A Basic Overview: Mineral, Oil & Gas Assets – Fiduciary ...€¦ · Mineral, Oil & Gas Assets –...

A Basic Overview: Mineral, Oil & Gas Assets – Fiduciary Management

May 14th, 2014

PDS Services, Inc. 1301 So. Bowen Rd, Suite 335; Arlington, TX 76013

www.pdscompanies.com 817‐524‐1201

This course qualifies for Continuing Education for the CTFA and CFP designations. See the last page of this handbook for a CE Credit Application

The Institute of Certified Bankers (ICB), a subsidiary of the American Bankers Association, is dedicated to promoting the highest standards of performance and ethics within the financial services industry. This statement should not be viewed as an endorsement of this program or its provider.

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management2

May 14, 2014

A Basic Overview: Mineral, Oil & Gas Assets – Fiduciary Management

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Today’s Session

A Basic Overview: MOG Fiduciary Management Pre-Acceptance Evidence of Ownership Property/Asset Management Recordkeeping Annual Reviews Valuations Inspection Insurance Accounting

Email questions to: [email protected]


May 14, 2014

Guiding Principles The OCC Unique and Hard to Value Assets Comptroller’s Handbook, August

2012 Written Policies and Procedures Appropriate Personnel – specialized training, experience and education.

Initial Client Interview

Questions to Ask o Do you receive any checks for an oil company? o Did you ever receive a 1099 from an oil company? o Do you pay property taxes for anything other than your residence? o Is your residence or vacation home in a rural setting? o Have you ever signed a mineral lease? o Do you ever own any land other than a residence or vacation home? o Did you inherit any land other than a residence or vacation home? o Is there a schedule C on your federal income tax return? o Do you have any bank accounts other than those used for personal

expenses and saving? Documents to request

o Royalty or bonus check stubs o 1099’s for royalties or lease bonus o Property tax bills o Mineral leases o Deeds for rural property

Pre-Acceptance

Risk Assessment o Note the revised risk assessment factors set out in the OCC Handbook –

Operational, Compliance, Reputational, and Strategic. o Specific risk categories to address the Oil and Gas Environment – Title,

Economic and Environmental o Operator - In the Oil and Gas industry, Operator means the individual,

company, trust, or foundation responsible for the exploration, development, and production of an oil or gas well or lease. Generally, it is the oil company by whom the drilling contractor is engaged. Decline the assets - Oil and gas production rates decline as a

function of time. Loss of reservoir pressure or the changing relative volumes of the produced fluids are usually the cause. Fitting a line through the through the performance history and assuming this same line trends similarly into the future forms the basis for the decline curve analysis concept.

Create an LLC/LLP and hire a reputable and qualified company to operate

o Working Interest – aka “WI” - A working interest is an interest in which the account participates (shares) with the operator of the well or mine in the actual expenses of drilling, mining, or maintaining the


May 14, 2014

property. This provides the account a greater share of the income remaining after deducting all RI. That share is substantially higher than the RI but also imposes a greater share of expenses and potential liability. (OCC Handbook)

o A fiduciary should avoid being the majority WI owner or the Operator Responsible for drilling and operating well Significant environmental risk Bears all costs associated with drilling and operating well Bears all risk and liability – Reputational Risk Majority Interest

Treated as operator Minority Interest

Evaluate operator & operating agreement o Mineral or Royalty Interest - Ownership of mineral estate

Has the right to lease minerals for exploration Bears little or no risk

Profitability o Working Interest

Operating expenses v. revenue Future plans

Workovers - The process of performing major maintenance or remedial treatments on an oil or gas well. In many cases, workover implies the removal and replacement of the production tubing string after the well has been killed and a workover rig has been placed on location. Through-tubing workover operations, using coiled tubing, snubbing or slickline equipment, are routinely conducted to complete treatments or well service activities that avoid a full workover where the tubing is removed. This operation saves considerable time and expense.

New development wells o Mineral or Royalty Interest

Generally considered profitable Other considerations

Need for immediate v. future cash flow Need to diversify due to heavy concentration of MOG assets

Evidence of Ownership – “A bank fiduciary should maintain documentation to support proper administration. This documentation should include evidence of ownership……” (OCC Handbook)

Minimum Standards o Sufficient evidence that asset exists o Note: This is not necessarily sufficient documentation to transfer title, nor

need it be “marketable title” in the strict legal sense.


May 14, 2014

o If unavailable, then an option is to create a plan to cure the title, i.e. gather and/or record documentation, can be used to evidence a reasonable and prudent approach.

Types of Documentation o Property deeds o Mineral leases o Division orders o Royalty or lease bonus check stubs o Property tax bills o 1099’s o Operating agreements

Property/Asset Management

Leasing – Leasing activity is primarily driven by science. o Analysis of offer

Term - A lease remains in effect for a certain period of time, called the primary term, as long as the lessee pays the annual rental. The lease expires after the primary term, unless drilling or oil and gas production has started on the lease. If production is established, the lease will remain in effect past the primary term, as long as the lease continuously produces oil or gas.

Delay rental - Yearly payments made during primary term to Lessor to delay drilling. (Paid-Up Lease - An Oil and Gas Lease where rental payments are paid along with bonus.)

