Attendees: Richard Vickroy, cx energy-marketing

10.09.12 Meeting with CX Energy, a leasing company

Attendees:

• 
  Richard Vickroy, CX Energy-marketing
  
• 
  Jake Polochak, CX Energy-legal
  
• 
  Larry Lee, Allegheny College Senior Associate Vice President, Finance & Planning
  
• 
  Kelly Boulton, Allegheny College Sustainability Coordinator
  

Company regional experience and local predictions

CX has a history of forming landowner groups and coordinating leases with production/drilling companies since they started in southern Lawrence County. They orchestrated a grouping of landowners there near Mount Jackson, identified a drilling company, and coordinated the leases. Then moved northwards with remaining landowners still interested. They’ve continued to do this until now when they’ve reached Crawford County and are putting together the fifth grouping of landowners, what they’re calling the Mount Jackson 5.

The first landowner in Crawford joined about 3 months ago and they now have about 20,000 potential acres in their grouping.

Drilling companies are “leasing wide” because they don’t know yet where the sweet spot for gas will be geologically.

Washington County 5-year leases are expiring now. About 20% were developed. Maybe 50% of the leases will be renewed.

CX believes 80% of the leases being signed now will not be produced within the primary term of the lease, in other words they’ll be “leased and wasted”.

Infrastructure also needs to be in place locally or regionally to separate out different components of the wet gas in order for it to enter the national pipelines.

Leasing process

Landowners can join CX Energy’s group at no cost and no obligation other than pledging to support the group process. When a drilling company presents an offer we can then make a decision whether to sign or not.

The Crawford landowner group is likely officially headed to the market in the next 2 months. It has already been published to the market informally with projections, etc. Would expect to get an offer from a gas company by the end of the year or will market the landowner group at NAPE (North America Prospect Expo), an exhibit booth based marketplace for buying, selling, trading oil and gas prospects and producing properties. Signing bonus comes at the end of the closing period which is usually about 3-4 months after the offer.

Perfect Lease constructed by usDrilling company reviews lease and determines what stipulations they’ll accept or refuseDrilling company makes an offer If we accept we sign the contractReceive signing bonusIf company drills within term of leaseproduction royalty payments

If company does not drill within term of lease and offers extensionwe decide whether to renew lease with additional signing bonus and potential for drilling and production royalty paments

Allegheny can be treated as a sub-group within the landowner group CX Energy is putting together, but they tend to consolidate groups when they take them to the drilling company

CX Energy has experience with crafting leases that emphasize good terms and protection clauses.

Pugh clause—What was said about this? My internet research indicates this relates to pooling of acreage in leases.

CX specializes in working with municipalities and organizations with boards; being at open meetings, board meetings, community forums, etc.; helping close leases and then working with the landowner and gas company to ensure leases are upheld.

Finances

CX estimates signing bonuses would be around $3-4000 currently in this area.

CX’s fee is 6% of the signing bonus.

Production royalties might average about $500-1000/month for a year or two and then decline. Was this per acre?

Surface restrictions often reduce the signing bonus, but not the production royalties.

Environmental concerns

One out of the 10,000 landowners they’ve worked with has complained of water quality issues.

Northeast Pennsylvania wasn’t using sufficient casing about 8 years ago but now this is heavily regulated.

There is still the unanswered question of whether 50 years down the line heavy metals could leach into groundwater.

You can build indemnification clauses into the lease, which would protect Allegheny should there be environmental violations by the drilling company. Without an indemnification clause, Allegheny would be responsible for any violations on our property whether it was our doing or not.