Legislative & Regulatory Update

1. Legislative & Regulatory Update COPAS Spring 2019 Nate Wolf-State Severance Tax Legislation Mike Foster-Federal and State Royalty & Volume Reporting Legislation 1

2. DISCLAIMER This presentation only reflects the views of the authors/presenters and not those of their employer(s). It is not intended as legal, tax or accounting advice. Each recipient should solicit their own legal, tax or accounting counsel with respect to any of these issues. 2

3. LEARNING OBJECTIVES The primary objective of this presentation will be to enable the participant to discern state severance tax, royalty, ONRR and Bureau of Land Management compliance requirements and information that has changed during the year 2018. 3

4. State Severance Tax Legislation Nate.Wolf@ConocoPhillips.com 4

5. Alaska (in session January 15 to April 19) SB14 – Repeal Certain Credits Used for Severance Tax Offset Introduced January 7, 2019 Repeals certain credits for oil & gas production tax • Alaska Statute 43.55.024 Identical to SB206 from last year Currently in Senate Resources Committee 5

6. California (in session December 3, 2018 to September 15, 2019) SB246 – Oil & Gas Severance Tax Introduced February 11, 2019 Imposes oil & gas severance tax on operator • Value based – 10% of: • Average price per barrel of oil • Average price per unit of gas Currently in Senate Rules Committee 6

7. Colorado (in session January 9 to May 10) Severance Tax Initiative #22 Heard by Secretary of State title board on February 6 Raises severance tax by 5% Removes Ad Valorem tax credit Estimated impact $703,900,000 7

8. Indiana (in session January 3 to April 23) SB565 – Revised Procedure for Partial Payment of Tax Liability Introduced on January 14 Specifies how partial payment of taxpayer’s tax liability will be applied • Tax liability • Penalty • Interest Passed Senate and House as amended. Senate did not concur If successful, will be effective July 1, 2019 8

9. Louisiana (in session April 8 to June 8) HB188 – Exemption for Stripper Wells Prefiled on March 26 Establishes a severance tax exemption for oil produced from stripper wells when trigger price reaches • Less than $75/barrel • Previously less than $20/barrel If successful, will be effective July 1, 2019 through June 30, 2029 9

10. Louisiana (in session April 8 to June 8) HB256 – Exemption for Incapable Wells Prefiled on March 27 Establishes a severance tax exemption for oil produced from incapable wells when average value of oil is less than $75/barrel If successful, will be effective July 1, 2019 through June 30, 2029 10

11. Montana (in session January 7 to April 28) SB28 – Revise Taxation on Certain Incremental Oil Production Removes $54 trigger price for Incremental Production from a tertiary well $54 trigger price will attach to New or Expanded Secondary Recovery Production Signed by Governor and has an immediate effective date 11

12. Montana (in session January 7 to April 28) HB213 – Revised Tax Rate on Certain Oil Production Introduced on January 15 Subjects stripper well exemption production to its reduced tax rate when average price received is less than $54 of Montana oil 2 Amendments • To include stripper well exemption production & stripper well bonus production • Effective date from effective immediately to July 1, 2019 Singed by Governor 12

13. Montana (in session January 7 to April 28) HB656 – Fixed Tax Rate for Privilege & License Tax Introduced on March 14 Amends the total privilege & license tax and oil & gas natural resource distribution account • From: May not exceed 0.3% • To: is 0.3% Passed House and Senate and is being enrolled If passed, will be effective July 1, 2019 13

14. North Dakota (in session January 3 to April 28) HB1439 – Tertiary Recovery Project Introduced on January 14 Exempts incremental production from oil extraction tax for 20 years if: • Production is from certified tertiary recovery project • Injects >50% carbon dioxide produced from coal • Project must: • Be outside of Bakken & Three Forks formations Exempts incremental production from oil extraction tax for 10 years if: • Production is from certified tertiary recovery project • Injects >50% carbon dioxide produced from coal • Project must: • Be inside of Bakken & Three Forks formations Passed House and Senate. Signed by Senate President If successful, will be effective July 1, 2019 14