Royalty rate or Landowners Royalty – a percentage paid to the mineral owner from the proceeds of production that is generally free of all costs except taxes.

Comparable to leases in surrounding area – This is very often difficult to obtain as the market is not particularly transparent. Even if it is available

Reputation of offering party – Local contacts are often the best source.

Expertise and financial viability of potential operator – Set standards and request

o Lease Negotiation Expenses to be charged Clauses to avoid or review

Pugh clause Continuous drilling “Cost Free” royalty Shut-in limitations

Working Interest o Review of operating agreement – AKA Joint Operating Agreement or JOA

- An agreement among working interest owners describing how a well is to be operated


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o Adequacy of Insurance – For both the account and the fiduciary. o Site inspections – “Inspections are required for all real estate properties

and mineral working interests when the bank has investment discretion.” (OCC Handbook)

o AFE’s - Authorization For Expenditure, a process of submitting a business proposal to owners that requires review of the expense and a judgment call on its financial merits.

o Review and approval of lease operating expenses – usually monthly charges by the Operator to each of the working interest owners for their share of the on-going costs of producing the well. Often specifically set out in the JOA.

Dormancy Statues – The increasing value of mineral rights coupled with the increasing complex ownership (smaller and smaller interests owned by absent or unknown owners) has created a move by some states to create, by statute a mechanism to simplify mineral title under specific circumstances by statute. “… in certain states, a landowner may reclaim ownership of the mineral rights underlying his property, so long as the minerals have remained “unused” for a certain period of time. Of course, the landowner must comply with the procedures provided by each statute in order to reacquire those minerals.” (Dormant Mineral Statutes: Reuniting The Mineral Interest With The Surface Of The Property In The New Era Of Advancing Technology, Budd – Falen Law Offices, Cheyenne, Wyoming)

o Allows for a severed mineral interest to be rejoined to with the surface if no activity for a specified period

o Dormancy statues currently in place in 20 or 21 states (depending on how you define it!)

o Cuts both ways Lose an existing mineral interest through inaction Through action regain a previously severed mineral interest

Distribution and Termination o Requires “marketable” title of MOG assets o Often requires title curative and, almost always, requires execution and

recordation of an appropriate conveyance or court order. Administrative Issues

o Documented policies and procedures must be in place o Experienced and knowledgeable personnel must be available

Recordkeeping

Division Orders - Division Order is a schedule of an owner’s decimal ownership share in revenues of a well’s production derived from the sale of oil or gas.

Transfer Orders – a schedule of an owner’s decimal ownership share of the well’s production when the paying companies change.

Reporting o Month-by-month analysis of revenue and expense o Report of division orders not receiving revenue


May 14, 2014

Annual Reviews Level of Analysis (suggestions)

o Concentration of MOG assets in portfolio o Asset level or the Account level? o Comparison of current year income and expenses with prior year

Profitability of asset Missing revenue

o Review compliance of operators with existing agreements o Required insurance in place o Property taxes paid o Review of non-producing assets

Valuations – “As part of the 12 CFR 9.6(c) and 12 CFR 150.220 annual investment review, the bank fiduciary must make a determination for accounts in which the bank has investment discretion whether to retain a property or sell it and whether to reinvest the funds in another asset. One of the factors used to make these decisions is the assessment of the property’s value.” (OCC Handbook)

Timing o Annual Review o Significant Event (sale, distribution, tax issue)

Requirements – “A broad range of market factors may affect the value of mineral interests, including supply and demand for refined products and leasing activity both in the immediate area and globally. The type of valuation needed depends on how the asset is to be used. Formal valuations are typically performed by geologists or petroleum engineers and are very costly. Bank fiduciaries generally obtain engineering reports for estate tax purposes, or when large interests are purchased, sold, or used for collateral for borrowing.” (OCC Handbook)

Methodology – Formal and informal – but all deal with product price, discount factor and the timing of the valuation.

Inspections – This is generally not an issue with oil and gas interests with the very noted exception of working interests, which has been previously cited.

Insurance

Types – Liability, environmental, operational (working interest owner). Insured – The Fiduciary, the account, the operator Level of coverage – vary by number, type and percentage of ownership.


May 14, 2014

Accounting Statutory Depletion

o Minerals are a wasting asset o Provides for a portion of proceeds to be set aside for the benefit of the

remaindermen o Percentage determined by state law if not covered in the trust agreement

2000 Uniform Principal & Income Act Info below base on Model Act Enacted in all states except George, Illinois and Louisiana Nominal bonus or delay rental – income Royalties, bonus, delay rentals, shut-in – 90% principal Working interests – 90% of net amount received

Model Act enacted differently in each state Texas Acts states that mineral revenues should be allocated

“equitably” The AICPA has created a table containing state-by-state

information on enactment date, citation and variations Revenue and expense processing

o Identification of correct asset o Validation of correct interest o Capturing sufficient information for management and compliance

purposes Production date Production volume Gross sales Expenses by category

Property Taxes o Non-Payment can result in

assessment of penalties and interest loss of property

1099 Reconciliation o Timing problem

1099’s based on check date Bank reports based on date check received or processed

o Amount problem 1099’s amount is gross mineral sales before any expenses Bank reports may only be available for net sales depending on how

checks were booked


May 14, 2014

Sample Documents

Oil & Gas Lease

OIL AND GAS LEASE (PAID-UP)

THIS AGREEMENT, made and entered into this 6th day of June , 2013 by and between

hereinafter called Lessor (whether one or more) and Continental Resources, Inc., 20 N. Broadway, Oklahoma City, OK 73102 hereinafter called Lessee.

