UFT RULE PROPOSALS09.16.2015

ADOPTING STATEWIDE HORIZONTAL RULES IN TEXASR. MARK HENKHAUS, PE, REGULATORY MANAGER, APACHE CORP

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Horizontal (HZ) drilling is an old method with new technology and much potential

It has enabled complex geometry of well paths Allows precise placement of entire lateral length Has dramatically increased drilling in unconventional

reservoirs- makes uneconomic plays economic Has dramatically increased production Has brought the US and Texas to the forefront of

energy technology and production!

HORIZONTAL DRILLING

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UFT means Unconventional Fracture Treated Generally, an unconventional reservoir requiring

horizontal drilling and hydraulic fracturing for commercial production

There is no formal designation by the RRC at this time This effort is a unique, grass-roots driven effort by

industry to implement state-wide horizontal rules Led by multi-trade group including the Alliance,

TIPRO, PBPA, and TXOGA

UFT? WHAT’S A UFT?

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Horizontal drilling is governed by Statewide Rule 86 SWR 86 was implemented 1990, amended 2000, 2001

and 2004 Rule was developed prior to current technological

developments in HZ drilling and multi-stage frac’ing In 1990 a long lateral was 500 ft… now it is not

uncommon to see 10,000+ ft laterals Clearly, SWR 86 needs modernization

CURRENT HZ STATUS IN TEXAS

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HZ well must be on lease at all points from formation penetration to terminus

No off-lease formation penetration point permitted No alternative lease line spacing (“heel” and “toe”) No “no perf zones” No “box rule” No “stacked laterals” In general, SWR 86 restricts efficient HZ development

rather than encouraging it

CURRENT SWR 86 REQUIREMENTS

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A formal procedure for the RRC designate certain fields as “UFT” fields within the rule Permeability < 0.1 md 5 producing wells 80% of wells must have been HZ and frac’ed Notice to operators If objections, set for hearing

Approximately 60 fields are under consideration at this time

PROPOSED UFT RULES-FIELD DESIGNATION

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A formal procedure for operators to nominate fields as “UFT” fields Formal request Notice to operators Applicant must submit technical data, including

Core analysis Well test Logs, other data as needed

If no protest, approval is administrative If protest, hearing is required

PROPOSED UFT RULES-FIELD DESIGNATION

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Allows duplicate assignment of acreage between vertical and horizontal wells

Identical to recent Spraberry (Trend Area) field rules Requires new P-16 to manage acreage accounting Allows full HZ development on vertically developed

tracts without use of Rule 38 (density) exceptions Example: 640 acre lease with 80 acre density.

Proposal would allow 8 vertical wells and 8 horizontal wells in this tract

PROPOSED UFT RULES-ACREAGE

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Proposal will allow field-wide density reduction to one-half existing density upon good evidence increased density needed for full development

Notice to operators Administrative approval if no objections

PROPOSED UFT RULES-DENSITY REDUCTION

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Streamlined procedure for Rule 38 density exceptions Reduced notice requirements- 600 ft radius No technical information required 21 day waiting period If no objections, administrative approval Similar to current Spraberry (Trend Area) procedure

PROPOSED UFT RULES-SWR 38

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Allows double assignment of acreage between vertical and horizontal wells

No requirements for Rule 38s in this case Does not affect field spacing Encourages HZ development without forcing vertical

operators into obligation drilling Essentially as Spraberry (Trend Area) rules allow now

PROPOSED UFT RULES- DOUBLE ASGMT OF ACREAGE

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Establishes a per-acre allocation formula for UFT fields.

Per-acre factors proposed: 100 bbl/acre oil, 600 mcf/acre gas

Overproduction can be cancelled upon request Allows for typical HZ production curves, with very

high rates early, steep decline, and long life

PROPOSED UFT RULES-ALLOWABLES

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Does not change field rule spacing Allows off-lease penetration point, with notice Allows Stacked Laterals Allows drilling box Allows NPZs- Non-Perf Zones in a well

PROPOSED UFT RULES-SPACING

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HZ lease line spacing without special field rules

Illustrated with statewide spacing

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HZ well-to-well spacing without special field rules

