Steptoe & Johnson, PLLC

Below the Surface

The latest research, news, & thinking in the shale gas and energy field

Why this groundbreaking study?

Download our

BELOW THE
SURFACE

research reports

VOLUME 1 - Legal Challenges

VOLUME 2 - Transaction Challenges

A DEEPER LOOK

at transactions and deals

Breaking ground, part two

The first edition of our Below the Surface shale gas research focused on legal challenges and
costs in U.S. shales, particularly disputes and litigation. This follow-up study expands the field
of respondents, takes a harder look at transactions and deals, and offers words of wisdom
from major players in the shale plays.

DEPTH OF
INVOLVEMENT

At the end of Q3 the majority of respondents’ companies
are working in two shales and expect an increasing
presence over the next twelve months.

Less than half of the respondents’ companies are working in the shales below. As
many as 16% expect to increase their presence in an area on the next slide.

DEPTH OF INVOLVEMENT

BREADTH OF INVOLVEMENT

$54 billion

was invested in seven resource plays in 2012

Why this groundbreaking study?

Today, just a handful of resource plays, mainly shales with an abundance of crude oil and liquids
targets, account for a substantial share of all spending for land drilling and development in the U.S.
It’s a substantial opportunity that comes with opportunity costs, including legal costs. As a player in
the field, Steptoe & Johnson PLLC set out to map the legal issues, trends and, yes, expenses below the
surface of shale production. Let’s dig in.

DEPTH OF
INVOLVEMENT

Four shales account for
most activity among
respondents

Answers do not total 100% as respondents
named all the shales where they are involved.

BREADTH OF INVOLVEMENT

Most activity is land acquisition and leasing,
followed by a full pipeline of activities

Answers do not total 100% as respondents named all the shales where they are involved.

OTHER SHALES WHERE
PARTICIPANTS ARE ACTIVE

Listed from most to fewest

Haynesville Shale
Mississippi Lime/
Mississippian
Niobrara Shale
Barnett Shale
Woodford Shale
Fayetteville Shale
New Albany Shale, IL

Basin
Cline Shale, Permian
Basin
Permian Basin
Wolfcamp, Permian
Basin
Monterey Shale
Tuscaloosa Marine

Shale
Utica Point Pleasant
Arkoma Basin
Brown Dense
Formation
Codell Formation
Huron Shale
Kreyenhagen

Formation
Lower Smackover
Brown Dense
Formation
Oriskany Formation
Pearsall Shale
Piceance Basin
Pinedale

Participant profiles and demographics

HOW WE DID THE STUDY

Participant profiles and demographics

The Brand Research Company conducted a total of 101 interviews from January through March
2013 with 96 legal service buyers at 56 companies doing business in U.S. shales, and 5 industry
experts. The list of potential respondents included Steptoe & Johnson PLLC clients and others
who are not clients of the firm.

RESPONDENTS’ INDUSTRY SECTORS

Several respondents identify themselves with multiple sectors.

WHO PARTICIPATED?

In addition to the requirement that companies be involved in some aspect of gas and oil extraction
from U.S. shales, the respondents were required to be significantly involved in the selection of
outside counsel for matters connected with their companies’ involvement in shales. Respondents
are mostly landmen, in-house counsel and executives with an average of 15.3 years selecting outside
counsel for their companies. Their companies have annual revenues ranging from less than
$50 million to more than $1 billion.

COMPANIES' ANNUAL REVENUE

LIST OF RESPONDENTS’ COMPANIES

Producers

  • AB Resources
  • Aera Energy, LLC
  • Anadarko Petroleum Corporation
  • Anderson & Associates
  • ANH Refractories Company
  • Antero Resources
  • Antero Resources Appalachian
    Corporation
  • Atlas Energy
  • Ben Energy
  • Berkley Oil
  • Bluescape Resources
  • Booth Energy
  • Broad Street Energy
  • Cabot Oil & Gas Corporation
  • Caiman Energy, LLC
  • Chesapeake Energy Corporation
  • Chevron Appalachia, LLC
  • CNX Land Resources, Inc.
  • Cohort/JW Operating
  • ConocoPhillips Company
  • CONSOL Energy, Inc.
  • Devon Energy Corporation
  • Dominion
  • Eastland Energy Group, Inc.
  • Energy Corporation of America
  • EQT Corporation
  • Graves & Company
  • Grenadier Energy Partners
  • Gulfport Energy Corporation
  • KC Cooper
  • Lake Region Oil
  • Murex Petroleum Corporation
  • Murray Energy Corporation
  • Newfield Exploration
  • NiSource
  • Northeast Natural Energy, LLC
  • Noble Energy
  • PDC Mountaineer
  • Percheron
  • Providence Energy Group, Inc.
  • Providence Resources, LLC
  • Range Resources
  • Range Resources Appalachia
  • Reliance Holding USA, Inc.
  • Reserve Energy
  • Rex Energy
  • Seneca Resources Corporation
  • Shell Oil Company
  • Sierra Buckeye, LLC
  • Southwestern Energy Production Co.
  • Statoil
  • Stone Energy Corporation
  • Sylvan Energy
  • Talisman Energy USA, Inc.
  • Texas Keystone
  • Tioga Resources, LLC
  • Vitruvian Exploration, LLC
  • Whitmar Exploration Co.
  • Worthington Energy Consultants
  • WPX Energy
  • XTO Energy, Inc.

