PETROLEUM INDUSTRY IN PETROLEUM INDUSTRY IN MONTANAMONTANA

September 2008September 2008

MONTANA PETROLEUM ASSOCIATIONMONTANA PETROLEUM ASSOCIATION

David A. Galt, Executive DirectorDavid A. Galt, Executive Director

Transportation

Refiners

ServiceCompanies

Producers

The Industry in MontanaThe Industry in Montana

MSU-Billings Economic Study PointsMSU-Billings Economic Study Points

$9 BILLION: Total economic impact 12,000 TOTAL JOBS

– 4,500: Direct jobs – 7,500: Indirectly supported jobs

Economic impact of an additional 1 million barrels of oil produced– 86 Full time positions– $18.5 million in labor income

A 10% increase in drilling activity could lead to 315 additional jobs.

Employment and Wages in the Employment and Wages in the Industry 2008Industry 2008

Oil & GasOil & GasExtractionExtraction

RefiningRefining

TransportationTransportation

Montana’s Average Montana’s Average Annual WageAnnual Wage

2,985 Employees 2,985 Employees Average Pay: $57,732Average Pay: $57,732Total Wages: $172,330,020 Total Wages: $172,330,020

975 Employees 975 Employees Average Pay: $91,744Average Pay: $91,744Total Wages: $89,412,551Total Wages: $89,412,551

354 Employees 354 Employees Average Pay: $64,487Average Pay: $64,487Total Wages: $22,839,190 Total Wages: $22,839,190

$31,426.20$31,426.20

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Do

llar

s

State Share Local Share

Oil and Natural Gas Production Oil and Natural Gas Production Tax Revenue CollectionsTax Revenue Collections

Total State Share: $615,658,548

Total Local Share: $654,099,145

TOTAL $1,269,757,693

State Land Mineral Revenue by State Land Mineral Revenue by Fiscal YearFiscal Year

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

FY04 FY05 FY06 FY07 FY08

Mil

lio

ns

Oil & Gas Coal Other

0

10

20

30

40

50

60

Year

Mill

ion

Bar

rels

Central Northeastern Northern South Central Southeastern

Kevin-Sunburst Field

Cat Creek Field

Cut Bank Field

Williston Basin / Cedar Creek Anticline

Bell Creek Field

Elm Coulee Field

Statewide Oil Production History, Statewide Oil Production History, 1916 through 2007 1916 through 2007

Oil Production, Rocky Mountain StatesOil Production, Rocky Mountain States

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Month and Year

Bar

rels

Per

Mo

nth

Pre-1994 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Pre-1994 Wells

Monthly Oil Production with Well Completion Monthly Oil Production with Well Completion Year Identified (1994 and Later)Year Identified (1994 and Later)

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Ga

s P

rod

uc

tio

n (

MC

F)

Central Northeastern Northern South Central Southeastern

Northern

Northeastern

South Central

MT Natural Gas Production 1986 through MT Natural Gas Production 1986 through 20062006

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Month and Year

MC

F P

er

Mo

nth

Pre-1994 Gas 1994 1995 1996 1997 1998 1999 20002001 2002 2003 2004 2005 2006 2007 2008

Pre-1994 Wells

Monthly Gas Production with Well Completion Monthly Gas Production with Well Completion Year Identified (1994 and Later)Year Identified (1994 and Later)

Gas Production, Rocky Mountain StatesGas Production, Rocky Mountain States

14

U.S. Natural Gas Production and U.S. Natural Gas Production and ConsumptionConsumption

0

5

10

15

20

25

30

1960 1970 1980 1990 2000 2010 2020 2030

(tri

llio

n c

ub

ic f

ee

t)

Consumption

Production

History Projections

21%

20.5 Tcf

26.1 Tcf

16%Net Imports

Natural Gas Projections from EIA and Six Others: March 28, 2007Source: Annual Energy Outlook 2007

Age of Natural Gas SuppliesAge of Natural Gas Supplies

Last year – 50% of the natural gas consumed in the US came from wells drilled in the prior 40 months

2 years ago – 50% of the natural gas consumed in the US came from wells drilled in the prior 48 months

State Acres Leased & ProducingState Acres Leased & Producing

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Acr

es

Leased Producing

Federal Leasing Activity In MontanaFederal Leasing Activity In MontanaFiscal Years 1997 to PresentFiscal Years 1997 to Present

0

1000

2000

3000

4000

5000

6000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Nu

mb

er

of

Le

as

es

New Leases Issued Leases In Effect at Close of the Fiscal Year

CHALLENGESCHALLENGES

AccessAccess– State and Federal Public LandsState and Federal Public Lands– Wildlife IssuesWildlife Issues

