020608 Gas Drilling Council Briefing

City Council BriefingFebruary 6, 2008

City of DallasGas Drilling & Production

Leases

Gas Drilling & Production Leases 2

Purpose

• Brief City Council on history of the Request for Proposal process and results

• Provide detail of proposers background• Give detail of potential drilling sites on City property

• Recommend leaseholder approval


History

• The City of Dallas issued a Request for Proposals (RFP) in July 2007 for companies interested in leasing city‐owned property for gas drilling and production


History• 7/20/07 – RFP issued

– July 20, 2007 the RFP was published on the City’s procurement website and e‐mail notifications were sent to all vendors registered under commodities related to oil and gas

– Phone calls were then made to the State’s top 30 gas production companies as well as additional companies solicited by other Cities and/or participated in lease solicitations

– July 26‐27, 2007 another phone call was made to targeted companies

• 10/9/07 – Two prospective proposers requested the due date to be extended 4 weeks

• 11/9/07 – Proposals Received • 12/14/07 – Best and Final Offers Due


City‐owned Property Included in

RFP


RFP Process

• The RFP included City‐owned properties located on the western edge of the City and within the Barnett Shale area of play

• Several key locations include:– Hensley Field– Florina/Nature preserve Areas– Gun Range (Mountain Creek)– L.B. Houston Golf course

• By utilizing horizontal drilling, drill sites can be located at the edge of these properties to provide minimum impact


General RFP Requirements

• Minimum Bid– A minimum lease bonus of $4,000 per acre and 25% royalty was established for the North, South, and Trinity River Properties

– No minimum bid for the airport properties was set due to their location on the far eastern boundary of the Barnett Shale

• Outside counsel, Moses, Palmer, & Howell, L.L.P., was engaged to review and advise on all aspects of gas drilling and production in the City, including the ordinance, RFP documents, lease agreement, and lease negotiation


Proposals Received

• In November 2007, the City received two proposals in response to the RFP– Trinity East Energy, LLC– XTO Energy, Inc.


Initial OffersLease Bonus

Initial Lease Bonus Offers Received on November 9, 2007

$32,413,036.61 $11,912,589.41 $26,840,200.95 7680.61Grand Total

$1,455,071.20 $0.00 $1,455,071.20 2499.11Enterprise Fund Subtotal

‐‐‐‐‐1176.32Group 4 ‐ Executive Airport

$1,455,071.20 ‐‐$1,455,071.20 $1,100.001322.79Group 3 ‐ Love Field Airport

$30,957,965.41 $11,912,589.41 $25,385,129.75 5181.50General Fund Subtotal

$6,655,605.00 ‐‐$6,655,605.00 $4,125.001613.48Group 2A ‐ Trinity River

$11,912,589.41 $11,912,589.41 $7,751.00$6,339,753.75 $4,125.001536.91Group 2 ‐ South

$12,389,771.00 ‐‐$12,389,771.00 $6,100.002031.11Group 1 ‐ North

TotalPer AcreTotalPer Acre High Offer

XTO Energy, Inc.Trinity East Energy, LLC

AcreageProperty Groups


Initial OffersRoyalty Production

Initial Royalty Offers Received on November 9, 2007

‐‐‐1176.32Group 4 ‐ Executive Airport

15%‐15%1322.79Group 3 ‐ Love Field Airport

25%‐25%1613.48Group 2A ‐ Trinity River

25.5%25.5%25%1536.91Group 2 ‐ South

25%‐25%2031.11Group 1 ‐North

XTO Energy, Inc.

Trinity East Energy, LLC High OfferAcreageProperty Groups


Best and Final OffersLease Bonus

Best and Final Lease Bonus Offers Received on December 14, 2007

*Contingent upon an award to Trinity East Energy of the Group 2 properties

$34,881,314.07 $14,380,866.87 $29,128,184.86 7680.61Grand Total

$1,455,071.20 $0.00 $2,043,232.65 2499.11Enterprise Fund Subtotal

‐‐‐$588,161.45 $500.00*1176.32Group 4 ‐ Executive Airport

$1,455,071.20 ‐‐$1,455,071.20 $1,100.001322.79Group 3 ‐ Love Field Airport

$33,426,242.87 $14,380,866.87 $27,084,952.21 5181.50General Fund Subtotal

$6,655,605.00 ‐‐$6,655,605.00 $4,125.001613.48Group 2A ‐ Trinity River

$14,380,866.87 $14,380,866.87 $9,357.00$8,039,576.21 $5,231.001536.91Group 2 ‐ South

