# Presentation: 780645

## EIA Energy Outlook and Modeling ConferenceImpediments to Developing Unconventional Natural Gas Resource PlaysMarch 27, 2006

**Laramie Energy**

## Agenda

**Laramie Energy Background**
**Unconventional Natural Gas Resource Plays**
**Emerging Resource**
**Financial Attributes**
**Model for Development**
**Impediments**
**Price Volatility**
**Market Access/Pipelines**
**Land Access**
**Regulations & Permitting**
**Obstructionists**
**Oilfield Services**
**Solutions**
**Implications**

## Laramie Energy Background

- Laramie Energy, LLC. was formed to invest in primarily unconventional natural gas plays in the Rocky Mountain region.  The Company was started in June 2004 and is headquartered in Denver, Colorado.
- Private Equity Capital commitments in the amount of $150 million dollars were obtained from EnCap Investments and Credit Suisse.
- Laramie Energy’s operations are focused in the  Piceance Basin of northwestern Colorado where it has accumulated interests in approximately 60,000 acres of Federal and fee mineral leases.
- The Piceance Basin is primarily a basin centered tight gas sand play in the Williams Fork section of the Mesa Verde formation.
- Since starting, the company has drilled 63 wells, grown reserves to 165 Bcfe and production to 15 MMcfd.
- In 2006 Laramie will operate a 5 rig drilling program to drill 100 wells and will participate in the construction of a 20 mile pipeline and central processing facility to move 60 mmcfd beginning in August of this year.

## Drilling Unconventional Indigenous Natural Gas Resources offers the Greatest Short Term Potential for Meeting the U.S. Goals of Safe, Affordable and Clean Energy

- Laramie Energy’s focus is on finding and developing gas reserves from unconventional gas reservoirs in the Rockies
- Rockies represent the largest onshore resource potential for natural gas in the lower 48.
- Advancing technology, potential pipeline expansions, improving Federal land access, and the Lower 48’s highest reserve potential provides the Country with the greatest opportunity to increase longer term supplies of natural gas.
- 80% of the Rockies Natural Gas Resource Potential Comes from Unconventional Natural Gas Resources:
-  Tight Gas Sands
- Coalbed Methane
- Shale Gas

## Business Rationale

***Unconventional reservoirs*** **(“UCRs”)** to be largest U.S. gas source within 10 years
- Production from*** UCRs has increased to 41% ***of natural gas output,
-      from 15% in 1990
- Production from ***conventional reservoirs has*** ***declined 15%*** since 1995
- Technological advances are shifting the E&P industry to **UCRs** to fill U.S. gas supply gap

**E&P Business is Being Revolutionized **

**Technological **
**Advances**

**Conventional Reservoirs:**
**Small volumes, difficult to find, **
**easy to develop**

**Unconventional Reservoirs:**
**Large volumes, easy to find,**
**previously less economic**
** ****to develop**

- Reservoir Knowledge
- Hydrofracing
- Stimulation
- Horizontal Drilling
- Drilling Fluids
- 3D Seismic

_**2004 U.S. Gas Production**_
**28%      Tight Gas Sands**
**  ****9%      Coal Bed Methane**
_**  **__**4%**_**      **_**Gas Shales**_
**41%      Total**

**Gas Shales**

**Oil**
** ****Shales**

## UCR’s have the following characteristics:
Lower drilling, completion, and operating risk (+98% drilling success rate with UCR)
Lower finding costs per Mcfe of reserves added
Lower reserve decline rates with tight sands and gas shale reservoirs
More predictable cash flow and capital expenditure programs
Yet requires a different corporate mindset than conventionally focused companies
Operations built around large scale development drilling (i.e. gas manufacturing projects)
Individual plays cover a wide aerial extent
Engineering project management, acreage inventory, and UCR technological expertise are key value drivers, not wildcat geologic prospecting

- Lower drilling, completion, and operating risk *(+98% drilling success rate with UCR)*
- Lower finding costs per Mcfe of reserves added
- Lower reserve decline rates with tight sands and gas shale reservoirs
- More predictable cash flow and capital expenditure programs
- Yet requires a different corporate mindset than conventionally focused companies
- Operations built around large scale development drilling (i.e. gas manufacturing projects)
- Individual plays cover a wide aerial extent
- Engineering project management, acreage inventory, and UCR technological expertise are key value drivers, not wildcat geologic prospecting

**UCR Gas – Lower Production Rates****	****         Longer Life Reserves****	**

** **

## Unconventional Natural Gas Resources

**Project Development Model**

** **

_**Basin / Play Analysis**_
-   Identification of Play Types
-   G&G/Engineering Evaluation
-   Reservoir Analysis
-   Review of Acreage Availability
-   Federal/State/Private
-   Farm-in
-   Acquisition
-   Market Access
-   Pipeline
-   Road
-   Field Infrastructure
-   Environmental
-   Commerciality Assessment
- _Technology Applications_
-   Seismic
-   Drilling
-   Logging
-   Completion
-   Production
-   _Economic Model_
-   Risk Assessment
-   Number of Wells Needed
-      to Evaluate
-   Field Development Model
-   Return Expectations