TaxesTaxes– Production tax drilling incentiveProduction tax drilling incentive– Central Assessment of Gathering Central Assessment of Gathering

SystemsSystems

Bureau of Land ManagementBureau of Land Management

Montana Oil & Gas Lease Sale ProtestMontana Oil & Gas Lease Sale Protest August 26, 2008 SaleAugust 26, 2008 Sale----ProtestProtest

Western Environmental Law Western Environmental Law Center--Protest LetterCenter--Protest LetterMontana Trout Unlimited--Montana Trout Unlimited--Protest LetterProtest Letter

June 17, 2008 SaleJune 17, 2008 Sale----ProtestProtest Western Environmental Law Western Environmental Law Center--Protest LetterCenter--Protest Letter

April 8, 2008 SaleApril 8, 2008 Sale----ProtestProtestWestern Environmental Law Western Environmental Law Center--Protest LetterCenter--Protest Letter

November 27, 2007 SaleNovember 27, 2007 Sale----ProtestProtest Montana Trout Montana Trout UnlimitedUnlimitedHellgate Hunters and AnglersHellgate Hunters and AnglersNational Wildlife FederationNational Wildlife FederationMontana Wildlife FederationMontana Wildlife FederationTheodore Roosevelt Theodore Roosevelt Conservation PartnershipConservation Partnership

July 31, 2007 SaleJuly 31, 2007 Sale----ProtestProtestMontana Trout UnlimitedMontana Trout UnlimitedTheodore Roosevelt Theodore Roosevelt Conservation PartnershipConservation PartnershipMontana Wildlife FederationMontana Wildlife FederationHellgate Hunters and AnglersHellgate Hunters and Anglers

May 30, 2007 SaleMay 30, 2007 Sale----Protest Protest Montana Trout UnlimitedMontana Trout Unlimited

March 27, 2007 SaleMarch 27, 2007 Sale——ProtestProtestMontana Fish Wildlife and Montana Fish Wildlife and Parks Parks Montana Trout UnlimitedMontana Trout UnlimitedTheodore Roosevelt Theodore Roosevelt Conservation PartnershipConservation Partnership

Jan. 15, 2007 Sale—Jan. 15, 2007 Sale—ProtestProtestMontana Fish Wildlife and Montana Fish Wildlife and ParksParks

Species Involved in ProtestsSpecies Involved in Protests Sage GrouseSage Grouse Sharp Tailed Grouse Sharp Tailed Grouse WaterfowlWaterfowl Bald EaglesBald Eagles Eastern Red BatEastern Red Bat Pallid BatPallid Bat Spotted BatSpotted Bat Townsend Big Eared BatTownsend Big Eared Bat Long-billed CurlewLong-billed Curlew Sprague’s PipitsSprague’s Pipits Baird’s SparrowsBaird’s Sparrows

Ferringous HawksFerringous Hawks Lark BuntingsLark Buntings Swainson’s HawkSwainson’s Hawk Grassland Song BirdsGrassland Song Birds ““Other” raptorsOther” raptors Mule DeerMule Deer ElkElk Prong Horn AntelopeProng Horn Antelope West Slope Cut ThroatWest Slope Cut Throat LingLing Great Plains ToadsGreat Plains Toads Spade Foot ToadsSpade Foot Toads

No Surface Occupancy No Surface Occupancy RecommendationsRecommendations

Sage and Sharp Tailed Grouse—March 1 Sage and Sharp Tailed Grouse—March 1 through June 15through June 15

Mule Deer Winter Range– December 1 Mule Deer Winter Range– December 1 through March 31through March 31

Water Fowl- April 1 through July 15Water Fowl- April 1 through July 15 One quarter mile setback on riversOne quarter mile setback on rivers

Producing Wells and Sage Grouse Active Leks Producing Wells and Sage Grouse Active Leks in Montanain Montana

Red = Gas; Black = Oil; Yellow = CBNG; Green = Birds

Sage Grouse Issues in MontanaSage Grouse Issues in Montana

Present StipulationsPresent Stipulations No Surface Occupancy No Surface Occupancy

within ¼ mile of an within ¼ mile of an active sage grouse lekactive sage grouse lek

No new activity No new activity between March 15between March 15thth and June 30 one mile and June 30 one mile from an active lek. from an active lek.

Proposed StipulationsProposed Stipulations No Surface Occupancy No Surface Occupancy

within 1 mile of an within 1 mile of an active sage grouse lekactive sage grouse lek

No new activity No new activity between March 15between March 15thth and June 30and June 30thth four four miles from an active miles from an active leklek

No more than one well No more than one well per 500 acres.per 500 acres.