  • Bexar County Economic Development
  • University of Texas Center for
    Community and Business Research
  • Columbus Business First
  • Daily News
  • Independent Research Scientist
    with U.S. Shale Expertise

Industry Experts

SHALE PLAYERS SURVEYED

Participant profiles and demographics

A total of 176 individuals completed the online survey from February through May 2014. They
represent 119 energy companies of varying sizes doing business in U.S. shales. Respondents are
mostly landmen, in-house counsel, and executives with an average of just over 11 years working
with outside counsel or legal issues in the field.

INDUSTRY SECTORS

Several respondents identify themselves with multiple sectors.

ANNUAL
REVENUE

LIST OF RESPONDENTS

  • AAPL
  • Acadian Land Services
  • Anadarko Petroleum Corp.
  • Antero Resources Corp.
  • Apex Energy, LLC
  • Assets International
  • Atlas Energy, L.P.
  • Atlas Resource Partners
  • Bertison-George, LLC
  • BG Group
  • BHP Billiton
  • Biehl Land Services, LLC
  • Bill Barrett Corp.
  • Billman Geologic
    Consultants, Inc.
  • Bonanza Creek Energy, Inc.
  • BP Production Company
  • Branzan Investment
    Advisors, Inc.
  • Breitburn
  • Brighton Resources
  • Caddo Bay Energy, LLC
  • Cardno MM&A
  • Chesapeake Energy Corp.
  • Chevron
  • Citation Oil & Gas Corp.
  • CNX Gas
  • CNX Land
  • Columbia Pipeline Group
  • Conoco Phillips Company
  • CONSOL Energy
  • CONSOL Energy/CNX Gas
  • Crestwood Midstream Partners
  • Dale
  • Devon
  • Dominion
  • Dorado E&P Partners, LLC
  • Drake Land Services, LLC
  • Edgewood Energy
  • EMG
  • Empire Energy E&P LLC
  • Enerplus
  • Enervest
  • Environmental Standards, Inc.
  • EQT Corp.
  • Ervin Equipment, Inc.
  • Fedoris Enterprises, LLC
  • FirstEnergy Services Company
  • Flat Rock Development, LLC
  • Freeport-McMoran Oil & Gas
  • Global Gas Law Consultants
  • Graves & Co.
  • Greenwood Energy
  • Griffin Petroleum Company
  • Gulfport Energy Corp.
  • Harbinger Land
  • Hat Creek Energy LLC
  • Hess Corporation
  • Honor Resources Co.
  • Hunt Oil Company
  • Huntington Bank
  • Independent
  • Key Oil Company
  • Marathon Oil
  • MCDRS LLC
  • McElvain Energy, Inc.
  • McFarren Group LLC
  • Memorial Resource
    Development
  • Midwest Land Services
  • Mogul Energy International, Inc.
  • Moody and Associates, Inc.
  • Mountaineer Keystone
  • MRO
  • NCPS
  • NiSource
  • Noble Energy
  • Northeast Natural Energy
  • Northwest Savings Bank
  • NuEnergy Operating, Inc.
  • Pardee Resources Company
  • PDC Energy, Inc.
  • PennEnergy Resources
  • Pennsylvania General Energy
  • Percheron
  • Pioneer Natural Resources
  • Range Resources
  • Reserve Energy
  • Rex Energy
  • RH USA
  • Rice Energy
  • RKI
  • Robert L. Bayless, Producer
  • Samuel Gary Jr. and Associates
  • Sierra Buckeye
  • Southwestern Energy
  • Spectra Energy
  • Statoil
  • Stone Energy
  • Talisman Energy
  • Tenaska Resources, LLC
  • Texas Keystone, Inc.
  • Total E&P USA, Inc.
  • TRC Environmental
  • Triana Energy
  • True Oil LLC
  • Ursa Operating Company LLC
  • Vanguard Natural Resources, LLC
  • Vista Ridge Resources, LLC
  • Vistar Oil Texas LLC
  • Vitruvian II Woodford, LLC
  • Western Land Services
  • Wolverine Gas and Oil Corp.
  • Wright Consulting
  • XOG Resources, LLC
  • XTO Energy Inc.