15. North Dakota (in session January 3 to April 28) SB2312 – Tribal/State Tax Agreement Introduced on January 17 Adjusts allocation of revenue from oil & gas gross production and oil extraction taxes • 80% (tribe) / 20% (state) – of total revenues from trust lands on the reservation & on trust properties outside reservation • 20% (tribe) / 80% (state) - of total revenues from non-trust land on the reservation Creates Legislative Management Committee to deal with Tribal taxation issues; and given expiration date of July 31, 2021 Effective for all new oil and gas wells subject to this agreement drilled after June 30, 2019 Signed by the Governor 15

16. Pennsylvania (in session January 1 to December 31) HB178 – Severance Tax Rate Introduced on January 28 Creates natural gas severance tax, effective July 1, 2019 at 3.5% of gross value of gas & NGLs • Adjusted annually on July 1 based on Pennsylvania hub price • Price between $0 - $2.50 3% • Price between $2.51 - $3.00  $4% • Price >$3.00  5% • Exemptions include: • Stripper well • Natural gas sold and delivered by operator within 5 miles of producing well for the processing or manufacture of tangible person property • Natural gas provided free of charge to surface owner • Natural gas, dry natural gas, or NGLs severed from storage field • Credit for impact fees allowed Currently in House Environmental Resources & Energy Committee 16

17. Pennsylvania (in session January 1 to December 31) Pennsylvania Supreme Court Ruling Snyder Bros. v Public Utility Commission • Ruled December 28, 2018 Wells must produce <90 MCF/day in ALL calendar months of the year in order to be exempt from impact taxes • Provisions of Act 13, apply if production exceeds threshold for even one month Supreme Court reinstated PUC’s order • PUC in process of generating invoices for shale gas producers who disputed and did not pay 17

18. Pennsylvania (in session January 1 to December 31) SB183 – Severance Tax Rate Introduced on February 1 Establishes Pay It Forward Pay It Back program • Awarding loans to eligible students Imposes a natural gas severance tax on every unconventional gas well 5% of gross value severed at the well Will be effective in 60 days of passing 18

19. Pennsylvania (in session January 1 to December 31) SB457 – Extraction for Education & Environmental Protection Tax Introduced on March 19 Establishes an Extraction for Education & Environmental Protection Tax • On every producer for severance of natural gas • 5% of gross value of units severed at wellhead Credit under Chapter 23 can be used to offset tax liability • Equal to producer’s total payment of unconventional gas well fee Currently in the Senate Environmental Resources & Energy Committee If passed, will be effective July 1, 2019 19

20. Pennsylvania (in session January 1 to December 31) SB468 – Natural Gas Severance Tax Introduced on March 21 Establishes Natural Gas Severance Tax • On every producer for severance of natural gas • 5% of gross value of units severed at wellhead Currently in Senate Environmental Resources & Energy Committee If passed, will be effective within 60 days of passing 20

21. Texas (in session January 8 to May 29) SB533 & HB1558 – 2 Year Inactive Well Incentive Introduced on January 30 & February 8, respectively Defines two year inactive well as a well that has not produced oil or gas in more than one month in the two years prior • Does not include: • Well in enhanced oil recovery project • Well that is drilled but not completed Shortened exemption period from 10 years to 5 years If successful, will be effective September 1, 2019 21

22. Texas (in session January 8 to May 29) SB925/HB3865 – Calculation of Low Producing Daily Production Filed on February 20 Outlines calculation of daily production for low-producing wells and leases • Average daily production from well using greater of monthly production from well as reported in: • Monthly well production reports made to commission • Producer’s reports made to comptroller including any amendments Currently in House If successful, will be effective September 1, 2019 22

23. Texas (in session January 8 to May 29) SB1417 – Phasing out high-cost gas tax incentive Filed on March 1 Phases out tax incentive for high-cost gas wells Requires application to be filed with Comptroller before September 1, 2019 23