$12,389,771.00 ‐‐$12,389,771.00 $6,100.002031.11Group 1 ‐ North

TotalPer AcreTotalPer Acre High Offer


AcreageProperty Groups


Best and Final Offers Royalty Production

‐‐15%*1176.32Group 4 ‐ Executive Airport

Best and Final Royalty Offers Received on December 14, 2007

*Contingent upon an award to Trinity East Energy of the Group 2 properties

15%‐15%1322.79Group 3 ‐ Love Field Airport

25%‐25%1613.48Group 2A ‐ Trinity River

26%26%25.5%1536.91Group 2 ‐ South

25%‐25%2031.11Group 1 ‐North

XTO Energy, Inc.

Trinity East Energy, LLC High OfferAcreageProperty Groups


Lease Details

• Initial Lease term of 36 months• Will allow property access for seismic testing

• Division order• Lease covers all hydrocarbons• Lease holder will indemnify• Provides for shut in royalty• Will cover drilling sites available under RFP

• Initial lease term of 36 months• Will allow property access for seismic testing

• Division order• Lease covers all hydrocarbons• Lease holder will indemnify• Provides for shut in royalty



Lease Details

• City retains asset if either company files bankruptcy– City royalties are not subordinated to other lien holders

• Lease can be sold, however all term remain intact and are not negotiable

• Trinity East Energy will also have a 3‐year extension option, but they must pay the lease bonus again


GFE Compliance

• In contrast to some entities in the area, the City unbundled the lease properties into several groups to create an opportunity for more companies, including MWBE’s, to bid on the property leases

• Although the current GFE policy does not address property leases and revenue contracts, proposers have committed to comply with the current GFE policy for opportunities for participation in the drilling and production of the gas lease

• The GFE compliance group will monitor the drilling operations utilization as the drillers apply for the Specific Use Permits


Property by Companywith

High Offer


XTO Energy, Inc.

• Leading energy producer in America with almost 1.5 billion cubic feet gas equivalent in daily production and more than 7.5 trillion cubic feet equivalent of reserves

• Today, XTO Energy is producing more than 2% of U.S. natural gas volumes daily and ranking top 10 in the nation

• XTO had operated 10,860 wells as of 12/2006 – 1,000 wells in the Barnett Shale, including 769 horizontal

• 2nd largest producer of natural gas in the Barnett Shale, 2nd largest producer in Texas and the 2nd most active driller of new wells in the United States

• XTO stock, up more than 3400% since 1993 IPO, has grown at a compound annual rate of 31%


Trinity East Energy, LLC• Trinity East Energy, LLC is a Texas limited liability company

established by Keystone Exploration Ltd. to lease, drill and reduce gas from the Barnett Shale in a specific geographic area that includes the land in this RFP

• Keystone, through an affiliate, is the owner of Trinity East Energy and will mange and operate the project, including all proposed drilling activities– Based in Fort Worth, Texas– Actively involved in the Barnett Shale beginning in 2000– Obtained the first drilling permit issued by the City of Fort Worth– Successfully developed two prospects in the Barnett and is continuing to

accumulate leases in Tarrant, Denton, Somervell, Bosque and Dallas Counties

– Leased extensively in urban areas, and worked with both land owners and developers to minimize the impact of drilling on the surrounding property through the use of equipment specifically designed to reduce noise levels

– Accumulated over 9,000 acres in Dallas County, generally east of DFW airport

– Target for the area is to lease 25,000‐30,000 acres by the spring of 2008


Trinity East Energy, LLC• Trinity East Energy has under lease or has agreements to lease

(pending title review) large tracts from the following entities which are contiguous or adjacent to the Dallas North Properties: City of Irving, Dallas County Utility Reclamation District, University of Dallas, Various Hines Entities, Chem Search, and Verizon

• The operator for Trinity East Energy, EXPRO Engineering, Inc., and its principals have drilled hundreds of wells, including multiple horizontal wells in North Tarrant County

• Keystone Exploration, Ltd., the principal entity in the Keystonegroup, has substantial assets and financial resources that are more than adequate to develop the subject leases—it is a privately held company


Safety• XTO Energy

– The Fort Worth Basin Division had no OSHA recordable incidents in 2006 or 2007 among company employees

• Trinity East Energy, LLC– EXPRO Engineering, Inc., Trinity East Energy’s operator, has

drilled and operated wells throughout the State of Texas, including wells located in the city limits of Bay City, all without incident

