STATE OF OHIO DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND GAS RESOURCES MANAGEMENT In re the Matter of the Application of : Gulfport Energy Corporation, for : Application Date: June 30, 2017 Unit Operation : Supplement Date: July 26, 2017 : Supplement Date: September 6, 2017 Ridgetop South Unit : Supplement Date: October 12, 2017 Supplement Date: October 17, 2017 APPLICATION OF GULFPORT ENERGY CORPORATION FOR UNIT OPERATION Zachary M. Simpson (0089862) GULFPORT ENERGY CORPORATION 3001 Quail Springs Parkway Oklahoma City, Oklahoma 73134 Attorney for Applicant TABLE OF CONTENTS APPLICATION I. APPLICANT INFORMATION...........................................................................................1 II. PROJECT DESCRIPTION ..................................................................................................2 III. TESTIMONY ......................................................................................................................2 IV. THE CHIEF SHOULD GRANT THIS APPLICATION ....................................................3 A. Legal Standard .........................................................................................................3 B. Gulfport’s Application Meets this Standard ............................................................4 i. The Unitized Formation is Part of a Pool ...................................................4 ii. Unit Operations Are Reasonably Necessary to Increase Substantially the Ultimate Recovery of Oil and Gas ...................................4 iii. The Value of Additional Recovery Exceeds Its Addi- tional Costs ..................................................................................................5 iv. The Unit Plan Meets the Requirements of Ohio Revised Code § 1509.28 ............................................................................................5 V. APPROVALS ......................................................................................................................6 VI. HEARING............................................................................................................................6 VII. CONCLUSION ....................................................................................................................6 EXHIBITS Exhibit 1 Unit Agreement Exhibit 2 Unit Operating Agreement Exhibit 3 Prepared Direct Testimony of Michael Buckner (“Geologist”) Exhibit 4 Prepared Direct Testimony of Danny Watson (“Reservoir Engineer”) Exhibit 5 Prepared Direct Testimony of Jenae Allert (“Landman”) Exhibit 6 Working Interest Owner Approval ii STATE OF OHIO DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND GAS RESOURCES MANAGEMENT In re the Matter of the Application of : Gulfport Energy Corporation for : Unit Operation : Application Date: June 30, 2017 : Ridgetop South Unit : APPLICATION Pursuant to Ohio Revised Code Section 1509.28, Gulfport Energy Corporation (“Gulf- port”), hereby respectfully requests the Chief of the Ohio Department of Natural Resources’ Di- vision of Oil and Gas Resources Management (“Division”) to issue an order authorizing Gulfport to operate the Unitized Formation and applicable land area in Belmont County, Ohio (hereinaf- ter, the “Ridgetop South Unit”) as a unit according to the Unit Plan attached hereto and as more fully described herein. Gulfport makes this request for the purpose of substantially increasing the ultimate recovery of oil and natural gas, including related liquids, from the Unitized For- mation, and to protect the correlative rights of unit owners, consistent with the public policy of Ohio to conserve and develop the state’s natural resources and prevent waste. I. APPLICANT INFORMATION Gulfport is a corporation organized under the laws of the State of Delaware. Gulfport has its principal office in Oklahoma City, Oklahoma and is registered in good standing as an “own- er” with the Division. Gulfport designates to receive service, and respectfully requests that all orders, corre- spondence, pleadings and documents from the Division and other persons concerning this filing be served upon, the following: Zachary M. Simpson – Corporate Counsel Gulfport Energy Corporation 3001 Quail Springs Parkway Oklahoma City, Oklahoma 73134 Tel. (405) 252-4608 E-mail: [email protected] II. PROJECT DESCRIPTION The Ridgetop South Unit is located in Belmont County, Ohio, and consists of one- hundred one (101) separate tracts of land. See Exhibit A-1 thru A-6 of the Unit Operating Agreement (showing the plat and tract participations, respectively). The total land area in the Ridgetop South Unit is approximately 614.356 surveyed acres. Gulfport has the right to drill on and produce from approximately 608.25381 acres of the proposed unit through its leasehold in- terest, trade agreement rights, and joint venture agreement rights committed to the Ridgetop South Unit by Gulfport, Gulfport Appalachia, LLC, XTO Energy Inc., and Ascent Resources-Utica, LLC – approximately ninety-nine percent (99.00673%) of the unit area, which is greater than the sixty-five percent (65%) threshold required by Ohio Revised Code § 1509.28.1 As more spe-cifically described herein, Gulfport seeks authority to drill and complete three horizontal wells in the Unitized Formation from a single well pad located just inside the northern boundary of the