WITNESSETH That the said Lessor, for and in consideration of Ten and More DOLLARS, cash in hand paid, the receipt of which is hereby acknowledged and of the covenants and agreements hereinafter contained on the part of Lessee to be paid, kept and performed, have granted, demised, leased and let and by these presents do grant, demise, lease and let exclusively unto the said Lessee, for the purpose of exploring by geophysical and other methods, mining and operating for oil (including but not limited to distillate and condensate), gas (including casing head gas, helium, coal bed methane gas, and all other constituents), and for laying pipelines, and building tanks, power stations, structures thereon, the right to use existing well bores, flow lines and other production related equipment, to produce, save and take care of said products, all that certain tract of land, together with any reversionary rights therein, situated in the County of , State of Oklahoma , described as follows, to-wit:

Section Township , Range , and containing acres, more or less.

It is the intent to lease all of Lessor’s interest in Section Township Range .

It is agreed that this lease shall remain in force for a term of three (3) years from the date above (hereinafter referred to as "primary term") and as long thereafter as oil or gas, or either of them, is produced from said land, or lands spaced or unitized therewith or the leased premises are being developed.

In consideration of the premises the said Lessee covenants and agrees: to deliver to the credit of Lessor, in the pipeline to which it may connect its wells, the 3/16 part of all oil (including but not limited to condensate and distillate) produced and saved from the leased premises, less a proportionate deduction for any transportation or other fees or taxes charged to the Lessee; to pay Lessor for gas (including casing head gas and coal bed methane gas) of whatsoever nature or kind (with all of its constituents) produced and sold, or used off the leased premises, or used in the manufacture of products therefrom, 3/16 of the gross proceeds received from any party (whether or not an affiliate of Lessee) for the gas sold, used off the premises, or in the manufacture of products therefrom, less a proportionate part, of any production, severance and other excise taxes and costs and/or fees incurred by Lessee in making marketable Lessor’s share of gas, and/or in gathering, transporting, processing, compressing or otherwise marketing Lessor’s share of gas, but in no event more than 3/16 of the net amount actually received by the Lessee from any such party. Said payments to be made to Lessor at the address stated above. During any period (whether before or after the expiration of the primary or extended term hereof) when neither oil nor gas is being so sold or used and the well or wells are shut in and there is no current production of oil or gas or operations on said leased premises sufficient to keep this lease in force, Lessee shall pay or tender a royalty of One Dollar ($1.00) per year per net acre retained hereunder such payment or tender to be made, on or before the anniversary date of this lease next ensuing after the expiration of ninety (90) days from the date such well is shut in and thereafter on the anniversary date of this lease during the period such well is shut in, to the royalty owners. When such payment or tender is made, it will be considered that oil or gas is being produced within the meaning of the entire lease.

If, at the expiration of the primary term, Lessee is engaged in operations for the drilling, testing or reworking of any well on the lands covered by this lease or on lands spaced or unitized herewith, this lease nevertheless shall continue in force and effect so long as the operations for drilling, testing or reworking of any existing or succeeding well are being conducted with no cessation of more than ninety (90) consecutive days and, if such operations result in production, so long thereafter as oil, gas or other hydrocarbons are produced from the leased premises or from acreage spaced or unitized herewith. If, during any extension or continuation of the primary term of this lease, by production or otherwise, a change in spacing or in the well pattern, as prescribed by the Oklahoma Corporation Commission or other governmental authority would otherwise result in all or a portion of the land covered by this lease being no longer held by production or otherwise subject to the terms hereof, Lessee shall have the right to conduct the following continuous drilling operations and maintain this lease as to all lands covered hereby. For a period of ninety (90) days after such order or regulation changing the spacing or well pattern affecting all or a part of the land covered hereby becomes final, Lessee shall have the right to commence drilling operations on that part of the land covered hereby which would no longer be held by production or on other lands which are included in the area which would no longer be held by production, and if such operations result in production, as to such land, this lease shall be extended for so long thereafter as oil, gas, or other hydrocarbons is produced.