Top legal issues in the field

EVERY OPPORTUNITY

has its legal challenges

Top legal issues in the field

A range of legal challenges confront decision-makers in their shale activities. No surprise there.
But the areas in which they have the highest volume of challenges are title and real estate,
transactions, litigation, regulatory and environmental–in that order. When asked which matters
require the most help from outside counsel, litigation is first, followed by title and real estate, and
then private financing and related securities. Presumably, this reflects subject matter expertise not
always found in-house.

DECISION-MAKERS FACE THESE CHALLENGES SOMETIMES OR OFTEN

USE OUTSIDE COUNSEL MORE THAN HALF THE TIME FOR

Outside counsel needs

LOCAL EXPERIENCE

wanted for transactions

Outside counsel needs

Nearly all of those working in U.S. shales engage outside counsel for title and real
estate transactions; more than half do so often. Two-thirds engage outside counsel
for regulatory transactions and more than half use outside counsel for environmental
and governmental regulation needs.

PERCENTAGE WHO USE OUTSIDE COUNSEL OFTEN OR SOMETIMES FOR:

Drilling down on legal costs

TITLE, REAL ESTATE

and litigation top the budget charts

Drilling down on legal costs

Half of shale developers report that their largest spend on legal services related to
U.S. shales is for title and real estate. Litigation was named by a third of the shale
players and transactions by most of the rest. While litigation is not the largest spend
among all shale developers, when it is reported as largest, it is dramatically larger.
This may explain the earlier cited prevalence of settlements.

LARGEST SPENDS

On average, shale developers spend

$3.4M ANNUALLY

for litigation in the shales

For those whose litigation spend is their largest budget item, the average annual
spend rises to $8.6 million. This amounts to two and a half times the average for title
and real estate when it is the largest spend.

IS LITIGATION THE LARGEST SPEND
FOR LEGAL SERVICES RELATED TO
THE U.S. SHALES?

USE ALTERNATIVE FEE
ARRANGEMENTS?

The volume of disputes

As activity deepens, so does the

VOLUME OF DISPUTES

The volume of disputes

It’s not just shale gas or oil production that keeps shale developers busy. Half
reported facing a steady flow of lawsuits at least quarterly, some as often as monthly
or even weekly. And the pace looks to remain steady. Nearly all of those working in
U.S. shales expect the number of legal disputes to increase or remain the same in
the coming year. Methods of defense vary, but practical settlements appear to make
the most business sense.

50%

93%

METHODS OF
DEFENSE

Faced with various suits,
clients use multiple
defense methods

DISPOSITION OF LEGAL DISPUTES

The nature of disputes

Lawsuits mostly driven by

FIGHTS OVER RIGHTS

The nature of disputes

Not surprisingly, decision-makers most often cited lawsuits arising from acquisition
and use of land as four of the top five reasons for disputes. Moreover, lawsuits
related to mineral title and contracts are the most frequently encountered and
perhaps expected by producers. Environmental lawsuits are the most concerning to
shale developers. This concern is likely related to unpredictability, cost, complexity
and public relations.

THE TOP 5 REASONS FOR LAWSUITS

MOST NUMEROUS LEGAL DISPUTES IN PAST YEARS

DISPUTES OF MOST CONCERN

Biggest transaction challenges

MURKY TITLE LAW

and changing regulations pose
greatest challenge

Biggest transaction challenges

Dealmaking headaches are most often caused by title and real estate,
regulatory, environmental, and government challenges. Respondents are most
concerned about lack of clear or current title law, poor records, and increasing
or changing regulations. These pressures show no sign of waning: 97% say the
volume of challenges will be the same or increase in the foreseeable future.

PERCENTAGE OF RESPONDENTS NAMING THESE TRANSACTIONAL
AREAS AS “MODERATELY TO EXTREMELY” CONCERNING

TOP CAUSES OF CONCERN

WILL TRANSACTIONAL CONCERNS
INCREASE IN 2015?

Top lessons from the field

KNOWLEDGE IS POWER

Top lessons from the field

Respondents offer specific guidance for newcomers with six categories of advice
dominating the lessons learned. These areas range from “know what you’re
getting into” to “attract competent employees and partners.” Also, respondents
say good communication is key.

GAUGING LESSONS LEARNED

Words of wisdom

ADVICE

from the field

Words of wisdom

When asked for their thoughts, respondents were forthright about their own
experiences and lessons learned. Several of those comments are shared below.
One favorite among other gems: “Understand what you know and don’t know
about shale and gas development.”

About Steptoe & Johnson

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