Ridgetop South Unit to efficiently test, develop, and operate the Unitized Formation for oil, natu-ral gas, and related liquids production. Gulfport’s plan for unit operations (the “Unit Plan”) is attached to this Application and consists of the Unit Agreement, attached as Exhibit 1; and the Unit Operating Agreement, at- tached as Exhibit 2. Among other things, the Unit Plan allocates unit production and expenses based upon each tract’s surface acreage participation in the unit; includes a carry provision for those unit participants unable to meet their financial obligations, the amount of which is based upon the risks of and costs related to the project; and conforms to industry standards for the drill- ing and operating of horizontal wells generally used by the Applicant with other interest owners. III. TESTIMONY The following pre-filed testimony has been attached to the Application supporting the Ridgetop South Unit’s formation: (i) testimony from a Geologist establishing that the Unitized Formation is part of a pool and supporting the Unit Plan’s recommended allocation of unit pro- duction and expenses on a surface acreage basis;2 (ii) testimony from a Reservoir Engineer estab- lishing that unitization is reasonably necessary to increase substantially the recovery of oil and gas, and that the value of the estimated additional resource recovery from unit operations ex- 1 See Prepared Direct Testimony of Jenae Allert at 2-3, attached as Exhibit 5. 2 See Prepared Direct Testimony of Michael Buckner, attached as Exhibit 3. 2 Rev. 10.11.2017 exceeds its additional costs;3 and (iii) testimony from an operational Landman with firsthand knowledge of Gulfport’s Ohio development who describes the project generally, the Unit Plan, efforts to lease unleased owners, and the approvals received for unit development.4 IV. THE CHIEF SHOULD GRANT THIS APPLICATION A. Legal Standard Ohio Revised Code § 1509.28 requires the Chief of the Division to issue an order provid- ing for the unit operation of a pool – or a part thereof – if it is reasonably necessary to increase substantially the ultimate recovery of oil and gas, and the value of the estimated additional re- source recovery from the unit’s operations exceeds its additional costs. See Ohio Rev. Code §1509.28(A). The Chief’s order must be on terms and conditions that are just and reasonable and pre- scribe a plan for unit operations that includes the following: (1) a description of the unit area; (2) a statement of the nature of the contemplated operations; (3) an allocation of production from the unit area not used in unit operations, or otherwise lost, to the separately owned tracts; (4) a provision addressing credits and charges to be made for the investment in wells, tanks, pumps, and other equipment contribut- ed to unit operations by owners in the unit; (5) a provision addressing how unit operation expenses shall be de- termined and charged to the separately owned tracts in the unit, and how they will be paid; (6) a provision, if necessary, for carrying someone unable to meet their financial obligations in connection with the unit; (7) a provision for the supervision and conduct of unit operations in which each person has a vote with a value corresponding to the percentage of unit operations expenses chargeable against that per- son’s interest; (8) the time when operations shall commence and the manner in which, and circumstances under which, unit operations will termi- nate; and (9) such other provisions appropriate for engaging in unit operation and for the protection or adjustment of correlative rights. See Ohio Rev. Code § 1509.28(A). The Chief’s order becomes effective once approved in writ- ing by those working-interest owners who will be responsible for paying at least sixty-five per- cent of the costs of the unit’s operations and by royalty and unleased fee-owners of sixty-five 3 See Prepared Direct Testimony of Danny Watson, attached as Exhibit 4. 4 See Prepared Direct Testimony of Jenae Allert, attached as Exhibit 5. 3 percent of the unit’s acreage. Once effective, production that is “allocated to a separately owned tract shall be deemed, for all purposes, to have been actually produced from such tract, and all operations *** [conducted] upon any portion of the unit area shall be deemed for all purposes the conduct of such operations and production from any lease or contract for lands any portion of which is included in the unit area.” Ohio Rev. Code § 1509.28. B. Gulfport’s Application Meets this Standard i. The Unitized Formation is Part of a Pool The “Unitized Formation” consists of the subsurface portion of the Unit Area (i.e., the lands shown on Exhibit A-1 and identified in Exhibit A-2 thru A-6 to the Unit Operating Agree- ment) at a depth located from fifty feet above the top of the Utica Shale to fifty feet below the top of the Trenton Limestone formation, and frequently referred to as the Utica/Point Pleasant formation. The evidence presented in this Application establishes that the Unitized Formation is part of a pool and thus an appropriate subject of unit operation under Ohio Rev. Code §1509.28.5 Additionally, that evidence establishes that the Unitized Formation is likely to be reasonably uniformly distributed throughout the Unit Area – and thus that it is reasonable for the Unit Plan to allocate unit production