Lessee is hereby granted the right at any time and from time to time to unitize the leased premises or any portion or portions thereof, as to all strata or any stratum or strata, with any other lands as to all strata or any stratum or strata, for the production primarily of oil or primarily of gas with or without distillate. However, no unit for the production primarily of oil shall embrace more than 40 acres plus a tolerance of ten-percent thereof, or for the production primarily of gas with or without distillate more than 640 acres plus a tolerance of ten-percent thereof; provided that if any governmental authority shall prescribe a spacing pattern for the development of the field or allocate a producing allowable based on acreage per well, then any such unit may embrace as much additional acreage as may be so prescribed or as may be used in such allocation of allowable. Lessee is also hereby granted the right, at any time, to amend, modify, alter or cancel said unitization agreement as may be necessary in Lessee's judgment to include or exclude different strata, royalty owners or lands or such other information as is deemed necessary by Lessee. Operations upon and production from the unit shall be treated as if such operations were upon or such production were from the leased premises whether or not the well or wells are located thereon. The entire acreage within a unit shall be treated for all purposes as if it were covered by and included in this lease except that the royalty on production from the unit shall be as below provided, and except that in calculating the amount of any shut in gas royalties, only the part of the acreage originally leased and then actually embraced by this lease shall be counted. With respect to production from the unit, Lessee shall pay Lessor, in lieu of other royalties thereon, only such proportion of the royalties stipulated herein as the amount of Lessors' acreage placed in the unit bears to the total acreage in the unit.

Lessee shall retain a continuing right-of-way and easement over, upon and across all of the leased premises to the extent necessary for Lessee and/or its gas purchaser to conduct its operations on the leased premises or lands spaced therewith, regardless if part of the leased premises revert or be released to Lessor.

If said Lessor owns a less interest in the above described land which is less than the entire and undivided fee simple estate therein, then the royalties herein provided, shall be paid to the Lessor only in the proportion which Lessors' interest bears to the whole and undivided fee.

Lessee shall have the right to use, free of cost, gas, oil and water produced from said land for its operations thereon, except water from wells of Lessor.

When requested by Lessor, Lessee shall bury its pipelines below plow depth. No well shall be drilled nearer than 200 feet to the house or barn now on the leased premises, without the

written consent of the Lessor. Lessee shall pay for all damages caused by its operations to growing crops on said land. Lessee shall have the right at any time to remove all machinery and fixtures placed on said premises,

including the right to draw and remove casing. If the estate of either party hereto is assigned, and the privilege of assigning in whole or in part is expressly

allowed, the covenants hereof shall extend to their heirs, executors, administrators, successors or assigns. However, no change or division in ownership of the land or royalties shall enlarge the obligations or diminish the rights of Lessee. No change in the ownership of the land or royalties shall be binding on the Lessee until after the Lessee has been furnished with a written transfer or assignment or true copy thereof. In case Lessee assigns this lease, in whole or in part, Lessee shall be relieved of all obligations to the assigned portion or portions arising subsequent to the date of assignment.

If, at any time within the primary term of this lease and while the same remains in force and effect, Lessor receives any bona fide offer, which Lessor is willing to accept from any party offering consideration to Lessor for a lease (top lease) covering any or all of the substances covered by this lease or covering all or a portion of the land described herein, with the top lease becoming effective upon the expiration of this lease, Lessor hereby agrees to immediately notify Lessee in writing of said offer, setting forth the proposed Lessee’s name, bonus consideration and royalty to be paid for such lease, and Lessor shall include a copy of the lease form to be utilized which form shall reflect all pertinent and relevant terms and conditions of the top lease. Lessee shall have fifteen (15) days after receipt from Lessor, of a complete copy of any such offer to advise Lessor in writing of its election to enter into an oil and gas lease or extend the primary term of this lease with Lessor on equivalent terms and conditions as made in the top lease. If Lessee fails to notify Lessor within the aforesaid fifteen (15) day period of its election to meet any such bona fide offer, Lessor shall have the right to accept said offer. It is understood that any top lease acquired by Lessee herein pursuant to this provision, shall not limit the term or otherwise affect the validity of this lease. Any top lease granted by Lessor to a third party without, prior notification to Lessee, as set out above, shall be null and void.

When operations or production are delayed or interrupted by lack of water, labor or material, or by fire, storm, flood, war, rebellion, insurrection, riot, strike, differences with workmen, or failure of carriers to transport or furnish facilities for transportation or lack of market in the field for the minerals produced, or as a result of any Federal of State law, or of some order, rule, regulation, requisition or necessity of any government or governmental authority, or any official acting thereunder, or as the result of any cause whatsoever beyond the control of Lessee, the time of such delay or interruption shall not be counted against Lessee and this lease shall remain in force during such delay or interruption and ninety (90) days thereafter, anything in this lease to the contrary notwithstanding.

All express or implied covenants of this lease shall be subject to all Federal and State Laws, Executive Orders, Rules and Regulations, and this lease shall not be terminated, in whole or in part, nor Lessee held liable in damages, for failure to comply therewith if compliance is prevented by, or such failure is the result of any such Law, Order, Rule or Regulation. The provisions of this lease are contractual in nature and each party’s responsibility arising out of or relating to this lease, or breach hereof, shall be limited to actual damages for breach of the provisions of this lease, and neither party shall have any liability in tort to the other party.

This lease shall be effective as to each lessor on execution hereof as to his or her interest and shall be binding on those signing, notwithstanding some of the Lessors above named may not join in the execution hereof. The word "Lessor" as used in this lease means the party or parties who execute this lease as Lessor, although not named above.

Lessee may at any time and from time to time surrender this lease as to any part or parts of the leased premises by delivering or mailing a release thereof to Lessor, or by placing a release of record in the proper County.

