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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 set out to map the legal issues, trends and, yes, expenses below the surface of shale production. Let’s dig in.

$54 billion was invested in seven resource plays in 2012.

Why this groundbreaking study?

OTHER SHalES WHERE paRTicipanTS aRE acTivE

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 ShaleKreyenhagen Formation Lower Smackover Brown Dense Formation Oriskany FormationPearsall ShalePiceance Basin Pinedale

Four shales account for most activity among respondents

dEpTH Of invOlvEmEnT

Marcellus Shale

Utica Shale

Eagle Ford Shale

Bakken Shale

Other Shales

33%

76%

81%

27%

53%

Acquiring Land/Leases

Drilling

Land Reclamation

Processing

Seeking Permits

Drilling Rig

Producing Gas

Other

Pipeline

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

Listed from most to fewest

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

BREadTH Of invOlvEmEnT

50250

45%

33%

33%

32%

26%

20%

18%

18%

11%

Answers do not total 100% as respondents named all the activities in which they are involved.

Participant profiles and demographics

How we didthe study.

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

participant profiles and demographics

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.

Who participated?

Producers AB ResourcesAera Energy, LLCAnadarko Petroleum CorporationAnderson & Associates Mineral Land ServiceANH Refractories CompanyAntero ResourcesAntero Resources Appalachian CorporationAtlas EnergyBen EnergyBerkley OilBluescape ResourcesBooth EnergyBroad Street EnergyCabot Oil & Gas CorporationCaiman Energy, LLCChesapeake Energy CorporationChevron Appalachia, LLCCNX Land Resources, Inc.Cohort/JW OperatingConocoPhillips CompanyCONSOL Energy, Inc.Devon Energy Corporation

liST Of RESpOndEnTS’ cOmpaniES

DominionEastland Energy Group, Inc.Energy Corporation of AmericaEQT CorporationGraves & CompanyGrenadier Energy PartnersGulfport Energy CorporationKC CooperLake Region OilMurex Petroleum CorporationMurray Energy CorporationNewfield ExplorationNiSourceNortheast Natural Energy, LLCNoble EnergyPDC MountaineerPercheronProvidence Energy Group, Inc.Providence Resources, LLCRange ResourcesRange Resources AppalachiaReliance Holding USA, Inc. Reserve EnergyRex Energy

Seneca Resources CorporationShell Oil CompanySierra Buckeye, LLCSouthwestern Energy Production Co.StatoilStone Energy CorporationSylvan EnergyTalisman Energy USA, Inc.Texas KeystoneTioga Resources, LLCVitruvian Exploration, LLCWhitmar Exploration Co.Worthington Energy ConsultantsWPX EnergyXTO Energy, Inc.

Industry Experts Bexar County Economic DevelopmentUniversity of Texas Center for

Community and Business Research Columbus Business FirstDaily NewsIndependent Research Scientist with

U.S. Shale Expertise

cOmpanyS’ annual REvEnuE100

50

25

0

75

$50 – $99 million

$500 – $999 million

$100 – $499 million

Less than $50 million

$1 billion +

RESpOndEnTS’ induSTRy SEcTORS

Oil and Gas

100

50

75

25

0

Midstream

14%

Pipeline

9%

Support for Oil & Gas Operations

6%

Drilling

23%

Other

5%

Energy

29%

Production

32%83%

Several repondents identify themselves with multiple sectors.

30% 1% 13% 10% 47%

Top legal issues in the field

Every opportunity has its legal challenges.

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.

Top legal issues in the field

dEciSiOn-makERS facE THESE cHallEngES SOmETimES OR OfTEn

uSE OuTSidE cOunSEl mORE THan Half THE TimE fOR

45% 39% 26% 42%Government

RelationsPrivate Financing & Related Securities

Labor & Employment

Other

100

50

25

100

50

75

25

0

100

50

75

25

0

100

50

75

25

0

85%Title & Real Estate

74%Transactions

90%Litigation

60%Regulatory

61%Environmental

52%Government

Relations

76%Private Financing & Related Securities

46%Labor &

Employment

94% 77% 72% 70% 60%Title & Real Estate Transactions Litigation Regulatory Environmental

75

0

The volume of disputes

50% 93%of shale developers say disputes arise quarterly or more frequently

of shale developer disputes will either increase in frequency or remain at the same high volume in the next twelve months

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.