_**Project Evaluation**_
-   Acreage Procurement
-   Well / Prospect Generation
-   Location Identification
-   Permitting / EIS
-   Proof of Concept
-   Field Study
-   Testing
-   Project Economic Evaluation
-   Development Model
-   Technology Alternatives
-   Multi-well Drilling Program
-   Assessments / Testing

_**Project Execution**_
-   Multi-Rig Drilling Program
-   Construction of Infrastructure for
-    Processing & Market Access
-   Service Contractor Alignment /
-    Negotiations
-   Sales / Marketing Agreements
-   Field Operations

## Largest U.S. Gas Resource Opportunities 

**Pacific**
***49 Tcf***

**Rocky**
**Mtn. Basins**
***318 Tcf***

**Mid-Con**
***41 Tcf***

**Permian**
***38 Tcf***

**N. Central**
***31 Tcf***

**Appalachia**
***89 Tcf***

**Gulf Coast**
***166 Tcf***

- Source:  United States Geological Survey (2000), Undiscovered Resources

**UCR Gas from Rockies – Our Principal Focus**

**Largest U.S. Gas Resource Opportunities**** **

***               ***_***Rockies***_
***  ***
***  ******41% of proved and probable ***
***    ******Lower 48 gas reserves***
***   ******Over 80% Unconventional***

**Undiscovered Gas Resources**

## Impediments – Price Volatility

- Natural Gas is a commodity
- Natural Gas has demonstrated the highest volatility of any commodity traded -62%
- Demand is dependent upon weather
- Market access/pipeline availability creates large regional differences in prices
- Crude oil and fuel oil prices impact natural gas prices
- Price volatility makes it difficult to budget and plan drilling programs
- Hedging can help stabilize cash flows but accounting regulations are difficult to understand and cause significant variability in earnings
- Combination of exploration risk and price volatility creates need to keep debt levels low and fund capital expenditures from cash flow
- Large changes in capital spending make it difficult to make long term commitments for infrastructure and oil field services.
- While natural gas prices have increased significantly recently, so have oilfield service costs.
- In today’s market the average unconventional resource play breaks even at $4/Mmbtu and requires in excess of $7/Mmbtu to achieve a 20% rate of return at the wellhead.

## Natural Gas Price Environment 

- 2010

**$2.00**

**$2.50**

**$3.50**

**Gas Prices**

***Prior***
***Decades***

**Marginal**
**Coal/Oil**
**Displaces**
**Gas**

**Industrial **
**Consumption**
**Decreases**

**E&P **
**Increases**
**Supply**

**Supply**
**Bubble**

**Gas**
**Displaces**
**Marginal**
**Coal/Oil**

**E&P**
**Reduces**
**Supply**

**Industrial **
**Demand**
**Increases**

**$4.50**

***New***
***Paradigm***

**Storage**

**Weather**

**E & P Services Cost**

**Natural Gas Price Environment **

**Current Paradigm Shift**

- Sources: Dominion Resources

## Impediments – Market Access/Pipelines

- The largest source of unconventional natural gas is the Rocky Mountains
- Most pipelines in the Rockies flow gas to the west into lower priced markets than the eastern markets.
- Basis differentials or price differentials for Rockies gas are significantly higher than the differentials for gas flowing from the Midcontinent and Gulf Coast areas.
- Rockies differentials average $1
- Midcontinent differentials average $.25
- Gulf Coast differentials average $.10 to $.15
- New pipeline construction will be necessary to move gas from the Rockies to the major consuming markets.

## Rockies Pipeline Infrastructure

- Source: Recent industry research reports
- Note: Dotted lines refer to ongoing expansion projects

**Map of Existing Pipelines and Capacity Expansion Projects**

**Existing pipelines**

**Southern Trails (STR)**
**90 MMcf/d**

**Northwest expansion (WMB)**
**175 MMcf/d**

**Ruby (EP)**
**750 MMcf/d**

**Transwestern**
**150 MMcf/d**

**Advantage (KMI)**
**320 MMcf/d**

**Cheyenne Plains (EP)**
**560 MMcf/d**

**Western Frontier (WMB)**
**500 MMcf/d**

**Bison (NBP)**
**540 MMcf/d**

**Kern expansion**
**900 MMcf/d**

## Rockies Pipeline Infrastructure

- Source: Recent equity research reports
- Pro forma for recently completed expansion projects