Lessor hereby warrants and agrees to defend the title to the lands herein described, and agrees that the Lessee shall have the right at any time to redeem for Lessor by payment, any mortgages, taxes or other liens on the above described lands, in the event of default of payment by Lessor, and be subrogated to the rights of the holder thereof.

IN TESTIMONY WHEREOF, I/we sign this the day of , 2013.

State of } } ss.

County of }

The foregoing instrument was acknowledged before me this day of , 2013 by

.

My commission expires:

Notary Number:

Notary Public

Sample Documents

Division Order

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management December 4, 2013 11

DIVISION ORDER

NADOA Model Fom1Division Order (Adopted 9/95)

To Escambia Operating Co. LLC P. 0. Box 2968 Houston, TX 77252-2968

Date: November 27, 2013

Property Number: TX371-000053 Effective Date: LAST SETTLEMENT Property Name: SHEARER (ROLLUP) Operator: ESCAMBIA OPERATING CO LLC County and State: Pecos, T e x a s Property Description:

E/2SW/4 of Section 117, Bick 10, H&GN Ry. Co. Survey from a depth of 2,500 feet subsurface to a depth of 3,593 feet subsurface

Production: x Oil x Gas X Other: all-products

Owner Name and Address:

TYPe of Interest: Decimal Interest:

RI 0.00068770

The undersigned certifies the ownership of their decimal interest in production or proceeds as described above payable by ESCAMBIA OPERATING CO. LLC (Payor).

(Company Name)

Payor shall be notified, in writing, of any change in ownership, decimal interest, or payment address. All such changes shall be effective the first day of the month following receipt of such notice.

Payor is authorized to withhold payment pending resolution of a title dispute or adverse claim asserted regarding the interest in production claimed herein by the undersigned. The undersigned agrees to indemnify and reimburse Payor any amount attributable to an interest to which the undersigned is not entitled.

Payor may accrue proceeds until the total amount equals $100.00, or pay annually, whichever occurs first, or as required by applicable state statute.

This Division Order does not amend any lease or operating agreement between the undersigned and the lessee or operator or any other contracts for the purchase of oil and/or gas (to include gas products).

In addition to the terms and conditions of this Division Order, the undersigned and Payor may have certain statutory rights under the laws of the state in which the property is located.

Special Clauses :

Owner(s) Signature(s):

Witnesses:

Owner(s) Tax I.D. Number(s):

Owner Daytime Telephone

Owner FAX Telephone #:

Federal Law requires you to furnish your Social Security or Taxpayer Identification Number. Failure to comply will result in 31 % tax withholding and will not be refundable by Payor

aw

MASTER COPY

Sample Documents

Property Tax Bill

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management December 4, 2013 12

owner Name and Address

Geographical ID

9-A0101-0000902RJ

$

If Paid in Month Tax Due

October 2013 0 .12 November 2013 0.12

December 2013 0 .12

January 2014 0.12

February 2014 0. 13

March 2014 0.13

April2014 0.13

May 2014 0.13

June 2014 0 .13

TAXING ENTITY ASSESSED HOMESTEAD EXEMPTION

065 0R OJS EXEMPTION

OTHER EXEMPTION

FREEZE YEAR and CEILING

TAXABLE VALUE

RATE PER $100

HONTINGTON SD 8 0 0 8 0 1.450000LUFKIN l:SD 12 0 0 12 0 1.207000ANGELINA .JR COLLEGE 20 0 0 0 20 0.170680ANGELINA COIJNTY 20 0 0 0 20 0 .466900

Paidin Month

February 2014

P&JRate

7% Tax Due

0.13March 2014 9% 0.13April2014 11% 0. 13May 2014 13% 0. 13

June2014 15% 0.13Total Tax Due may include Additional Penalty up to 20% incurred on

Pmt.

1st

Due By

January 31, 2014

Payment.:Amount

2nd March 31, 2014 3rd May 31, 2014 4th July 31, 2014

Make checks payable to: THELMA "MIDGET" SHERMAN

ANGELINA COUNTY TAX OFFICE

1111111111111111111 1111111111m111111

ANGELINA COUNTY TAX OFFICE P.O. BOX 1344 LUFKIN, TEXAS 75902 (936)634-8376

If there is an error in ownership, appraisal amount, exemptions or jurisdictions, you MUST contact the Angelina County Appraisal District at 936-634-8456 for correction.

111111111111111111

IF YOU PAY YOUR PROPERTY TAX TO A MORTGAGE COMPANY.

PLEASE DISREGARD THIS STATEMENT.

