY NEEDS ! Yesterday, Today, & Tomorrow Example: October 2005, October 2006, March 2008 Department of Conservation & Natural Resources Bureau of Forestry Oil & Gas Program DCNR Legal Mandates *! Conservation and Natural Resources Act 1995 ­!302(a)(6) Authorizes DCNR to make and execute leases for mining or removal of valuable material from State Forests. ­!302(b)(10) Empowers DCNR to lease State Forest for underground storage of natural gas *! Act 1955-256 Established "Oil and Gas Fund." Royalties and rents to be used by DCNR for conservation, recreation, and flood control The mission of the Bureau of Forestry is to ensure the long-term health, viability and productivity of the Commonwealth's forests and to conserve native wild plants. The Bureau will accomplish this mission by: Managing State Forests under sound ecosystem management, to retain their wild character and maintain biological diversity while providing pure water, opportunities for low density recreation, habitats for forest plants and animals, sustained yields of quality timber, and environmentally sound utilization of mineral resources. Gas Wells Drilled on State Forest Land Through a Commonwealth Lease Agreement 1947-2007 1,437 wells in 60 years OIL & NATURAL GAS PROGRAM *! OIL & GAS LEASE FUND (1955) ­ Rents, Royalties, Associated Fees *! OVER $153 MM GENERATED *! USES OF O&G LEASE FUND 26 State Parks, State Forest Land, Subsurface Rights, Pine Creek Trail OIL & NATURAL GAS PROGRAM *! DCNR OWNS 85% STATE FORESTS fee simple *! CURRENTLY 99 ACTIVE LEASES on 270,609 acres *! GAS STORAGE LEASES on 69,983 acres *! 650 ROYALTY PRODUCING GAS WELLS *! $4.4 MM REVENUE ­ 2007 (O&G Lease Fund) OIL & NATURAL GAS PROGRAM *! DCNR LEASE AGREEMENT *! SURFACE USE AGREEMENT (Severed Ownership) *! SURETY BONDS *! COMPREHENSIVE OVERSIGHT *! WELL LOCATION APPROVALS *! TIMBER DAMAGES *! PLUGGING CLAUSE OIL & NATURAL GAS PROGRAM *! OIL & GAS WEBSITE http://www.dcnr.state.pa.us/forestry/oil_gas.aspx *! FORESTRY DOCUMENTATION http://www.dcnr.state.pa.us/sfrmp/documents.aspx MINERALS SECTION MAIN # 717-787-4835 Nathan Bennett: 717-783-7940 nabennett@state.pa.us OGM Activity & Development on State Game Lands Michael DiMatteo, Chief Oil/Gas & Mineral Development Division of Environmental Planning & Habitat Protection June 19, 2008 P E N N S Y L V A N I A S T A T E G A M E L A N D S N The image cannot be displayed. Your computer may not have enough memory to 1,428,908 Acres open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again. 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The Commission may issue permits, licenses and enter into leases for uses of its lands as it deems in the best interest of the commission at such charge as it deems reasonable Title 34 Game and Wildlife Code *! Chapter 7 ­ Subchapter B ­! 723 Exchange or Sale ­! The Commission may, by resolution adopted by a majority of the members present and voting at a public meeting: *! (1) Authorize the exchange of any lands acquired in return for lands having an equal or greater value when the exchange is in the best interest of the Commission. *! (2) Exchange timber, minerals, oil or gas to which the commission holds title for suitable lands having an equal or greater value. Title 34 Game and Wildlife Code *! Chapter 7 ­ Subchapter B ­!724 Disposition of timber, minerals and other products *! The commission may dispose of by lease, sale, or otherwise, timber, buildings, other appurtenances, minerals, oil, gas, or rights therein, including natural gas storage, or