24. Texas (in session January 8 to May 29) HB2256 – Tax Auditing Procedures Impacts procedure related to determining overpayments of gas production taxes due to marketing cost deductions Authorizes Comptroller to use selected marketing cost sampling in managed audit if: • Comptroller approves the selection of marketing transactions to be used in sample • Sampling method complies with generally accepted sampling methods described by Statement on Auditing Standards If successful, will be effective September 1, 2019 24

25. Texas (in session January 8 to May 29) HB2545 – Tax Credit for Desalination Introduced on February 27 Allows credit to be taken against franchise taxes (Chapter 171) and/or for oil and gas taxes (Chapters 201 & 202) paid by entity that produces fresh water at a desalination facility • Credit is valued in tiers • $1.00/1000 gallons if ≥ 3000 milligrams of contaminants • $5.00/1000 gallons if ≥ 70,000 milligrams of contaminants • $17.00/1000 gallons if ≥ 90,000 milligrams of contaminants Credit may be sold or reassigned in part or in whole If successful, will be effective January 1, 2020 25

26. Texas (in session January 8 to May 29) HB2675 – Repealing Language for Suspension of Fees Introduced on February 20 Repeals language providing for suspension of Oil and Gas Regulatory Clean-up fees when balance in the Oil & Gas Regulatory and Cleanup Fund exceed specified amount Passed House and in Senate If successful, will be effective September 1, 2019 26

27. Texas (in session January 8 to May 29) HB3067 – Production Tax Credit for Produced Water Introduced on March 4 Creates production tax credit for oil & gas producers providing produced water for recycling • Total # Barrels of Produced Water x Monthly Average Closing Price of WTI x 3.75% or 2.3% as applicable • May not exceed $25,000,000 • May be carried over to second year of biennium If successful, will be effective September 1, 2019 27

28. Texas (in session January 8 to May 29) HB3717 – Production Tax Credit for Produced Water Introduced on March 7 Creates production tax credit for oil & gas producers providing treated produced water to aquifer storage & recovery project operators • Total # Barrels of Produced Water x Monthly Average Closing Price of WTI x 2.3% as applicable • May not exceed $25,000,000 • May be carried over to second year of biennium If successful, will be effective September 1, 2019 28

29. Texas (in session January 8 to May 29) SB1999 – Production Tax Credit for Produced Water Introduced on March 7 Creates production tax credit for oil & gas producers providing treated produced water to aquifer storage & recovery project operators • Total # Barrels of Produced Water x Monthly Average Closing Price of WTI x 2.3% as applicable • May not exceed $25,000,000 • May be carried over to second year of biennium If successful, will be effective September 1, 2019 29

30. Texas (in session January 8 to May 29) HB3275 – Repealing Flared or Vented Gas Severance Exemption Introduced on March 5 Repeals flared or vented severance tax exemption If successful, will be effective September 1, 2019 30

31. Utah (in session January 28 to March 9) HB389 – Tax Credit Certificates for Workover/Recompletion Introduced on February 20 Creates tax credit certificate process for well recompletion or workover severance tax credit To claim credit, taxpayer must: • Submit application • Include proof of payment of expenses during calendar year as reviewed by independent certified public accountant • Receive certificate from Division of Oil, Gas, and Mining Passed and will be effective January 1, 2019 31

32. Virginia (in session January 9 to February 24) SB1165 & HB2555 – Local Gas Severance Tax Extends Sunset Provision Extends sunset date for local (city or county) gas severance tax • From January 1, 2020 • To January 1, 2022 SB1165/HB2555 approved by Governor • Section 58.1-3712 states the governing body of any county or city may levy a license tax on every person engaging in business of severing gases from the earth, however shall not exceed 1% of gross receipts from sale of gases severed within such county 32