THELMA "MIDGET' SHERMAN Phone: 936-634-8376

DETACH HERE AND RETURN WITH PAYMENT

RETAIN THIS PORTION FOR YOUR RECORDS

In January Pay

0.12

Taxes are payable October 1, 2013 and become delinquent on

February1, 2014

STATEMENT NUMBER

PROPERTY ID NUMBER

PROPERTY GEOGRAPHICAL ID

9-A0101-0000902RI

MN LAND MARKET VALUE AGITIMBER VALUE ASSESSED VALUE

0 0 0

0 20

Appraised Value: 20

TAX DUE

0.00 0.00 0 .03 0.09

COIJNTY TAXES REDUCED BY SALES TAX 0 • 03 j Total Taxes Due By Jan 31, 20141 0.12

Make checks payable to: THELMA "MIDGET" SHERMAN ANGELINA COUNTY TAX OFFICE P.O. BOX 1344 LUFKIN, TEXAS 75902 (936)634-8376

w Please note that this taxing unit does not offer early payment discounts,

Property truces in Texas are assessed as of January 1st each year and cover a period of one year from that date* Tax statutes make no provisions for proration: therefore, a change of address during the year would have no effect on the tax liability eslablished on January 1st of the calendar year. These tax statutes also make no provisions fOr proration in case the property is disposed of during the calendar year. Also, if you owned personal property described on the tax statement on January 1st, then you are personally liable for the taxes. IF YOU ARE 65 YEARS OF AGE OR OLDER OR ARE DISABLED AND THE PROPERTY DESCRIBED IN THIS DOCUMENT IS YOUR RESIDENCE 1-:lOMESTEAD, YOU SHOULD CONTACT THE APPRAISAL DISTRICT REGARDING ANY ENTITLEMENT YOU MAY HAVE TO A POSTPONEMENT IN THE PAYMENT OF THESE TAXES.

t'ena1rv & inter"'"' 1r oa1d after Jari 31.2014

April 1or July 1 of the year of delinquency (Tax Code Section 33.11) or Additional Late AG Penalty of 10% (Tax Code Section 23.54). Taxpayers who were 65 years of age or older, or disabled on January 1, 2013 and have filed an application for exemption may pay the taxes on their HOMESTEAD in four equal installments. Contact your Tax Office for more information

Sample Documents

Joint Operating Agreement

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management December 4, 2013

13

A.A.P.L. FORM 610 -1989

MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT

DATED

M_ay_l , 2010 "'"'

OPERATOR EnerVest Operating, L.L.C.

CONTRACT AREA E/2 NW/4 1 4-03N-23ECM

COUNTY OR PARISH OF _B_ ea_v_er__ C_o_u_n ty - - - - - - , STATE OF Oklahoma

COPYRIGHT 1989 - ALL RlGIITS RESERVED AMERICAN ASSOCIATION OF PETROLEUM LANDMEN, 4100 FOSSIL CREEK BLVD. FORT WORTII, TEXAS, 76137, APPROVED FORM.

AAP.L. NO. 610 -1989

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

TABLE OF CONTENTS

Article

I. IL

Ii1k 00

DEFINITIONS .............................................................................................................................. 1 EXHIBITS .............................................................................................................. I

m. INTERESTS OF PARTIES .................................................................................................................... 2 A. OIL AND GAS INTERESTS: ......................................................................................................................... 2 B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: ...................................................................... 2 C. SUBSEQUENTLY CREATED INTERESTS: ......................................................................................... 2

IV. TITLES .......................................................................................................................................... 2 A. TITLE EXAMINATION: ................................................................................................................................ 2 B. LOSS OR FAILURE OF TITLE: ..................................................................................................................... 3

1. Fail.me ef Title ................................................................................................................................... 3 2. Less 'ey Nee Paymeat er J;;ffeeeeas Paymem ef Aieew:it Due ................................................................. 3 3. Other Losses ....................................................................................................................................... 3 4. Curing Title .............................................................................................................................................. 3

V. OPERATOR ...................................................................................................................... 4 A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: ................................................................. 4 B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: ..................... 4

1. Resignation or Removal of Operator ..................................................................................................... 4 2. Selection of Successor Operator ............................................................................................................ 4 3. Effect of Bankruptcy............................................................................................................................... 4

C. EMPLOYEES AND CONTRACTORS: ....................................................................................................... 4 D. RIGHTS AND DUTIES OF OPERATOR: ................................................................................................... 4

1. Competitive Rates and Use of Affiliates ................................................................................................ 4 2. Discharge of Joint Account Obligations ...................................................., .................................... 4 3. Protection from Liens ............................................................................................................................. 4 4. Custody of Funds .................................................................................................................................... 5 5. Access to Contract Area and Records .................................................................................................... 5 6. Filing and Furnishing Governmental Reports ................................................................................... 5 7. Drilling and Testing Operations ....................................................................................................... 5 8. Cost Estimates ................................................................................................................................. 5 9. Insurance .................................................................................................................................................. 5

VL DRILLING AND DEVELOPMENT ...................................................................................................... 5 !.. 1NITlAL WELL: .............................................................................................................. 5 B. SUBSEQUENT OPERATIONS: .................................................................................................................... 5

1. Proposed Operations ............................................................................................................................... 5 2. Operations by Less Than All Parties ............................................................................................... 6 3. Stand-By Costs ....................................................................................................................................... 7 4. Deepening .......................................................................................................................................... 8 5. Sidetracking ............................................................................................................................................ 8 6. Order of Preference of Operations ......................................................................................................... 8 7. Conformity to Spacing Pattern ............................................................................................................... 9 8. Paying Wells ........................................................................................................................................... 9

C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK: .................................................. 9 1. Completion .............................................................................................................................................. 9 2. Rework, Recomplete or Plug Back ........................................................................................................ 9

D. OTHER OPERATIONS: ................................................................................................................................ 9 E. ABANDON?.IBNT OF WELLS: ............................................................................................................ 9