any other product, on or under lands to which it has title. Title 34 Game and Wildlife Code *! Chapter 7 ­ Subchapter B ­!726 Leases *! Not withstanding any other provision of the law, the director, with the approval of the commission, may lease any land or interest in land over which the commission exercises title or control for a term not to exceed 25 years when the commission determines the lease will promote public hunting or furtaking or benefit the game or wildlife resource or will otherwise further the interests of the commission Leasing Policy *! Bid Process *! Land Exchange *! Sole Source lease due to circumstances BID PROCESS *! Oil/Gas company nominates Gameland *! PGC determines OGM ownership - prepares map *! Questionnaire sent to Regional Office *! Regional Office comment, review and recommendation. *! Comments reviewed and any wildlife habitat and environmental concerns addressed. *! If all concerns are met Bid package can be initiated *! If all concerns not met- then further discussions occur and decision is made whether to proceed or to not proceed any further. Bid Process (cont.) *! If bid process continues, a comprehensive review is completed to delineate critical and unique habitat areas, no drilling areas, and well spacing distance. *! Lease bid map prepared. *! Site specific drilling and development restrictions established to include: ­! Reclamation and revegetation plans ­! Land rental requirements ­! Assigned acreage for producing wells Bid Process (cont.) *! Formally notify Commissioners *! Written public notice and bid advertisement in two local papers Personal bid invitations sent to most probable bidders *! Bids received and opened *! Highest bidder recommended for Commission approval and lease award Bid Process (cont.) *! Leasing Action approved by Commissioners *! Lease terms and conditions approved by Chief Counsel and State Attorney General *! Bond collected and held for term of lease *! Meeting with Lessee to review all terms and conditions. *! Periodic field review and audit by PGC. Land-Lease Exchange *! Land exchange provided land has equal or greater value. *! Opportunity to offset "Temporary Loss" *! Exchange rate of 3 to 1 ie: Hunters get 3 acres of land in exchange for each acre leased. Lease Value towards Land *! Bonus $/acre *! Well location Fees *! Surface support value (6% f.o.b. pit price) *! Coal or Mineral value (6% f.o.b. pit price) ­!If all upfront as a LAND exchange Land Value towards Lease *! Habitat values (thermal cover, wetlands, species diversity , hunting opportunity, T/E species, streams, soils, etc.) *! Indentures, Interiors, Additional Public Access Needs, Stand alone parcel, OGM under current State Game Lands surface previously excepted out *! PGC assesses land value upfront ­! Comparable sales values for local real estate ­! Other related OGM values ­! Total PGC value credit towards advanced surface damage royalties or timber surface damages (single stumpage) Sole Source Lease Action due to Circumstances *! Oil/gas drilling on private reserves encroaching on PGC owned reserves *! Coal mining on adjacent lands presents opportunity to complete reclamation projects on Gamelands through leasing. *! Potential Lessee owns the land, or can cause to have PGC designated land conveyed Goals & Strategic Objectives *! Maintain & improve wildlife habitat *! Land acquisition & Habitat Enhancement *! Promote natural resource recovery on Game Lands *! Ensure wildlife habitat impacts are considered during regulatory permit