and expenses to separately owned tracts on a surface acre- age basis.6 ii. Unit Operations Are Reasonably Necessary to Increase Substantially the Ultimate Recovery of Oil and Gas The evidence presented in this Application establishes that unit operations are reasonably necessary to increase substantially the ultimate recovery of oil and gas from the lands making up the Ridgetop South Unit. The Unit Plan contemplates the potential drilling of approximately three (3) horizontal wells from a single well pad, with lateral lengths of approximately 7,774 feet and with the potential for additional unit wells in the event they are necessary to fully recover the resource.7 Gulfport estimates that the ultimate recovery from this unit development could be as much as 54.2 billion cubic feet (Bcf) of natural gas from the Unitized Formation.8 Absent unit development, that recovery would be substantially less: First, the evidence shows that it is un- likely that vertical development of the unit would ever take place because it is likely to be une- 5 A “pool” is defined under Ohio law as “an underground reservoir containing a common accumulation of oil or gas, or both, but does not include a gas storage reservoir.” Ohio Rev. Code § 1509.01(E). See also Exhibit 3 at 2-3. 6 Exhibit 3 at 3-5. 7 See, e.g., Exhibit 5 at 4-5. 8 See, e.g., Exhibit 4 at 3-6. We emphasize that these are only estimates, and like the rest of the estimates set forth in this Application, they should be treated as simply estimates based upon the best information available at the time. 4 Rev. 7.26.2017 conomic – resulting in potentially no resource recovery from the Unitized Formation.9 Second, simply relying on shorter horizontal laterals to develop the Unitized Formation underlying the Ridgetop South Unit would be uneconomical. Oil and gas recovery from horizontal drilling methods is directly related to the length of the lateral – limit a lateral’s length and you limit its ultimate recovery. Here, in absence of unit operations being granted, the unleased and uncom- mitted tracts would prevent the development of most the wells in the unit area and lead to strand- ing the corresponding reserves.10 The evidence thus shows that the contemplated unit operations are reasonably necessary to allow for, much less increase substantially, the recovery of oil and gas from the Unitized For- mation.11 iii. The Value of Additional Recovery Exceeds Its Additional Costs As set forth in Danny Watson’s testimony, Gulfport estimates the difference in net pre- sent value between the two scenarios (i.e., the difference between EUR in the “Unitized Scenar-io” and EUR in the “Non-Unitized Scenario” referred to in Exhibit 5) is approximately $7.671 million12 at a net present value discounted at 10% per annum; or $18.35213 million at an undiscounted net cash flow. See Exhibit 5, showing for each proposed well the estimated value of the well’s production and the estimated drilling and operating costs (incorporated here as if fully written herein). In particular, it shows that the capital/ drilling costs will average $9.52214 million per well. Incorporated into this analysis are both fixed and variable operating cost estimates estimated to be realized to maintain production for the life of the well.15 Thus, the evidence es-tablishes that the value of the estimated recovery exceeds the estimated additional costs incident to conducting unit operations. iv. The Unit Plan Meets the Requirements of Ohio Revised Code § 1509.28 The Unit Plan proposed by Gulfport meets the requirements set forth in Ohio Revised Code § 1509.28. The unit area is described in the Unit Agreement at Article 1, as well as on Ex- hibit A-1 thru A-6 to the Unit Operating Agreement. The nature of the contemplated unit opera- tions can be found generally in the Unit Agreement at Article 3, with greater specificity through- 9 Id. at 4-6. 10 Id. at 4-6. 11 Id. at 5-7. 12 Id. at 5-7. 13 Id. at 5-7. 14 Id. at 5-7 15 Id. at 5-7. 5 Rev. 10.11.2017 out the Unit Agreement and Unit Operating Agreement.16 Unit production and unit expenses are allocated on a surface acreage basis as set forth in the Unit Agreement at Articles 3 through 5 (generally), except where otherwise allocated by the Unit Operating Agreement.17 Payment of unit expenses is addressed generally in Article 3 of the Unit Agreement.18 No provision for cred- its and charges related to contributions made by owners in the unit area regarding wells, tanks, pumps and other equipment for unit operations are addressed in the Unit Operating Agreement because none are contemplated.19 The Unit Plan provides for various carries in the event a par- ticipant is unable to meet its financial obligations related to the unit – see, e.g., Article VI of the Unit Operating Agreement.20 Voting provisions related to the supervision and conduct of unit operations are set forth in Article XV of the Unit Operating Agreement, with each person having a vote that has a value corresponding to the percentage of unit expenses chargeable against that person’s interest.21 Commencement and termination of operations are addressed in Articles 11 and 12 of the Unit Agreement. V. APPROVALS As of the filing of this Application, the Unit Plan has been agreed to or approved by ap-proximately ninety-nine percent (99.00673%) of Working Interest Owners. See Exhibit 5 at 2-4, and Exhibit 6. Said approval exceeds the statutory minimum requirements set forth in Ohio Re-vised Code § 1509.28. VI. HEARING Ohio Revised Code § 1509.28 requires the Chief to hold a hearing to consider this Appli- cation, when requested by sixty-five percent (65%) of the owners of the land area underlying the proposed unit. Ohio Rev. Code § 1509.28(A). That threshold level is met here. Accordingly, Gulfport respectfully requests that the Division schedule a hearing at an available hearing room located at the Division’s Columbus complex for the earliest available unitization docket, to con- sider the Application filed herein. VII. CONCLUSION 16 See also, e.g., Exhibit 5 at 6-10. 