1. Abandonment of Dry Holes .................................................................................................................... 9 2. Abandonment of Wells That Have Produced ....................................................................................... 10 3. Abandonment of Non-Consent Operations .......................................................................................... 10

F. TERMINATION OF OPERATIONS: .......................................................................................................... 10 G. TAKING PRODUCTION IN KIND: ........................................................................................................... 10

(Option 1) Gas Balancing Agreement. ...................................................................................................... 10 (Ofitiee 2) "Ne Gas Balimsmg.\gfeemem:............................................................................................................ 11

VII. EXPENDITURES AND LIABILITY OF PARTIES ........................................................... 11 A. LIABILITY OF PARTIES: ........................................................................................................................... 11 B. LIENS AND SECURITY INTERESTS: .......................................................................................... 12 C. ADVANCES: ............................................................................................................................ 12 D. DEFAULTS AND REMEDIES: ..................................................................................................... 12

1. Suspension of Rights ............................................................................................................................ 13 2. Suit for Damages ................................................................................................................................... 13 3. Deemed Non-Consent ........................................................................................................................... 13 4. Advance Payment ................................................................................................................................. 13 5. Costs and Attorneys' Fees ..................................................................................................................... 13

E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: ......................................... 13 F. TAXES: .......................................................................................................................................................... 13

VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST. .............................. 14 A. SURRENDER OF LEASES: ........................................................................................................................ 14 B. RENEWAL OR EXTENSION OF LEASES: .............................................................................................. 14 C. ACREAGE OR CASH CONTRIBUTIONS: ............................................................................................... 14

Sample Documents

Authorization for Expenditure

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management December 4, 2013

14

Phoenix PetroCorp, Inc. 6401 South Custer Rd. #130 :VlcKinney, TX 75070 Office: (469) 452-6035 Facsimile: (972) 540wl224

May 14, 2013

RE: Waterflood Re-Activation Project AFE West Brock Penn Unit Carter County, OK

Dear Working Interest Owner:

Phoenix PetroCorp,Inc. , operator of the West Brock Penn Unit (Unit), proposes to re-activate a large portion of this 740 acre waterflood unit that has been inactive for many years, mainly due to numerous issues with the injection facilities and the injection system, sections of which are over 40 years old.

At this time, the Unit produces about 45 bopd and 3800 bwpd from 16 active producing wells and 5 active injection wells. Once this project is implemented, the Unit should produce about 150 BOPD and 12,000 bwpd from 38 producing wells and 15 water injection wells. The project should recover an additional 200 mbo of oil and will cost an estimated $2,800,000.

This project will include well work on 22 producing wells and 14 water injection wells. In addition to the well work, the old injection system will be replaced so that water injection can be re-established on the eastern and far western p011ions of the Unit and the injection facilities will be upgraded to handle the additional produced and iajected fluids.

This Unit is a mature waterflood that produces from 13 Penn Sands that range in depth from 3300 feet to 4500 feet. Most of the injection wells are inactive because the injection system is in poor condition and thus not able to get water to those wells, resulting in many injection wells being shut-in. This lack of injection capacity limits the water handling capability of the Unit to about 4000 bwpd. This 4000 bwpd constraint forces a number of producing wells to be shut-in which limits oil production. In order to increase oil production to 150 bopd, the injection system, including the injection wells, must be reactivated and upgraded so that about 12,000 bwpd can be processed.

A map, a list of wells and a cost estimate are attached. Phoenix plans to begin work in mid to late June 2013. Please submit your approval of this $2,800,000 gross capital expenditure AFE by signing the ballot below and return one copy to Phoenix.

Approve AFE

Disapprove AFE

Print Company Name

Signature Date

Print Name & Title

RETAIN THIS COPY FOR YOUR RECORDS

West Brock Unit Cost Estimate

!nje.!.ion and Facility Costs

112-3 Active Injector, change out tbr, & pkr, perforate, acidile - LG2 & \.G12

113-1 Inactive Injector, Pull well, dri!! out CIBP, cleanout, acidize and set pkr for LG12 Injection.

llS-2 Active Injector - <Jean out well, Drill up CIBP, RIH w/ Liner, Addize, and adjust inj1..-ction to a concontrated water Hood of LG2 & lG12 115-6 Active lnjoctor - Clean out Wt>ll, drill up CIBP, & adjust Injection to a concentr<1ted watcrflood of LG2 & l.Gl2

ltS-8 Active Injector - Cle<1n out we!!, drill up CIBP, & adjust injection to a concentrated waterflood of LG2 & \.Gll.

1:8-1 Inactive Injector - Clean out we!\, R\H w/ new tbg - LG12

#10-lA inactive Injector -· Pull well, cteanout, acidize, rerun Pkr, put on injection·- LG12

1113-3 Inactive Injector, drill up C!BP, clean well, put on injection -LG12.

lt22-l inactive injector, Pull the wen, Drill out CIBP, setup for injection into 81 & 83 :124·3 Inactive Injector, Pull the well, bit & scraper run, run ncw pkr set {3800') to isolate WF of LG4.

llZ5·4 Inactive Injector, Pull the well, dean and acidi2c, S\ttup for injection in LG4

:12.6-7 Inactive Injector, Cle<in well, i.lcldize and run new pkr, put back on injection ·83 lt28·1 inactive Injector, Pull the well, bit & scraper run, run new pkr set {3870') to bolate WF of l.G4.