33. West Virginia (in session January 9 to March 9) HB2673 – Low Volume Oil & Gas Production Tax Exemption Introduced on January 25 Exempts low producing oil & gas wells from severance tax Creates a special use fee of 2.5% on sales • Natural Gas > 5,000 cubic feet of natural gas per day, but < 60,000 cubic feet per day • Oil > ½ barrel of oil per day, but < 10 barrels of oil per day • To be used by Secretary of the Department of Environmental Protection to plug abandoned wells • Fee not due following calendar year when Oil & Gas Abandoned Well Plugging Fund exceeds $4MM on June 1 fiscal year Passed but vetoed Effective for taxable periods on or after January 1, 2019 33

34. Questions? 34

35. Federal and State Royalty Legislation Mike.Foster@cop.com 35

36. Limit Hydraulic Fracking, Change Setback Hydraulic Fracturing AZ: Prohibited (HB2498,SB1197)(pending) CT: State-wide Ban (SB753)(pending) FL: Prohibited (HB239,SB7064)(pending) IL: 5 Bills (all pending) (prohibit, revoke approvals)(HB3386,3238) (allow county approval)(HB3383) (require mineral owner consent)(HB1562) (no new future permits)(SB5743) (more info in APD)(HB282,SB3174) MA: Moratorium; Regulation (S130,S425) MI: Requires Public Hearing(HB 4474) NC: Statewide Ban (HB 632) NM: SB 459 No New Permits (failed) NY: 6 Bills (pending) (more regulation of fracking) (A1741) (no outside gas from fracking) (A1559) (moratorium to study aquifers) (A3561) (must disclose frac settlements) (A1219) (prohibits producing w/ fracking) (A3184) (restricts waste products transport)(A7154) OR: Moratorium on fracking (pending) PA: Inject Tracer Fluid in Fracking (rights to drill horizontally)(pending) (allow multi-well pad drilling)(pending) US: Amend MLA to regulate (HR484) Fracking Disclosure & Safety Act (HR 436) Change Well Setback CA: (AB345) 2,500 ft from residence, school, child care, playground et al CO: COGCC (Passed - eff 1/30/19) (1,000 from school facilities vs bldg.) MI: (HB4317,4318) From 450 ft to 2,000 ft (pending) TX: SB 1146 1,500 ft from school, child care facility (pending) US: HR 1333, 1,500 ft from homes, schools, business, other buildings for federal properties only (pending) 36

37. Restrict Exploration & Development Restrict Onshore Drilling CA: No leasing public lands (AB342) CO: No drilling big game habitat (Agency) NY: No production State Forests (S3569) US: Empower States to manage production on federal lands (SB218) Ban Offshore Drilling CT: Prohibit O&G Exploration (pend)(HB6012,SB588) FL: Moratorium on Oi & Gas Leasing in GOM (US HR 205) MA: Prohibit O&G Drilling (pend) (SD425,HD777) ME: Prohibit O&G Drilling & Exploration (pend) (LD955) NY: Prohibits Offshore & State Forests (pend)(S2316) SC: No Explor/Dev. S. Atlantic Plan Area (pend)(SB 296) VA: Prohibits Offshore Drilling (failed) (SB 1573) TRUMP vs. CONGRESS (Atlantic (HR 371), Eastern GOM, Arctic, Pacific)( 78M acres GOM) 37

38. Alaska (in session January 15 to April 19) • SB111, HB 134 Modify Net Profit Share Leases • Updates AS 38.05.180(j) to allow DNR to modify • Net Profit Leases (with consent of Lessees) upon clear • and convincing showing that additional capital expenditures to prolog the economic life of an oil or gas field or pool would make future production no longer economically feasible. 38

39. Colorado In Session thru May 10 • SB181 Protect Public Welfare Oil and Gas Operations • (Aka Omnibus Oil and Gas Bill) • Change focus of COGCC from fostering development to regulate oil and gas in order to put health and safety first. • Empower local communities to regulate oil and gas operations; enable to go beyond State regulations. • Protect Environment by strengthening wildlife protection, reducing harmful emissions (including methane) and preventing abandoned orphaned wells. • Protect property owners from forced pooling; increase threshold required to force pool interest owners • Bill was signed by Governor April 16, 2019 • March 20 Adams County Board of Commissions voted to immediately halt any new natural gas and oil development projects • Per Senate Majority Leader Fenberg, “If there was an effort to end extractive oil and gas industries, I would support that. I think absolutely that is where we need to go.” 39

