Forensic Analysis of Well Head Gas Pricing, 1999-2005 State of Texas PART 1 Overview

1. Forensic Analysis of Well Head Gas Pricing, 1999-2005 State of Texas PART 1 Overview Allen Gilmer agilmer@drillinginfo.com Ramona Hovey rhovey@di-esp.com 1-888-477-7667 A drillinginfo Company

2. An analysis of Wellhead Gas Prices for each Railroad Commission District was carried out to determine if said prices were being negatively impaired relative to historical pricing. The top 1000 gas producers per district were accessed through the Drillinginfo database along with their monthly produced and sales volumes along with their “Raw Gas” sales amounts and Price per MCF amounts for July 1999, July 2001, July 2003 and July 2005, and the values compared to Henry Hub gas prices for those months. Although the volumes are in MCF, the produced volumes account for nearly 70% of the state production and is unlikely to vary significantly in overall BTU mix from test period to test period. It is determined from the study that there is, in fact, a significant impairment to wellhead gas prices amounting statewide to an equivalent of 12% relative to Henry Hub. Further, this impairment began sometime between 7/2003 and 7/2005, except in the Barnett Shale area, where transportation access has had a measurable effect since 2001. Due to the dynamic nature of natural gas markets, a definitive determination of non-market causes, if any, to this effect is impossible to ascertain. The only definitive statement made herein is that well head market prices for Texas natural gas are becoming increasingly impaired versus the most liquid market basis.

4. Producer Take as a Percentage of Henry Hub Price Combined State of Texas, July Index and Prices 4 Year Range 8-12% Drop 93% 97% 97% 85% In the last 7 years, Texas Working Interest and Royalty Interest Owners have received 93-97% of Henry Hub prices at the wellhead in the Summer Season. Between 7/2003 and 7/2005, that percent has dropped to 85%.

5. Producer and Differential Take Combined State of Texas $7.63 $6.48/$1.15 Differential $5.03 $4.90/$0.13 Minimum Midstream % Henry Hub Producer/ Royalty % Wellhead $3.14 $3.05/$0.09 $2.29 $2.13/$0.16 Between 2003 and 2005, WI and RI owners have seen a dramatic drop in their take in Summer Markets relative to Henry Hub indices at the wellhead.

6. Producer and Differential Revenue Increase Per 2 Year Period Combined State of Texas Minimum Midstream % Producer/ Royalty % Note how the Minimum Midstream take has increased over 750% between 7/2003 and 7/2005 while WI/RO take increased only 33% during the same time period. Henry Hub increased from $5.03 to $7.63 (51.7%) during that period

7. District 1

8. Producer Take as a Percentage of Henry Hub Price RRC District 1 4 Year Range 4-13% Drop 101% 92% 96% 88% Wellhead prices in RRC District 1 have ranged from 92-101% of Henry Hub. In the last 2 years, this has dropped to 88%.

9. Producer and Differential Take RRC District 1 $7.63 $6.70/$0.93 Differential $5.03 $5.08/$? Henry Hub Wellhead $3.14 $3.00/$0.14 $2.29 $2.11/$0.18

10. District 2

11. Producer Take as a Percentage of Henry Hub Price RRC District 2 4 Year Range 15-22% Drop 102% 95% 100% 80% Wellhead prices in RRC District 2 have ranged from 95-102% of Henry Hub. In the last 2 years, this has dropped to 80%.

12. Producer and Differential Take RRC District 2 $7.63 $6.17/$1.46 Differential $5.03 $5.16/$? Henry Hub Wellhead $3.14 $3.14/$? $2.29 $2.18/$0.11

13. District 3

14. Producer Take as a Percentage of Henry Hub Price RRC District3 4 Year Range 2-13% Drop 106% 95% 104% 93% Wellhead prices in RRC District 3 have ranged from 95-106% of Henry Hub. In the last 2 years, this has dropped to 93%.

15. Producer and Differential Take RRC District 3 $7.63 $7.10/$0.53 Differential $5.03 $5.34/$? Henry Hub Wellhead $3.14 $3.27/$? $2.29 $2.18/$0.11

16. District 4

17. Producer Take as a Percentage of Henry Hub Price RRC District4 4 Year Range 7-12% Drop 103% 98% 101% 91% Wellhead prices in RRC District 4 have ranged from 98-103% of Henry Hub. In the last 2 years, this has dropped to 91%.

18. Producer and Differential Take RRC District 4 $7.63 $6.93/$0.70 Differential $5.03 $5.17/$? Henry Hub Wellhead $3.14 $3.18/$? $2.29 $2.25/$0.04

19. District 5

20. Producer Take as a Percentage of Henry Hub Price RRC District 5 4 Year Range 5-11% Drop 96% 90% 85% 93% Wellhead prices in RRC District 5 have ranged from 90-96% of Henry Hub. In the last 2 years, this has dropped to 85%.