1130·6 Inactive Injector, Pull the well, bit & scraper run, run new pkr set (3850') to isolat(J WF of LG4.

Supply Well lt7·1 Inactive Supply Well, put on pump

sCost SK &s-- $ 60,548 $ 38,468 $ 38,468 $ 38,468 $ 39,968

$ 31,668

$ 39,968 $ 34,168

31,668 31,668 31,668

s 31,668 $ 31,668

s 90,680

Facility Work Setting 2 new water tanks, refurblshinr.: injeciton pumps, replumbing the facilities

Electrical Work Setup 3 new 167KVA transformers to help supply power for plant {pumps), powering severn! produdnr, wells Injection System Approx. n.,000 ft, We will be replacing the injection system on the East side of the property

Total Injection and Facility Costs, $K

Producing Wei! Costs

" ,

$ Z17,SOO $ 67,500

s _ 398,lOS

l,28S,517

Cost SK --·-··-- 112-1 112-6 112·9

115·1 ll:j-4

ltS-S

#6-2 118-2

1112-2

#13-4 1113-7 #15·2 #1G·2

1118-82

#19·1 #23-5

1124·2 112<1·<1 #25-1 1128-2

1128-3 1128-4 1129-1 1130-5

Ringling 1

Inactive Producer, pump chanec, needs electrical work (panel & motor), Needs new pumping unit Inactive Producer: drill out CIBP, dean well, put back on pump, possible !::SP Inactive Producer, pull well, pump change, put back on pump, needs pumping unit, panel box, motor

Inactive Producer; drill out and/or fish On/Off Tool {clean liner) , acidize lG12 specifically, possible ESP

Active Producer, pull well, Acidize <ind put back on pump

Inactive Producer, Fish sub pump, Addize, possible ESP inactive Producer, Lower the pump <ind acidizc Inactive Producer, Drillup CIBP and dean out, perforate, acidize, put on pump. Need flowlines, need panel box, new motor ln<ictive Producer -suspected tbg leak; pump change. Could potentially deepen to lG 12

Inactive Producer, R!H w/ pumping equipment, put on pump Inactive, clean out, acidire, and put on pump. Needs pumplne unit, f!owline, electrical work Inactive Producer, C!ear eie(tric ROW, n(lw motor, p;inel box Inactive Producer, Nueds new pumping unit, new foncn, electric pole, <'.!lectric pane!, new 20HP motor. Needs downho\e pump and rods lm:ictive Producer, Needs a new pumping unit, new downhole pump, needs panel box, new 20HP motor

Replace Pumping Unit Inactive Producer, Needs road work, extra power pole, panel box, 20HP motor. May acidize Need to clear electric ROW, need to reconnect electricity, panel box, 20HP motor Active Producer, Acidirn wull & put on new Pumping l!nit lnuctive Producer, Replace downhole equipment, need to reconne<..1:electricity, panel box, 20KP motor Test Csg, may run Csg patch or pump under PKR. Clear electric ROW !nact!vfl Producer, drillout CIBP, replace tbg and lower pump, lay flowline, dear electric ROW, n(iw panel box, new 7.0HP motor

Inactive Producer, drill up 2. CIBP's, Cle n well, RlH w/ pump and rods. Needs pumping unit, needs panel box, new 20HP motor

!nnctiv<i Producer, pull well, replace tbg, put back on pump, new panel box, new 20HP motor

Inactive Producer, pull the well, acidize. run new pump, panel box, 20HP motor needed

Inactive producer, put on pump

$ 82,905

s 89,600 $ 20,405 $ 99,72S $ 27,080 $ 99,725 $ 13,935 s 41,980

s 11,913 32,132 43,805 33,957

s 38,805 $ 66,305

s 32,500 $ 3S,261 $ 40,806 $ 53,761

s 12,825 $ 32,761 $ 30,S86

75,13.l 3S,131

s 4S,131 $ 119,631

Total Producing Well Costs, SK

1,21S,796

Total Project Costs, $K Continr,ency Cost, $K

final Total Cots, SK

10".4 Contingency Added

2,501,313

250,131

S2,751,444

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Virtual Events

Free Continuing Education Credits

for the CTFA & CFP Designation I attended the Webinar on May 14, 2014 provided by PDS Systems, Inc., entitled A Basic Overview: Mineral, Oil & Gas Assets – Fiduciary Management, and wish to receive Continuing Education Credit for the following designation:

CTFA CFP #____________

Name:

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Please Fax back to:

817-524-1202,

Or scan and email to: Misti Davis at

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Please Note: All Credit Applications must be back to PDS no later than one week after webinar presentation to be assured Continuing Education Credits. Thank you.

PDS Services, Inc. 1301 So. Bowen Rd, Suite 335; Arlington, TX 76013

www.pdscompanies.com

817‐524‐1201

PDS Services, Inc. A Basic Overview: MOG Fiduciary Management May 14, 2014

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