40. New Mexico (passed legislation) Adjourned March 16 • SB 553 Admin. Filing Fees by Oil Conservation Commission The Oil Conservation Commission may establish by rule a schedule of administrative filing fees, application fees and permit fees to cover its costs to review, implement and enforce orders and permits per the Oil and Gas Act. Signed by Governor 4/4/19 • HB 547 Produced Waters Act • Allows working interest owners to hold a possessory interest in produced water, • recycled water or treated water, and to convey, transfer and sell this water and retain • the proceeds. Signed by Governor 4/3/19 40

41. North Dakota In Session thru April 28 • HB 1077 Allowing State Auditors to Audit Federal Mineral Royalties • HB 2044 Enhanced Penalties for Tampering w/ Oil and Gas Facilities • SB 2123 Confiscation of Equipment for Reclamation Costs • Pipelines, production facilities, saltwater handling facilities and treatment plants added to list of structures that may be seized for plugging & reclamation cost recovery. • SB 2212 Penalty for Failure to Make Royalty Records Available w/i 90 Days • Board of University and School Lands may impose a civil penalty of $1,000 per day if information requested for audit is not made available within 90 days of request by registered mail. • SB 2344 Relating to Pore Space and Oil and Gas Production • Clarifies the Oil and Gas Production Compensation Act to remove uncertainty related to ownership of pore space (mineral or surface owner). This will determine who is compensated for operation of saltwater disposal well and could impact CO2 enhanced oil recovery. • HB 1392 Confidentiality of Audit Records • Ensures confidentiality of audit data submitted to the Dept of Trust Lands. • SCR 4010 Directs Study of Post-Production Cost Deducts from Royalty Pymts. 41

42. NORTH DAKOTA • NDIC Administrative Royalty Reporting Rules, eff 7/1/19 • Check Stub Detail, following info must be provided monthly: • Lease, property or well name & identification • Month and year in which sales occurred • 100% of corrected volume of oil in bbls; 100% volume of gas in MCF • Price (w.a. price of Oil, Gas and NGLs) (Net Price s/b after deducts) • Amount of severance and other production taxes • Amount and purpose of each deduction, identified as transportation, processing, compression or administrative costs • Amount and purpose of each adjustment or correction made (State appears agreeable • to “major categories of adjustments, like “Volume”, “Price”, “Ownership” • Net value of total sales after deductions(Net Value s/b before taxes) • Owners interest in sales expressed as a decimal • Owner’s share of the total value of sales prior to any deductions • Owner’s share of sales value less deductions (Net Value s/b before taxes are deducted) • Address where add’l information may be obtained/questions answered • Could other western states follow? (CO,NM,WYO,UTAH) 42

43. NORTH DAKOTA • NDIC Administrative Royalty Reporting Rules, eff 7/1/19 • Ownership Interest Information Statement • Within 120 days after end of month of 1st sales or change in spacing unit • Identify spacing unit for the well, effective date, net mineral acres owned by the mineral owner, gross mineral acres in the spacing unit, mineral owners decimal interest applied to the well 43

44. OKLAHOMA In Session thru May 26 • US HR 2606 Stigler Act Amendments of 2018 (eff 12/2018) • Removes 50% Indian Blood Requirement for Restricted Status • Now available to all lineal descendants of original enrollee • Restricted status is not subject to taxation • Restricted status may not be sold or transferred w/o permission of DOI • For persons inheriting land originally allotted to Five Civilized Tribes of OK • HB 2233 Limits at 10% Expense Deductions from Royalty Owners over 65 • Royalty owners over 65 receiving checks from a producing oil and gas well shall • have no expense deductions greater than ten percent from proceeds • HB 2111 Creating OK Oil & Gas Regulatory Modernization Commission • Eight members (reps from House, Senate, Corp Commission, AG, Gov., Lt. Gov, OERB, Energy & Envir.) • Inquiry on Impact of Well Communication in New Drilling (Horiz. & Conv.) • Identify additional resources needed for OK Corp Commission • Identify processes in other States to resolve disputes from well communication • HB 1219 Damages to Existing Wells Caused by New Wells • Corp. Commission promulgate rules to investigate damages • Injured parties must seek Corp. Commission investigation before filing action 44

