co2 buyer’s perspective co contracting seminar · 03-12-2012 · can be called ―daily contract...

December 3, 2012 CO2 Conference Week – Midland TX

CO2 Buyer’s Perspective

Global CCS Institute’s

CO2 Contracting Seminar

Chaparral Overview

Company Statistics

2011 3Q 2012 2012

Forecast

Production (Boe/d) ~23,700 ~26,100

~25,200

Proved Reserves (MMBoe)1 156.3 153.1 N/A

Proved Reserves PV-10 ($ in mm)1 $2,309 $2,398 N/A

TTM EBITDA ($ mm) $313 $314 $334

¹Based on 12/31/2011 and 9/30/2012 SEC methodology

Founded in 1988, Based in Oklahoma City

Core areas — Mid-Continent (Oklahoma) and Permian Basin (W. Texas)

Oil-weighted producer (64% oil; 36% gas); R/P ratio 18 years

Third largest oil producer in Oklahoma

Stable 1P base with large potential upside – 742 MMBoe

Near-term growth potential through drilling in conventional

& emerging plays ~ 450,000 acres

Long-term growth through CO2 EOR – 74 candidate fields

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CO2 Buyer’s Perspective – Today’s Topics

I. Where is the Transaction?

II. Some Important Contract Terms:

A. No-Brainers (absolutes)

B. Got-To-Have’s (other essentials)

C. Like To’s (preferences)

III. Checklists To Consider

A. Contract Terms

B. Negotiating

IV. Additional Thoughts on CO2 Price

Copyright 2012 © by Keith Tracy

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Where is the Transaction?


Where is the Transaction?

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Many contract terms (not only price) can differ

significantly depending on where the transaction occurs

Natural CO2 Source (Sheep Mountain)

CO2 Compression (Chaparral’s Borger TX

Compression Facility)

Man-Made CO2 Source (CVR Partners Fertilizer Plant)

CO2 Pipeline (Chaparral’s Coffeyville Pipeline)

CO2–EOR Injection Well (Chaparral’s Farnsworth Unit)

Pre-

Compression

Post-

Compression

Delivered

At The Field


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Some Important Contract

Terms for a CO2 Buyer


No-Brainers (absolutes)

WHO: Parties

Buyer: as operator, as company, or an affiliate company

HOW MUCH: Quantity of CO2

Volume in mcf per day (or convert from tons to mcf/d)

Can be called ―Daily Contract Quantity‖ (DCQ)

Fixed, or fluctuating annually over time

WHERE: Delivery Point

WHEN/HOW LONG: Term/Tenor (plus renewal periods)

HOW MUCH: Price

Fixed, or formula driven based on oil price, or other

Dollars per mcf

More details in later session of Seminar

7 Copyright 2012 © by Keith Tracy

Gro

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Secondary

Development

Primary

Development

Tertiary

Development

Camrick CO2–EOR Flood

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Got-To-Have’s (other essentials)

WHAT: Quality

The purer, the better – to a point

Certain contaminants are a concern

EOR Field (i.e. MMP): N2, CH4+, H2S

Pipeline Integrity: O2, H2O


Pipeline Quality of CO2

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Cortez Sheep

Mtn.

Gas

Plants

Ethanol

Plants

Fertilizer

Plants

CVR

Partners

Dakota

Gasification

Industrial

Grade

CO2 (% purity) ≥ 95 ≥ 96 ≥ 96 ≥ 97 ≥ 95 ≥ 95 96.8 ≥ 99

H2S (ppm by weight) ≤ 20 ≤ 10 ≤ 10 ≤ 10 ≤ 20 1.1% ≤ 1

S (ppm by weight) ≤ 35 ≤ 10 ≤ 10 ≤ 40 ≤ 10 ≤ 35 ≤ 0.1

O2 (ppm by weight) ≤ 10 ≤ 10 ≤ 10 ≤ 20 ≤ 10 ≤ 30

N2 (ppm by weight) ≤ 4 ≤ 80 ≤ 4

CH4+ (mole%) ≤ 5 ≤ 2.5 ≤ 4 ≤ 5 1.0% ethane

0.3% methane

≤ 50 (ppm

by weight)

H2O (lbs per mmcf) ≤ 30 ≤ 25 ≤ 12 ≤ 30 ≤ 20

Temperature ≤ 120°F ≤ 100°F ≤ 120°F ≤ 100°F

CO (ppm by weight) ≤ 10

NO2 (ppm by weight) ≤ 2.5

Other ≤ 2,000 ppm organics

0.8%


Got-To-Have’s (other essentials)