• The City of Dallas Ordinance requires an emergency response plan and several types of liability insurance including Control of Well insurance– An emergency phone number is answered 24 hours a day and can

mobilize the proper operations employees to respond to any emergency


Environmental

• XTO Energy– A member of the Barnett Shale Water Conservation and

Management Committee studying ways to minimize water use and promote recycling

• Trinity East Energy, LLC– The operator for Trinity East Energy, LLC, EXPRO

Engineering, Inc., has a record of working successfully in environmentally sensitive areas, including The Nature Conservatory of Texas’s Attwater Prairie Chicken Reserve in Texas City, the shallow waters of Nueces Bay among the shoals and nesting areas, and in Bay City


Environmental

• As required by City of Dallas Ordinance, all gas well permits will require:– Stormwater Pollution Prevention Plan– Notice of intent required by EPA– TCEQ’s determination of depth of usable‐quality ground

water– Hazardous Material Management Plan– Hazardous Materials Inventory Statement

• City of Dallas Office of Environmental Quality (OEQ) will require well operators have clean air plan which includes:– A goal of the reduction of air emissions such as nitrogen

oxides, volatile organic compounds, particulate matter, carbon dioxide from the project equipment

– Air quality plan for heavy equipment at site


Environmental

• Recently adopted code amendments do not allow injection wells at drilling locations due to the potential for ground water contamination

• All salt water and condensate must be transported offsite for disposal at an appropriate facility


Park Land

• There will be no drilling allowed on the surface of City of Dallas park land– The Texas Parks & Wildlife Code would require a finding

that “there is no feasible and prudent alternative” to using the park surface as a drill site

• While surface operations could impact the public’s use and enjoyment of a park, the lease of subsurface rights would have no impact whatsoever on the public’s use and enjoyment of a park– The required finding must be made after 30 day notice and

a public hearing • The subsurface mineral rights of some City of Dallas

park lands are included in the lease packages

Drill Site Detail


Drill Sites• Only 5 sites of City property are available for potential on‐site

drilling • There will be no drilling on City park land• Of the 7,680 total acres of city‐owned property, only 2,243 is

available for drilling– Hensley Field accounts for 710 acres– Love Field accounts for 1,323 acres– Other acreage (3 sites) accounts for 210 acres

• The RFP notified proposers that all drill sites on city‐owned property shall be limited to the designated portions of land that are currently undeveloped and not planned to be developed and that all acres may not be available due to existing structures and other regulations

• All drill sites will still have to undergo the Special Use Permit (SUP) process as approved by Council in September 2006 and must comply with all other laws, codes, and regulations


Potential City‐owned Drill Sites

1. Adjacent to the City of Dallas Northwest Service Center

2. Love Field3. Vacant land W. of Walton

Walker and S. Anderson Ave.4. Hensley Field5. Vacant land W. of Walton

Walker and N. of Mountain Creek Parkway


Potential Drill Site 1

• Location: Adjacent to the City of Dallas Northwest Service Center

• Acreage:29.20, including NW Service Center

• Drilling could potentially take place on the vacant land North of the Service Center if the SUP permits



• Location:Love Field

• Acreage:1,322.79

• Actual drilling site may be difficult to configure due to existing structures



• Location:Vacant land W. of Walton Walker and S. Anderson Ave.

• Acreage:3.52



• Location:Hensley Field

• Acreage:709.86



• Location:Vacant land W. of Walton Walker and N. of Mountain Creek Parkway

• Acreage:177.94

• The property did not sell as a Dallas County foreclosure at the courthouse and was conveyed to the City of Dallas


Northern Drill Sites with Residential Areas

• Drill sites leased by Trinity East Energy, LLC

• Includes 300’ buffer around residential areas


Southern Drill Sites with Residential Areas

• Drill sites leased by XTO Energy, Inc.

• Includes 300’ buffer around residential areas


Recommendation

• Council approval of lease for Gas Well Drilling & Production in the City of Dallas with XTO Energy, Inc. and Trinity East Energy, LLC in the amount of $34,881,315


Next Steps

• Council approval of Lease terms• Lease executed with XTO Energy Inc. and Trinity East energy, LLC.

• Public Hearing for park land

Appendix


Resources

• Texas Railroad Commission Website http://www.rrc.state.tx.us

• Barnett Shale Newsletter Websitehttp://www.barnettshalenews.com

• Barnett Shale Energy Education Councilhttp://www.bseec.org/index.php

020608 Gas Drilling Council Briefing

Documents

Transcript of 020608 Gas Drilling Council Briefing