Illustrated with statewide spacing

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Does not change field rule spacing Allows off-lease penetration point, with notice Allows Stacked Laterals Allows drilling box Allows NPZs- Non-Perf Zones in a well

PROPOSED UFT RULES-SPACING

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Terminus

PenetrationPoint

First Take Pt

Surface Loc

Off Lease Penetration Point

Off Lease Surface Location

Allows full lateral length on lease

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Does not change field rule spacing Allows off-lease penetration point, with notice Allows Stacked Laterals Allows drilling box Allows NPZs- Non-Perf Zones in a well

PROPOSED UFT RULES-SPACING

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STACKED LATERAL WELLS

Vertical Section View Plat View

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The “red” wells are stacked laterals They share acreage and allowable

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Stacked laterals allow the conservation of acreage by allowing “multiple assignment” of acreage in multiple landing zones

Wells must be within a defined distance in distinct landing zones, 660 ft

Allow efficient drilling and development in thick, tight unconventional reservoirs

Enables additional HZ wells to “share” acres and allowable with the parent well

Common in modern HZ fields now

PROPOSED UFT RULES-STACKED LATERALS

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Does not change field rule spacing Allows off-lease penetration point, with notice Allows Stacked Laterals Allows drilling box Allows NPZs- Non-Perf Zones in a well

PROPOSED UFT RULES-SPACING

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Box Rule for Drilling Allows a “legal well” to be within a box 50 ft either side of

permitted well path Provides for drilling efficiency Common in recent HZ field rules

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Does not change field rule spacing Allows off-lease penetration point, with notice Allows Stacked Laterals Allows drilling box Allows NPZs- Non-Perf Zones in a well

PROPOSED UFT RULES-SPACING

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NPZ Illustration Allows penetration

closer to lease line than field rules allow

All take points must be within field rules

Notice required to NPZ offsets, opportunity for protest

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To address concern about wellbore placement and legal well spacing and take points, survey required

Requires as-drilled, as-completed plats for all HZ wells showing actual well path and first/last take pts

Plats must be certified by RPLS or PE as to the wellbore path and take points.

Continues requirements for directional companies to independently upload and certify directional surveys

PROPOSED UFT RULES-PLATS

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An orderly process for requesting new fields to be added to approved UFT list

Requires technical data Allows other operators to object Hearing process if objections, otherwise

administrative approval

PROPOSED UFT RULES-NEW FIELDS

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Alliance, PBPA, TIPRO, TXOGA have been working with RRC staff since early 2014 on this proposal

Those participating have the backing of their companies and their Trades

RRC staff has been very open to suggestions and have been very helpful in cleaning up proposals

Proposal exists in draft form only, has not been released by Trades or RRC

PROPOSED UFT RULES-CURRENT STATUS

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UFT group has requested RRC initiate formal rulemaking for SWR 5, 31, 38, 40, 45, 52, and 86

RRC must decide, at conference, to formally publish for rulemaking

Initially was to be at September conference, but we believe that is postponed until October

Upon publishing, public comments will be received

PROPOSED UFT RULES-GOING FORWARD

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When this proposal is open for rulemaking, please support the Alliance and the other Trades by expressing your support to the Commissioners, and commenting in writing to the RRC Rules Coordinator

PROPOSED UFT RULES-GOING FORWARD

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HZ development represents a sea-change in how we do business and how we develop resources

These proposed rules eliminate inconsistencies in existing rules

These proposed rules will eliminate red tape, increase efficiency, while still protecting correlative rights

These proposed rules will enable the technology shift to be utilized fully to the benefit of the operators, owners, and the State of Texas

BENEFIT OF UFT RULES

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These proposed rules will work These proposed rules are essentially in place now, in the Spraberry They work now in the Spraberry (Trend Area) Field

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Full Development in Action!

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Texas has always been the most important contributor to American energy, but there has never been a time where the work of Texas operators has been so closely tied to international geopolitics, economics and the security of our nation. For the past 50 years we have been in a near-constant price war with OPEC. This paradigm has shifted... it is now a production war. As Texans we only know a few ways to deal with our problems: work harder, get better…. and Win!

PROPOSED UFT RULES- IN CLOSING

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UFT RULE PROPOSAL09.16.2015

ADOPTING STATEWIDE HORIZONTAL RULES IN TEXAS

THANK YOU!