Our Unconventional Natural Gas Resource Initiative targets the use of modern stimulation and completion technologies for the economic development and production of tight gas formations.

Woodford Shale Projects in Oklahoma

Following the closing of our Delhi Farmout in June 2006, we began the process of identifying unconventional natural gas resource projects. We chose two projects in the shallower portion of the Woodford Shale trend in Oklahoma. In choosing these two:

• We are concentrating on projects with relatively low unit development costs that can economically compete at $4 index priced gas;
• We are leveraging our staff’s expertise in both vertical and horizontal drilling and completion of tight gas formations, a prerequisite to successfully exploiting and developing these resources;
• We are focusing on well known formations;
• We have considered that these projects require large amounts of capital over long periods of time, thereby providing reinvestment opportunities to absorb the substantial cash flows we expect from our other projects, particularly Delhi; and
• We are adding natural gas exposure to balance our substantial crude oil exposure.

We began actively acquiring leases in these two projects in May 2007. At June 30, 2010, we had acquired approximately 23,925 and 17,421 gross and net acres, respectively, across Wagoner and Haskell counties. As of February 1, 2011, our net acreage position was about 14,900 acres due to selectively nonrenewal of noncore leases in Wagoner County.

During the fourth quarter of our 2009 fiscal year, we initiated a program in Wagoner County testing three of our four acreage blocks by drilling and re-entering wells utilizing air drilling in order to test two distinct gas bearing shale formations.  To date, we have established good commercial production in the western block, achieved noncommercial production in the southern block and are currently testing the eastern block.  Based on results, we are selectively not renewing noncore leases outside of the western block. The successful test there indicated potential reserves of 0.2-0.3 MMCF per vertical well having a drill and complete cost of about $200,000.

During fiscal 2011, we are testing our Haskell County acreage and, to date, have re-entered one well with good initial results.  Full production testing is waiting on completion of a pipeline connection that is expected to be completed by the end of February 2011.  A second test well is being taken through a unitization process before its anticipated re-entry in March 2011.  These wells, estimated to cost less than $500,000 as new wells, target gas reserves of 0.5 – 1.0 BCF at a depth of 4,000’ – 6,000’ through vertical well development and minimal hydraulic fracturing. Our lease net position is spread across thirty section covering over 19,000 acres, allowing for substantial growth in our net acres through forced pooling.