17 Id. at 7-10. 18 Id. 19 Id. at 10. 20 Id. at 10-13. 21 Id. at 11-13. 6 Rev. 10.11.2017 Ohio Revised Code § 1509.28 requires the Chief of the Division to issue an order for the unit operation of a pool – or a part thereof – if it is reasonably necessary to increase substantially the recovery of oil and gas, and the value of the estimated additional recovery from the unit’s operations exceeds its additional costs. Gulfport respectfully submits that the Application meets this standard, and that the terms and conditions of the Unit Plan are just and reasonable and satis- fy the requirements of Ohio Revised Code § 1509.28(B). Gulfport therefore asks the Chief to issue an order authorizing Gulfport to operate the Ridgetop South Unit according to the Unit Plan attached hereto. Respectfully submitted, Zachary M. Simpson (0089862) GULFPORT ENERGY CORPORATION 3001 Quail Springs Parkway Oklahoma City, Oklahoma 73134 Attorney for Applicant 7 UNIT AGREEMENT THE RIDGETOP SOUTH UNIT PEASE TOWNSHIP BELMONT COUNTY, OHIO THIS AGREEMENT, entered into as of this 30th day of June, 2017, by the parties subscribing, ratifying, approving, consenting to, or bound to the original of this instrument, a counterpart thereof, or other instrument agreeing to become a party hereto; and by those parties participating as a result of an order issued by the Division of Oil and Gas Resources Management (“Division”) pursuant to Ohio Revised Code Section 1509.28. W I T N E S S E T H: WHEREAS, in the interest of the public welfare and to promote conservation and increase the ultimate recovery of oil, natural gas, and other substances from the Ridgetop South Unit, in Pease Township, Belmont County, Ohio, and to avoid waste and protect the correlative rights of the owners of interests therein, it is deemed necessary and desirable to enter into and approve this Agreement to create and establish a unit comprising the Unit Area under the applicable laws of the State of Ohio to unitize the Oil and Gas Rights in and to the Unitized Formation in order to conduct Unit Operations as herein provided; and, WHEREAS, this Agreement generally maintains a 1/8th royalty (12.5%) and allocates responsibility for the supervision and conduct of Unit Operations, and responsibility for the payment of Unit Expenses, to Working Interest Owners based upon each owner’s pro rata interest in the unit acreage; NOW THEREFORE, in consideration of the premises and of the mutual agreements herein contained, it is agreed and approved as follows: ARTICLE 1: DEFINITIONS As used in this Agreement: Effective Date is the time and date this Agreement becomes effective as provided in Article 11. Oil and Gas Rights are the rights to investigate, explore, prospect, drill, develop, market, transport, and operate within the Unit Area for the production of Unitized Substances, or to share in the production so obtained or the proceeds thereof, including without limitation the conducting of exploration, geologic and/or geophysical surveys by seismograph, core test, gravity and/or magnetic methods, the injecting of gas, water, air or other fluids into the Unitized Formation, the installation, operation and maintenance of monitoring facilities, the laying of pipelines, building of roads, tanks, power stations, telephone lines, and/or other structures. Person is any individual, corporation, partnership, association, receiver, trustee, curator, executor, administrator, guardian, fiduciary, or other representative of any kind, any department, agency, or instrumentality of the state, or any governmental subdivision thereof, or any other entity capable of holding an interest in the Unitized Substances or Unitized Formation. Royalty Interest means a right to or interest in any portion of the Unitized Substances or proceeds from the sale thereof other than a Working Interest. Royalty Owner is a Person who owns a Royalty Interest. Tract means the land identified by a tract number in Exhibit A-2 thru A-6 to the Unit Operating Agreement. Tract Participation means the fractional interest shown on Exhibit A-2 thru A-6 to the Unit Operating Agreement for allocating Unitized Substances to a Tract. Uncommitted Working Interest Owner is a Working Interest Owner, other than an unleased mineral owner, who has not agreed to, ratified or otherwise approved this Plan. Uncommitted Working Interest Owners are likely, but not necessarily, to have obtained their interest by lease. Unit Area means the lands shown on the plat attached as Exhibit A-1 and identified on Exhibit A-2 thru A-6 to the Unit Operating Agreement, including also areas to which this Agreement may be extended as herein provided. Exhibit 1