SAGE GROUSE MANAGEMENT PLANMITIGATION STANDARD

Surface Activity Prohibited

¼ mile radius (125 acres)

Timing Restrictionfor breeding and nesting

2 mile radius (8,000 acres)

NEW FWP RECOMMENDATION

Timing Restrictionfor breeding and nesting

4 mile radius (32,000 acres)

Surface Activity Prohibited1 mile radius (2,000 acres)

Production Tax IncentiveProduction Tax Incentive Current tax rate is .76% of the value of Current tax rate is .76% of the value of

production for the first 12 months on production for the first 12 months on vertical wells and 18 months for horizontal vertical wells and 18 months for horizontal wells.wells.

After Drilling incentive time frame tax rate After Drilling incentive time frame tax rate reverts to standard rate of 9.26% for reverts to standard rate of 9.26% for working interest ownersworking interest owners

Purpose is to encourage drilling by helping Purpose is to encourage drilling by helping operators to recoup costs. Also, to give operators to recoup costs. Also, to give Montana a competitive edge in the region.Montana a competitive edge in the region.

Well completion costs have increased Well completion costs have increased 150%150%

Leasehold costs increased 200% Leasehold costs increased 200% OperatingOperating costs increased 125% costs increased 125% Since 2004 rig rates have increased from $8,500 Since 2004 rig rates have increased from $8,500

to $22,000 PER DAYto $22,000 PER DAY Projections for 2009 will increase 12%Projections for 2009 will increase 12% New built rig rates for 2009 will range between New built rig rates for 2009 will range between

$25,000 and $30,000$25,000 and $30,000

Increased Cost FactorsIncreased Cost Factors1999-20071999-2007

Central Assessment of Gathering Central Assessment of Gathering SystemsSystems

Treats all inter-county operating units as one Treats all inter-county operating units as one continuous system threatening to bring equipment continuous system threatening to bring equipment usually taxed at class 8 (3%) into central usually taxed at class 8 (3%) into central assessment class.assessment class.

The issue is pending before Montana supreme The issue is pending before Montana supreme Court. MPA filed an Amicus Curiae Brief. Court. MPA filed an Amicus Curiae Brief.

MPA analysis shows unit valuation method used in MPA analysis shows unit valuation method used in central assessment increases valuation by central assessment increases valuation by approximately 20%.approximately 20%.

Raises tax rate from 3% of value to 12%, an Raises tax rate from 3% of value to 12%, an increase of 400%increase of 400%

Significant increase in tax liability.Significant increase in tax liability.

Refinery ProductionRefinery Production

8.2 Million Gallons of Products per Day8.2 Million Gallons of Products per Day

– 40% Distributed in Montana40% Distributed in Montana

– 60% Exported to 7 Other States60% Exported to 7 Other States

Gasoline, Diesel, Jet, Avgas, Propane, Gasoline, Diesel, Jet, Avgas, Propane, Fuel Oil, AsphaltFuel Oil, Asphalt

Fuels ProductionFuels Production

Value of Refined Products Produced $7.3 Billion

50% of the total Manufacturing Production

10% of the total Industrial Production

Alternative Fuel ConcernsAlternative Fuel Concerns Alternative FuelsAlternative Fuels

– Mandated volumetric requirements in Mandated volumetric requirements in transportation fuel. transportation fuel.

– Quality verification of 100% bio fuelQuality verification of 100% bio fuel– Biofuel transportation requirements: Biofuel transportation requirements:

these fuels are not accepted in pipelines these fuels are not accepted in pipelines that transport multiple fuel typesthat transport multiple fuel types

– Require infrastructure enhancement at Require infrastructure enhancement at terminals, some locations very difficult terminals, some locations very difficult and expensiveand expensive

EVENT SPONSORS

ENCORE OPERATING

GOUGH,SHANAHAN, JOHNSON AND WATERMAN

CONTACT INFORMATIONCONTACT INFORMATION

MONTANA PETROLEUM ASSN.MONTANA PETROLEUM ASSN.

David A. Galt, Executive DirectorDavid A. Galt, Executive Director PO Box 1186PO Box 1186

Helena MTHelena MT (406) 442.7582(406) 442.7582

MPA@montanapetroleum.org www.montanapetroleum.org

2008 Legislators’ Briefing Tour Sponsors

Bitter Creek PipelinesConocoPhillips

Devon Energy CorporationEnbridge Energy Company, Inc.

Encore Operating, L.P.Enerplus Resources (USA) Corporation

ExxonMobilFidelity Exploration & Production Co.

Gough, Shanahan, Johnson & WatermanMontana Refining Company

Noble Energy ProductionWilliston Basin Interstate Pipeline Co.