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Eagle Ford Shale Overview

Ramona Hovey, SVP Analysis and ConsultingFebruary 23, 2011

Copyright © 2010, Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies.

OVERVIEWEAGLE FORD SHALE

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Geologists have known about Eagle Ford Shale for several decades, but technology did not exist to produce economically

Conoco drilled first well in Sugarkane Field in 2006, however, early production was more Austin Chalk than Eagle Ford

Apache also started producing from Eagle Ford Shale in 2006. Most wells were vertical wells and focus was Austin Chalk.

October 2008 – Petrohawk STS #1 in Hawkville Field was first “true” Eagle Ford Shale well. Promising initial results help lead to increase in Eagle Ford Shale Activity

Early development was in more gas rich areas, but recent activity is almost entirely in liquids rich areas

June 2010 – Shell acquires 105,000 acre lease in Oil Window for $1 Billion USD and 25% royalty

Eagle Ford History

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Sub Basin of the Gulf Coast Basin. Covers an area 40 miles wide and 400 miles long, extending from Maverick County in South Texas to Brazos County in East Texas.

Deposited during the Cretaceous Period (approximately 65‐145 million years ago)

Underlies the Austin Chalk and Edwards Limestone and is above the Buda Lime. The Eagle Ford shale is the source rock for oil and gas in the Austin Chalk

Divided into lower transgressive and upper regressive layers. Transgressive shales have optimium oil‐prone potential; regressive shales are gas prone

Setting / Depositional Environment

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Maverick Basin Stratigraphic Column

Period Formation

Cretaceous Escondido

Olmos/CBM*

San Miguel

Anacacho

Austin Chalk*

Eagle Ford*

Buda*

Del Rio

Georgetown*

Pryor

McKnight

Glen Rose

Pearsall*

Pine Island

Sligo

Hosston

Jurassic

Eagle Ford Geologic Overview

Map Source: Geologic Map of Texas, Bureau of Economic Geology

*currently producing


Eagle Ford Structure Map

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Eagle Ford Isopach

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Age CretaceousPermeability up to 0.13 mdPorosity 4% to 15%TOC 4.5 to 5.5%Frac Nature Brittle, high calcite, fracs easyThickness 100‐330 ftDepths 4,000 – 14,000 ftPressure Gradient 0.6 psi/ftThermal Maturity 0.5 to 2.2% Vitrinite ReflectancePrimary Production Dry Gas / Wet Gas / Oil windows

Reservoir Characteristics – “Fracs Like a Dream”

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Three main areas of production The northern part of the play is the “oil” window, with lower pressure and high volumes of oil.

The middle section is the “wet gas” or “condensate” window

The deeper section farther south (=>15,000 feet) is the “dry gas” window

Eagle Ford Geologic Overview

Note: Gas/Oil Windows based on public data (EOG, HK) and internal analysis


ACTIVITY AND PLAYERSEAGLE FORD SHALE

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Two Waves of Leasing

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1.5 million acres leased in 2008

Peak: 2Q10 – 880,000 acres with majority in

liquids phase


Leasing By Quarter (Windows)

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• Average term historically around 36 months (3 years)

• Operators will begin to “drill up” expiring acreage in 2010

• Could present problems for operator’s with assets in multiple shale plays

• Royalties slightly increased over time in each window

• Dry Gas royalty (22%) higher than Oil and Wet Gas (21%) in 2010


Eagle Ford Leasing – Movement into Oil “Window”

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Early leasing in Gas rich area’s

Slow movement in 2007 into more “oily” area’s

First “wave” of leasing in 2008, mostly in oil

/wet gas phaseLow natural gas prices pushes

companies further into oil window

2nd “wave” occurs in early 2010, core area’s quickly leased up ,

slowing land rush by the end of 2010


Large Leases Available Early, but Little Left

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Shell – 105,000 acre lease. Paid $1

Billion USD in 2010 along with 25%

royalty

LaSalle & McMullen Counties represent some of the earliest and best wells –almost entirely leased up

St. Mary L&E –65,000 acre lease


Top 10 Grantees – 2006 to current

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EOG large leaseholder, but focused entirely in

Oil phase

Laredo – small private company in Dry Gas window

Some lease positions in North East Eagle Ford, but largely undeveloped and uneconomic wells


Expiring Acreage May Present Opportunities

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First “wave“ of leasing set to expire in 4Q11 if not drilled

Expiring acreage mostly in liquids rich

areas


Top 10 Grantees ‐ Expiring Leases

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EOG, Griffith, Cinco all have significant

“potentially expiring”position in oil phase


2010 ‐ Operators Change from “Acquisition” to “Drill Up”

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Over 90% of new permits are in oil or gas condensate window


Permits By Quarter (Windows)

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• Eagle Ford is actually 3 different shale plays with 3 different set of characteristics

• Operators beginning to “drill up” expiring acreage in 2010

• Total Depth getting smaller in oil window but laterals getting longer

• Dry Gas window – very little permit activity. Also, deepest area with largest total depth