WHAT: Quality

The purer, the better – to a point

Certain contaminants are a concern

EOR Field (i.e. MMP): N2, CH4+, H2S

Pipeline Integrity: O2, H2O

HOW MUCH: Pressure

Usually stated as a minimum psig

Can dramatically affect price (atmospheric pressure vs pipeline pressure)

Various real property rights and utilities may be needed, especially for man-made CO2 supply

Site Lease or Deed for compression/processing facility

Utility tie-ins (electricity, nat gas, water, wastewater, etc.)


Like To’s (preferences)

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Right to release

Right to not take or pay

Banking provision, if there is a take or pay

Liquidated damages, if man-made CO2 source goes away

Measurement – own the sales meter, or have right to install check meter

Limitation on liability

Force majeure

Flexibility in volume expectations during the term, due to EOR field response that may be different than initial expectation


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Checklists

Checklist of Primary Issues

Definitions Term Delivery, Acceptance, Take or Pay, Banking provision Price, Sales Point Quality and Pressure Equipment, Real Property matters (site lease, utilities, etc.) Measurement, Testing, Volume Determination Accounting, Invoices, Payments, Interest, Audits Title Transfer Point, Risk of Loss, Indemnification, Liabilities,

Insurance, Taxes, Credits (EOR, 45Q, Voluntary Carbon Credits) Covenants, and Reps and Warranties Force Majeure, Defaults, Remedies Time Schedules (if construction is necessary) Miscellaneous/General Provisions (Assignability, Dispute Resolution,

Governing Law, Choice of Forum, Notices, etc.) Adapted from http://www.sec.gov/Archives/edgar/data/1346980/000119312511080561/dex1031.htm (Exhibit 10.31 to Chaparral Energy 10K, filed March 29, 2011)


http://www.sec.gov/Archives/edgar/data/1346980/000119312511080561/dex1031.htm

http://www.sec.gov/Archives/edgar/data/1346980/000119312511080561/dex1031.htm

Contract Negotiation Process

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Reference Text: Contract Negotiations, by Gregory A. Garrett, CCH, Inc. (2005), pg. 61.

Other

Typical two-step negotiation process:

Start with a term sheet, letter of intent (LOI), or memorandum of understanding (MOU)

Then move to a fully-negotiated ―CO2 Purchase and Sale Agreement‖

There is no such thing as a ―standard contract‖

If there was, negotiation would not be necessary

A sample, exemplar or template can be helpful

Watch out for some favorite phrases of contract lawyers:

―; provided that …‖

―Subject to Section ___, …‖

―Notwithstanding anything in this contract to the contrary, …‖


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Additional Thoughts on CO2 Price

Additional Thoughts on Price

Types of prices

Fixed price (man-made CO2 source only)

―Oil Floater‖ price (man-made or natural CO2 source)

Other Aspects of Prices

May have periodic escalators (i.e. annually)

Portions of price might be pass-through of actual costs (i.e. electricity for compression costs)

Definitions for next page:

―WTI‖ = then-current oil price, based on WTI, NYMEX or other; a posted price for crude oil that is expected to change over time

―FOP‖ = fixed oil price (typically market price at time of contract execution); an initial crude oil reference price that does not change during the contract


Additional Thoughts on Price

Example Formulas of Oil Floater Prices:

$0.__ x (WTI / FOP)

$0.__ x (WTI / FOP), but a minimum CO2 price of $0.__ that escalates $0.__ annually

$0.__ x (WTI – FOP); and multiply by 1.1 if WTI is >$__

[$0.__ x (WTI / FOP)] + $0.__, but a minimum CO2 price of $0.__

[$0.__ x (WTI – FOP)] + $0.__

[$0.__ x (WTI / FOP)] + $0.__ that escalates $0.__ annually, but a minimum CO2 price of $0.__

If FOP ≤ y, then $0.__ + [(WTI – y) x $0.__]; if FOP > y-10, then $0.__ + [(WTI – {y-10}) x $0.__]


Keith Tracy

CO2 Supply and Transport Manager

Chaparral Energy

701 Cedar Lake Blvd.

Oklahoma City, OK 73114

(405) 426-4521

[email protected]

Contact Information

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co2 buyer’s perspective co contracting seminar · 03-12-2012 · can be called ―daily contract...

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