review *! Monitor wildlife mitigation plans & critical habitat *! Develop sustainable funding sources thru OGM recovery, compliance, and damage assessment *! Protect & Conserve wildlife species of special concern RESOURCE RECOVERY QUESTIONAIRE PURPOSE *! Information Gathering *! Assessment *! Pros & Cons of proposed activity *! REGION / FIELD INPUT Resource Recovery Quest. *! Harrisburg will provide map depicting: ­! SGL boundary ­! OGM ownership ­! Proposed lease area(s) ­! NWI wetlands & Hydric Soils ­! Wild Trout Streams & Chap 93 designations *! EV, HQ, CWF, WWF ­! Species of special concern and Buffer area ­! Existing well locations ­ coal mines, highwalls etc Resource Recovery Questionnaire *! Current and historic drilling activity *! Assessments, surveys academic research etc... *! Wetlands *! Critical & unique Habitats *! Wildlife propagation areas *! Wild or Scenic Rivers, historical sites, regional trails, or public recreation areas *! suspected or confirmed species of special concern and/or their habitats *! public or private water supplies MINERAL OWNER VS Surface Owner !! "#$%&'()*+$%&),*&)(%--%%.)/'-)#01(#%2)/4)4*)5-%) 4/%)-5&6'7%)'-)&%'-*$'8(9)$%7%--'&9)6*&)0#$%&'() %:1(*&'4#*$)'$2)1&*2574#*$) !! ;6)9*5)2*)$*4)*+$)4/%)*#()'$2)3'-)5$2%&)9*5&)('$2<) 9*5)7'$$*4)1&%=%$4)4/%)0#$%&'()*+$%&>-)&%'-*$'8(%) '77%--)6*&)2%=%(*10%$4)'$2)1&*2574#*$ !! ?'$2*+$%&)/'-)/4)4*)1&*4%74#*$)6&*0) 5$&%'-*$'8(%)%$7&*'7/0%$4)*&)2'0'3% Severed mineral interest *! Severed mineral interest: the mineral estate is separate from the surface estate *! Mineral estate is generally dominant to the surface estate OGM activity on SGL *!77,256 acres leased *!117 leases *!319 wells on PGC leases *!2,610 Total oil/gas wells on SGL PGC well permits 2006-2008 OGM activity on SGL Gas Activities & Impacts Surface Use Activities Access roads (permanent vs. temporary) *! Exploratory drilling *! Haulroads (OGM related, timber related) *! Maintenance & Service roads *! Private access roads (individual dwelling) *! Public access roads (park, other State Agency, etc.) Surface Use Activities (cont.) Seismic geophysical lines Coal gob vent holes and air shafts Passive treatment systems and watershed abatement projects Electric transmission lines Oil/Gas pipelines Gas Compressor stations Sewer lines Water lines (private vs. public) OGM Well Coordination !! @('4)&%7%#=%2)#$)A'&&#-85&3) !! B%=#%+)C+$%&-/#1) !! @DE;)) !! B%=#%+)F%4('$2-G)H4&%'0)5-%-)I/'1)JK) !! H%$2)%0'#()L)0%0*)4*)B%3#*$)+#4/)0'1) Region Coordination !! ?'$2)"'$'3%&GM*&%-4%&)0%%4)+#4/)7*01'$9) !! M#%(2)B%=#%+)+%(()(*7'4#*$<)'77%--)&*'2<) 1#1%(#$%) !! N'((9)-5&6'7%)G)4#08%&)2'0'3%) !! H%$2)#$=*#7%)4*)I*01'$9) !! H%$2)7*19)4*)A'&&#-85&3) !! "*$#4*&)2%=%(*10%$4)'74#=#49)) Surface Damage *! Operator can make reasonable use of the surface for the purpose of exploring, drilling, operating for, use water, build roads lay pipe, Must compensate surface owner for damages to growing crops and timber, *! Well Location fee Exploration *! SEISMIC 2D OR 3D SHOOT *! USUALLY ALLOWED FOR IN LEASE TERMS *! REQUIRES PERMIT WELL SITE DEVELOPMENT LANDOWNER NOTIFICATION-PLAT LOCATION APPROVAL TIMBER ASSESMENT CLEARING / GRUBBING E&S CONTROLS SLUSH PIT GRADE / LEVEL SITE for RIG Well Drilling Completion Steps *! Casing and cementing - stabilize the hole *! Perforations - allow oil, gas to enter the well *! Stimulation - increase production *! Equipment - determined by well conditions Well Casing Conductor, surface, intermediate, and production casing cemented in well. Well