45. OHIO In Session thru December 31 • HB 55 Royalty Owner Check Stub Requirements (pending) • Lease, property, or well name; and identification number • County and state • Beginning and ending date of the payment period • Volume of natural gas or number of barrels of oil • Price per mcf or per barrel of oil; • Volume of natural gas that was shown to have passed through the owner’s • meter or the number of barrels of oil that were removed from the field • State severance taxes and any other production taxes paid • Windfall profit tax paid on the holder’s interest • Deductions from or adjustments to the holder’s interest during the payment period; • Net value of total sales of oil and natural gas produced from the lease, property, or well • The holder’s royalty interest in sales from the lease, property, or well expressed as a decimal; • The holder’s share of the total value from the lease, property, or well before any tax deductions… • The holder’s share of the net value of sales from the lease, property, or well • An address and telephone number at which additional information may be obtained • or questions may be answered; 45

46. Pennsylvania In Session thru December 31 • SB 282 Impact Fee for Natural Gas and Oil Pipelines (pending) • Impact pipeline transmits oil and gas • PA Public Utility Commission shall collect a fee based upon acreage of linear feet plus right-of-way width using county average land value from each person utilizing an impact pipeline 46

47. Texas In Session thru May 29 • SB 817 Requires BTU factor to be shown on Owner Check Detail • HB 3226 Pooling Units Dissolve after Two Years of No Production • Changes period of dissolution from one to two years • SB 2064 Methane Reduction Plans on University of Texas Lands • Lessee shall implement a methane reduction plan to be reviewed and approved by the board of regents of The University of Texas System • SB 1988 No Action on Payors Withholding Oil and Gas Payments • A payee may not bring action for breach of contract against a payor for withholding payments. • SB 1156, HB 2920 Wells within 1,500 ft of child care or school may be denied • Commission may not grant APD if new wells is within 1,500 feet of the property line of a child-care facility, private school, or primary or secondary public school unless commission holds public hearing to get public comment 47

48. Utah Adjourned March 14 • School and Institutional Trust Lands Administration (SITLA) • SITLA is moving forward with formal Rulemaking and anticipates • new rules to be completed in May or June 2019 48

49. Wyoming Adjourned March 10 • U.S. District Judge Blocks Oil and Gas Drilling • Judge Rudolph Contreras blocked drilling in 500 square miles of Wyoming saying the U.S. government must consider climate change impacts more broadly as it leases huge swaths of public lands. 49

50. Other States - Ownership Related • Mississippi (in session thru April 2) HB 355, HB 106, HB 1437 (failed) • Split estate revert to surface owners after 10 or 20 years non production • Montana SB41 (in session thru April 28) (proposed) • Written bids for State Trust Lands now accepts (was oral bids only) • New York A2649 (in session thru June 30) (proposed) • Bids for leases on state lands require lease AND royalty payment amounts • Virginia(adjourned) SB 1422 (passed) • Agreement conveying non-freehold estate in land is not invalid because the conveyance was not in the form a deed, signed by Governor Feb. 19, 2019 • West Virginia (adjourned) SB 2779 (failed) • Surface owner can claim interest of unknown owners after 7 years • West Virginia HB 2055 (failed) • Restores requirement for 100% owner consent to start drilling unit • W Virginia SB 576 HB 3065 (both failed) New Withholding Tax on Royalty • Withholding of WV Income Tax from Resident and Non Residents 50