21. Producer and Differential Take RRC District 5 $7.63 $6.51/$1.12 Differential $5.03 $4.80/$0.23 Henry Hub Wellhead $3.14 $2.92/$0.22 $2.29 $2.07/$0.22

22. District 6

23. Producer Take as a Percentage of Henry Hub Price RRC District 6 4 Year Range 5-11% Drop 101% 95% 90% 98% Wellhead prices in RRC District 6 have ranged from 95-101% of Henry Hub. In the last 2 years, this has dropped to 90%.

24. Producer and Differential Take RRC District 6 $7.63 $6.84/$0.79 Differential $5.03 $5.06/$? Henry Hub Wellhead $3.14 $3.08/$0.06 $2.29 $2.17/$0.12

25. District 7b

26. Producer Take as a Percentage of Henry Hub Price RRC District 7b 4 Year Range 7-16% Drop “Barnett Effect” Limited Pipeline Capacity 93% 102% 86% 96% Wellhead prices in RRC District 7b have ranged from 93-102% of Henry Hub. In the last 2 years, this has dropped to 86%.

27. Producer and Differential Take RRC District 7b $7.63 $6.57/$1.06 Differential $5.03 $4.70/$0.33 Henry Hub Wellhead $3.14 $3.01/$0.13 $2.29 $2.32/$?

28. District 7c

29. Producer Take as a Percentage of Henry Hub Price RRC District 7c 4 Year Range 2-7% Drop 97% 92% 90% 97% Wellhead prices in RRC District 7c have ranged from 92-97% of Henry Hub. In the last 2 years, this has dropped to 90%.

30. Producer and Differential Take RRC District 7c $7.63 $6.87/$0.76 Differential $5.03 $4.87/$0.16 Henry Hub Wellhead $3.14 $3.05/$0.09 $2.29 $2.12/$0.17

31. District 8

32. Producer Take as a Percentage of Henry Hub Price RRC District 8 4 Year Range 5-10% Drop 82% 82% 77% 87% Wellhead prices in RRC District 8 have ranged from 82-87% of Henry Hub. In the last 2 years, this has dropped to 77%.

33. Producer and Differential Take RRC District 8 $7.63 $5.87/$1.76 Differential $5.03 $4.12/$0.91 Henry Hub Wellhead $3.14 $2.74/$0.40 $2.29 $1.88/$0.41

34. District 8a

35. Producer Take as a Percentage of Henry Hub Price RRC District 8a 4 Year Range 70% 65% 69% 17-22% Drop 48% Wellhead prices in RRC District 8 have ranged from 65-70% of Henry Hub. In the last 2 years, this has dropped to 48%.

36. Producer and Differential Take RRC District 8a $7.63 $3.67/$3.96 Differential $5.03 $3.50/$1.53 Henry Hub Wellhead $3.14 $2.17/$0.97 $2.29 $1.49/$0.80

37. District 9

38. Producer Take as a Percentage of Henry Hub Price RRC District 9 4 Year Range 12-26% Drop “Barnett Effect” Limited Pipeline Capacity 91% 105% 94% 79% Wellhead prices in RRC District 9 has been dropping from a high of 105% of Henry Hub to its recent low of 79% of Henry

39. Producer and Differential Take RRC District 9 $7.63 $6.05/$1.58 Differential $5.03 $4.55/$0.48 Henry Hub Wellhead $3.14 $2.96/$0.18 $2.29 $2.40/$?

40. District 10

41. Producer Take as a Percentage of Henry Hub Price RRC District 10 3-4% Drop 4 Year Range 90% 90% 89% 86% Wellhead prices in RRC District 9 have been steady at 89-90% of Henry Hub and is just now seeing some weakness to 86%.

42. Producer and Differential Take RRC District 10 $7.63 $6.56/$1.07 Differential $5.03 $4.50/$0.53 Henry Hub Wellhead $3.14 $2.80/$0.34 $2.29 $2.06/$0.23

43. Summer well head price impairment relative to historical district base levels is evident in every RRC District. Statewide, it is the monetary equivalent of a 12% add’l royalty burden. District 10 is the least effected with a 4% burden, While “Barnett” District 9 exhibits a 26% burden District 10 4% Drop District 8a 22% Drop District 9 26% Drop District 5 11% Drop District 7b 16% Drop District 6 11% Drop District 8 5-7% Drop District 7c 7% Drop District 3 13% Drop District 1 13% Drop District 2 22% Drop District 4 12% Drop

44. The “Barnett Districts” can make claim to capacity restrictions on a year to year basis… All other districts are producing at or under 6 year norms, thus suggesting local capacity is not responsible.

45. Summer market similar to Winter market… The “Barnett Districts” can make claim to capacity restrictions on a year to year basis… All other districts are producing at or under 6 year norms, thus suggesting local capacity is not responsible.

46. However, when January to July production is compared, even “Barnett Districts” produced above the previous January Volumes, except in District 9, i.e. Only District 9 can make a case for local capacity restrictions. In this graph, positive numbers mean lower July produced volumes to previous January produced volumes.