Fracing *! Artificial way to enhance permeability *! Pumping sand, water, polymers, gels, foams into formation under high pressure *! Liquid is then pulled out of well bore leaving sand in place *! Sand fills fractures and provides flow path for gas to well bore Perforating the Casing Reservoir A perforating gun OR Shape Charges are used to create holes in the casing and cement to allow fluids or gas to enter the well. Rule of Capture *! The Rule Of Capture: one who captures the resource has ownership and therefore there is no liability for capturing oil and gas that drains from another's lands *! Under the classic rule of capture, a landowner has only one option when someone is draining oil and gas from beneath his property: drill his own offset well to intercept the flow. Rule of Capture Property GAME Private Line LAND Land Gas well PGC Reserves can migrate = $ LOST How much gas can a well produce? Bradford Group Typical wells Royalty for life of well : $105,000 -$210,000 @12.5% $142,800 - $285,600 @ 17% Production ­ Decline Curve Medina Group Well 150,000 ­ 200,000 mcf for life of well $175,000 @ min Royalty $ 238,000 @ 17% Deep Well Decline Curve 1 million mcf for life of well @ $7 / mcf and 17% royalty = $ 1, 190,000 = $ 875,000 min Royalty 1 BCF 216 million cubic feet For years 10-23 ENVIRONMENTAL IMPACTS *! WATER USE *! TAILINGS AND DISPOSAL *! HAZARDOUS WASTE COLLECTION / DISPOSAL *! ROADS *! PIPELINES *! INVASIVE SPECIES WATER USE *! DRILLING PROCESS USES 50,000 ­ 70,000 GALLONS WATER *! FRACING USES MUCH GREATER AMOUNTS UP TO 1MILLION GALLONS / STAGE *! SRBC/DRBC WITHDRAW & CONSUMPTIVE USE PERMITS TAILINGS AND DISPOSAL ROADS & PIPELINES *! LOCATION APPROVAL BY PGC *! MUST FOLLOW BMPS / E& S CONTROL PLAN *! OBTAIN STREAM CROSSING/ ENCROACHMENT PERMITS Roads & Pipelines SITE RESTORATION *! 9 months after completion of the well *! PGC ­ seed mix rec plan for each site *! Site Restoration Report *! 9 months after plugging the well *! Well Plugging report WELL SPACING Density regulations Distance regulations provides for minimum distances between wells and for minimum distances between wells and boundary lines Unitization / Pooling Private Lease 10.8 acres @ 12.5% 60 % of area =7.5% of well on Private lease production Royalty 1000' Spacing 18 acres 40 % area PGC on PGC 7.2 acres @ 17.5% = 7% of well production The MARCELLUS SHALE *! Black, Organic Rich Shale *! Middle Devonian-aged, Moderate Depth (Btw Shallow UD Sands and LD Oriskany Ss) *! Present Throughout PA, Thickest in East, Fractured, Nano-Darcy Permeability *! Continuous resource / Resource Play / Source Rocks as Reservoirs The MARCELLUS SHALE *! Known about for Decades *! Completion Technology Play Fracturing Technology, Drilling Techniques *! Estimated 200 + TCF, 1200 miles Long *! Still "Unknown" *! Range Res., Atlas, Chief, Chesapeake, Cabot MARCELLUS Shale New York THEORETICAL EXPLORATION CARTOON ~ 6,000' DEEP, SOMEWHAT UNIFORM, 150' THICK or less TULLY LIMESTONE Vertical Well Bore MARCELLUS SHALE ONONDAGA LIMESTONE HUNTERSVILLE CHERT ORISKANY SANDSTONE THEORETICAL EXPLORATION CARTOON ~ 6,000' DEEP, SOMEWHAT UNIFORM, 100' THICK or less TULLY LIMESTONE MARCELLUS SHALE Angle of Deviation: 2000' ­ 3000' 90* in 500' "Horizontal Leg" ONONDAGA LIMESTONE "Rat Hole" HUNTERSVILLE CHERT ORISKANY SANDSTONE VERTICAL vs. HORIZONTAL DRILLING RECENT HORIZONTAL TECHNIQUES THEORETICAL COMPLETION TECHNIQUES From the Air From the Ground From Below *! 1 MM gal H2O *! Slickwater & Sand *! Increased Pumping Time, Multi Stage