- Rocky Mountain region has suffered in the past from depressed natural gas prices due to relatively immature pipeline infrastructure
- Expansion of the Kern River pipeline system in Q2 2003 dramatically improved the basis differential for Rockies gas
- Transports gas from southwestern Wyoming to markets in central California, Nevada, Arizona, and New Mexico
- Basis differentials are projected to decrease through end of 2005, through additional capacity from planned projects

| Existing Pipelines | Capacity (MMcf/d) |
| --- | --- |
| KMI (Pony Express) | 450 |
| TransColorado | 180 |
| Northwest1 | 1,015 |
| CIG | 520 |
| Trailblazer | 725 |
| Kern2 | 1,825 |
| WNG | 190 |
| Southern Trails2 | 90 |
| Total | 4,995 |

| New Projects | Capacity (MMcf/d) |
| --- | --- |
| East  |  |
| Ruby | 750 |
| Entegra/RM Express           | 1500 |
| West |  |
| Advantage | 320 |
| Cheyenne Plains  | 560 |
| Western Frontier  | 500 |
| Bison  | 540 |
| Total | 4170 |

## Rocky Mountain Gas Price Differentials

- Source: Bloomberg and recent industry research reports

**CIG discount to NYMEX**

***Supply / export capacity inequality***

***Hurricane Effects***

## Impediments – Land Access

- Roughly 50% of the land in the west is owned by Federal and state governments
- These lands have extensive permitting and regulatory requirements
- Multiple agencies have regulatory and permitting requirements
- 10 Agencies and over 100 regulations have to met to drill one well
- Department of Energy
- Department of Interior
- Bureau of Land Management
- National Forest Service
- National Wildlife and Fisheries
- Environmental Protection Agency
- Department of Transportation
- State Oil and Gas Commissions
- County Planning Commissions
- State Wildlife Agencies
- USGS

## Impediments – Land Use

- Permitting requirements are extensive on Federal and State lands
- Environmental Impact Statements
- Environmental Assessment Statements
- Plans of Development
- Drilling Permits
- Air Quality Permits
- Surface Use Agreements
- Wildlife Stipulations
- Endangered Species
- Etc.

## Endangered Species, Wilderness and other Land Use Restrictions

**Endangered Species, Wilderness and other Land Use Restrictions**

## Surface Use/Restrictions

**Surface Use/Restrictions**

## Winter Wildlife Stipulations Effects on Drilling

## Rockies Surface Use

## Federal Land Uses In the Rockies

## Leasing of Federal Lands

- Federal practices for the leasing of government lands need to be updated.
- Current practices:
- Open bids
- 10 year leases
- 12.5% royalties
- Leases held by production even if wells are shut-in if royalties are paid
- Large areas can be unitized to hold lands and avoid Federal limitations of 250,000 acres per state
- No commitment to drill or develop
- Lands bought by speculators with no intention of development
- Large companies amass huge acreage positions

## Obstructionists

- “Man is always and everywhere a blight on the landscape” –John Muir, founder of the Sierra Club
- “Human beings as a species have no more value than slugs” –John Davis, Editor of Earth First
- I do not believe that a human being has a right to life...I would rather have medical experiments done on our children than on animals.” –PETA (People for the Ethical Treatment of Animals)
- “Giving society cheap, abundant energy would be the equivalent of giving an idiot child a machine gun.”  -Dr. Paul Ehrlich, Stanford Professor of Biology
- “Complex technology of any sort is an assault on human dignity.  It would be a little short of disastrous for us to discover the source of clean, cheap, abundant energy, because of what we might do with it.”-Amory Lovins, Rocky Mountain Institue
- “Isn’t the only hope for the planet that the industrialized civilizations collapse?  Isn’t it our responsibility to bring that about?”- Maurice Strong, head of 1992 Earth Summit and Executive Officer for Reform in the office of the Secretary General of the United Nations.
- Etc.
- Source:  The Environmentalists’ Little Green Book –Compiled by the US Chamber of Commerce

- environMENTALists

## Impediments – Oilfield Services

- The Oil and Gas Industry employs approximately 1.5 million people in the U.S.
- The downturn in the 1980’s reduced employment by over 700,000 people
- “Green hands and worn out iron are syndromes from the downturn”
- In the late 70’s and early 80’s in excess of 4000 drilling rigs were operating
- Today the rig count is approximately 1500
- The biggest constraint is finding skilled workers to man the rigs
- Oilfield service prices have roughly doubled over the past two years but the biggest costs increases are generally due to human errors related to a work force in training and to pushing older equipment to its limits.

## Solutions

- Price Volatility – put in place tax incentives that offset marginal economic returns when prices dip below certain levels or variable royalties on Federal lands.
- Market Access –encourage the development of pipeline infrastructure and consolidate the regulatory processes for permitting under a single agency.
- Land access – the number one constraint on new supply:
- Revise Federal leasing policies
- Identify regions for development and streamline the regulatory requirements for development
- Lease the lands under five year work programs with the that requirement that capital be spent on the evaluation and development of lands (Canadian frontier model)
- Oilfield Services – work with industry to establish job training programs.

## Implications

- Failure to act will result in:
- Higher energy prices
- Increased imports
- Potential economic disruptions for unreliable foreign sources
- Less efficient development of indigenous resources