• Wet Gas – horizontal length the same as oil window


Permits by Year

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Top 10 Permitters – Focus on Oil and Wet Gas Window

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Lewis only top permitter with any Dry

Gas permits

Chesapeake, Anadarko, and EOG in most shallow area


Top 10 Permitters (2010‐present)

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Operator Permit Count Avg Total Depth Avg Horz Length

CHESAPEAKE 322 7,432 6,269

EOG 212 11,693 5,091

ANADARKO 147 8,555 5,893

PETROHAWK 103 13,636 6,116

CONOCO 84 13,097 5,196

LEWIS PETRO PROPERTIES 77 14,833 5,295

PIONEER 74 16,729 5,030

ENDURING RESOURCES 60 14,323 5,144

ROSETTA RESOURCES 57 9,448 5,890

EL PASO 47 10,066 4,977

Grand Total 1,183 11,981 5,490


Historical Production – BOEPD (6:1)2009 Represents First Significant Production

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• October 2010 Production ~ 95,000 BOE/D

• Earliest production from commingled Apache wells

• Petrohawk’s Hawkville and Conoco’s Sugarkane first wells start producing in late 2008


Liquids vs Gas Production

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40,000 BBL/D

350 MMCF/D


Operator Quoted IP Rates – Little Correlation to Production

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R^2 not significant when comparing IP Rate to 6 Month Cumulative

Production


MaxIP – Good Predictor of Cumulative Production

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R^2 increases significantly when using MaxIP (peak

monthly production) instead of IP Rate


R‐Squared Continues to Increase When Comparing to 12/24 Month Cums

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MaxIP Early Indicator of Core Areas

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Conoco, Petrohawk, Pioneer significant condensate

production

Great oil/condensate production in 2010 from

Webb and Dimmitt Counties


MaxIP also Points to Gas Core Areas

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Conoco, Petrohawk, Pioneer also leader in gas production

Hawkville best results for gas MaxIP


Top Operators All in Core Areas

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Lewis Energy assets gas oriented, but position is still close to significant liquids

production


Top Operators also Represent Best in Gas Production

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Creaming Curves Continued – Useful for Comparisons

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Wet Gas best results of all three windows

Dry Gas beginning “cream over” due to depressed gas prices and little focus in area

Oil continuing to make gains in production


BEST PRACTICESEagle Ford Shale

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Operator Performance – Eagle Ford

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Operator Performance – Eagle Ford

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Big Savings In The Casing Design

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Forgoing Intermediate Casing Intermediate Casing is not necessary if the wellbore pressure can be controlled without it

Swift Energy quotes a savings of $800k per well by not setting an intermediate string

Surface casing is set to about 5,000’, then a production casing or liner is set to TMD

Source: Swift Energy

Source: Petrohawk Energy


Percentage of EF Wells with Intermediate Casing

Steady increase in percentage of wells without intermediate casing

over time


Play Wide Trends(Squares have Intermediate Casing, Circles do not)

60% of oil window wells do not use intermediate casing

Sugarkane and Blackhawk have a higher percentage of wells with

intermediate casing.

Early wells in Hawkville Field used intermediate casing. Current wells are trending strongly towards not setting


Maverick Basin wells follow the Hawkville trend of not using



RELATIVE ECONOMICS

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Relative Economics by Area

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Region B‐Factor EUR (Bcfe) %EUR @ 10 yrs

Hawkville Dry 1.4 4.7 54

Hawkville Wet Gas 1.1, Liq 1.1 5.4 65

Sugarkane‐Blackhawk Gas 1.1, Liq .6 5.5 73

Maverick Basin Gas 1.1, Liq 1.1 2.8 72

Copyright © 2010, Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 42

How does the Eagle Ford compare with other unconventional plays?

•Geology• Some of the best rocks•Good areal extent and thickness

•Activity/Players•Lots of activity•Many players

•Best Practices•Evolving quickly from a technical standpoint•Strong economics for liquid rich part of play•Questionable economics for gas part of play

•Infrastructure•Service bottlenecks but better than most plays•Restricted market access, particularly for oil/liquids

•Business Risks•Not significant compared to other plays

•Opportunities•Some undercapitalized leaseholders looking for capital•Experienced operators looking for development partners•Gas development opportunities for longer term players•Good opportunity for well capitalized companies


•Acreage• Very little open acreage• Expectations of high bonuses• Significant amount of expiring

acreage• Attraction of drilling

commitment• Market access

•Leasehold Acquisitions• Underfunded lease holders• Condensate/oil bias• Development potential upside

• Technology advances• Better capitalized operators• Re‐fracing possibilities• Infill potential/tighter spacing

• Joint Ventures

• Underfunded operators

• Relative attractiveness

• Access to experience

• Established service company relationships

• Market connections

• Risk/Reward tradeoffs

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What sort of opportunities does the Eagle Ford hold?

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