The volume of disputesAs activity deepens, so does the volume of disputes.

Pre-Trial Settlement

Mediation

Other

Litigation/Trial

Arbitration

100

50

75

25

0

diSpOSiTiOn Of lEgal diSpuTES

74%Settled

26%Went to Court

Faced with various suits, clients use multiple defense methods.

METHODS OF DEFENSE USED AGAINST LAWSUITS

65%

46%

42%

67%

10%

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 nature of disputesLawsuits mostly driven by fights over rights.

Real Estate

Regulatory

Mineral Title

Personal Injury

Contracts

Class Action

Labor & Employment

Business Torts

Toxic Torts

Other

Environmental

mOST numEROuS lEgal diSpuTES in paST yEaR1005025 75

73%

57%

35%

27%

19%

12%

9%

8%

6%

3%

14%

0

100

50

75

25

•Environmental Issues

•Property Damage

•Payment of Gas Royalties

•Regulatory Disputes

•Employment Disputes

•Premises Liability

•Zoning Disputes

•Labor Disputes

• Insurance Disputes

•Deliberate Intent

THE TOp 5 REaSOnS fOR laWSuiTS

60%

Land

owne

r Dis

pute

s

55%

Title

Issu

es

51%

Cont

ract

Issu

es

51%

Leas

e D

ispu

tes

42%

Prop

erty

Rig

hts

Other Reasons

Regulatory

Class Action

Environmental

Real Estate

Mineral Title

Personal Injury

Labor & Employment

Business Torts

Product Liability

Other

Contracts

diSpuTES Of mOST cOncERn

56%

52%

30%

26%

23%

19%

10%

6%

2%

2%

12%

Toxic Torts 7%

0 1005025 75

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.

On average, shale developers spend $3.4M annually for litigation in the shales.

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.

drilling down on legal costs

iS liTigaTiOn THE laRgEST SpEnd fOR lEgal SERvicES

RElaTEd TO THE u.S. SHalES?

uSE alTERnaTivE fEE aRRangEmEnTS?

34%

66%

Yes

No

13%

13%

Yes

59%

28%No

Not Sure

Drilling down on legal costs

50

25

Title, real estate and litigation top the budget charts.

Litigation

Transactions

EnvironmentalPrivate Finance/

Securities

35%

14%

1%2%

Title & Real Estate

48%

0

laRgEST SpEndS

Naturally resourceful counsel

200 attorneys and 200 paralegals serving only the energy industry220 in-house land professionals

12th largest energy practice in the country– Energy Law 360

Largest team of oil and gas lawyers in the East

30 former in-house energy attorneys who know the industry

Vigorous efforts to shape energy law for the futureScalable, time-sensitive land and title solutions to meet client needs

Robust in-house abstracting resources

Nationwide title servicesTop rated by Best Lawyers in America® & Chambers USA in Oil, Gas & Energy LawStrategic locations in U.S. shale plays, including Marcellus and UticaServing energy and natural resource clients since the firm’s founding 100 years ago

About Steptoe & Johnson

dEpTH Of EnERgy ExpERiEncE

dEpTH and BREadTH

Colorado Kentucky Ohio Pennsy l -

vania Te x a s W e s t Virginia

Mineral Title Opinions• More than 7,000 mineral title opinions

in 2012

• Uniform quality, opinion formats and approaches to title analysis and reporting all major basins

Environmental & Regulatory• In-house FERC and public utility experience

Litigation• Experienced team of mineral title litigators

who know the courts and the industry

• 75 seasoned litigators

• 60% individually recognized as leaders in their field by The Best Lawyers in America®

Deals• $6.2B in recent transactions

Emergency Response Team• Trained multi-disciplinary Emergency

Response Team

• Provides instantaneous support to in-house emergency response teams

Government Relations• Government relations team experienced in

shaping eastern oil and gas legislation

• Strategic relationships provide clients with connections

Colorado | Kentucky | Ohio | Pennsylvania | Texas | West Virginia

Recognized strengths in Energy, Litigation, Transactional, and Labor & Employment Law 285 14 40

Attorneys Offices in 6 states Practice Areas