Oil & Gas
Rocky Mountain Region
Williston Basin - Bakken Participation Agreement
In August 2009, U.S. Energy Corp. entered into a Drilling Participation Agreement (DPA) with Brigham Exploration Company ("Brigham") to earn working interests in up to fifteen 1,280 acre spacing units in Brigham's Rough Rider project area located in Williams and McKenzie Counties of North Dakota. The terms of the DPA call for the drilling of up to 15 initial Bakken wells in 15 separate 1,280 acre spacing units. The ultimate number of wells to be drilled in the units could reach 90.
Under the terms of the DPA, USE has committed to drilling six initial wells (and earning subsequent working interests in six 1,280 acre spacing units) and will have the option to commit to drilling four additional wells (and earning subsequent working interests in four additional 1,280 acre spacing units) after receiving notification of the initial production (IP) rates from four of the first six initial wells drilled. If USE elects to drill the four additional wells, it will then have an option to participate and earn working interests in five additional wells and 1,280 acre spacing units after receiving notification of the IP for the fifth and sixth initial wells drilled in the first six well program. Upon the drilling and completion of the first or initial well in each 1,280 acre spacing unit, USE will earn 36% of Brigham's original working interest in the remaining acreage (or drilling locations) in each 1,280 acre unit. If USE participates in the drilling of the initial wells in all fifteen 1,280 acre spacing units, it will earn working interests in 19,200 gross acres in the Rough Rider project area.
USE has agreed to participate for 65% of Brigham's original working interest in each initial well drilled in the first six well program. Upon receiving a pooled payout of all of the costs and expenses incurred to drill and complete the six initial wells in the six initial 1,280 acre spacing units, USE will assign back 35% of its 65% of Brigham's original working interest in the first well in each 1,280 acre spacing unit to Brigham. Following that, USE will own 42.25% of Brigham's original working interest in the initial well in each 1,280 acre spacing unit. If USE elects to participate in the second group of four wells and spacing units, it will also be entitled to a pooled payout similar to the first six well program. If USE elects to participate in the third group of five wells and spacing units, it will be entitled to an initial well by initial well per spacing unit payout before a 27.7% back in assignment on each initial well drilled in each spacing unit to Brigham.
The drilling of each well typically takes 30 days while the completion typically takes 21-28 days. Brigham will operate all of the wells. If USE elects to participate in all 15 initial wells and earns subsequent working interests in each 1,280 acre spacing unit, the Company will have earned the rights to drill up to 30 total wells in the Bakken formation and an additional 30 wells in the Three Forks formation, for a total of 60 wells, based on the current spacing in North Dakota. If the spacing is ultimately increased to three wells per 1,280 acre spacing unit, the potential number of drilling locations could increase to 90.
USE expenditures are anticipated to approximate $17.6 million for the first six initial well program based on its, Brigham's and other working interest partner's anticipated participation in the currently identified spacing units. If working interest owners other than Brigham and USE do not participate in the wells then that amount could increase. In the second groups of 4 and 5 wells that USE could elect to participate in respectively, Brigham will have the option to participate at a range of 15-50% in those wells. Prior to USE's election to participate in those well groups, Brigham must notify USE of its participation percentage. If Brigham participates 15% in those well groups, USE can participate for 85% of Brigham's original working interest. If Brigham participates 50% in those well groups, USE can participate for 50% of Brigham's original working interest. Each participation amount for both Brigham and USE will be subject to dilution or expansion based on other working interest owners' participation in the initial wells and/or subsequent wells in each 1,280 acre spacing unit.
PetroQuest
The Company entered into an Exploration and Area of Mutual Interest Agreement (the "E&AMI Agreement") with PetroQuest Energy Inc. ("PetroQuest"), which relates to three prospect areas in the Gulf Coast region of the United States. In connection with that agreement, the parties have also signed an Operating Agreement, whereby PetroQuest will be the operator. The E&AMI Agreement provides the Company with the right, through September 13, 2011, to acquire a 20% working interest in each lease acquired by PetroQuest, within any of the three prospect areas.
In September 2008, USE reached contract depth on the Bluffs prospect, encountering approximately 85 feet (true vertical depth) of net pay in the Cris I - Hollywood 1 sand. Production from the well began on November 3rd, 2008 with an initial production rate of approximately 17,000 MCFE per day. U.S. Energy Corp. has a 15% working interest and a 10.4% net revenue interest in this well. The company expects that several additional prospects will be generated by PQ in our area of mutual interest over the course of the next two years.
Houston Energy
The Stoddard # 1 well was spudded in May 2009. USE has an 8.5% after casing point (ACP) working interest (6.2% net revenue interest). There is also a 10% after prospect payout (APO) back-in working interest due the operator, which will reduce USE's working interest to 7.65% (5.6% net revenue interest) APO. Upon reaching contract depth on the Stoddard #1 well in June, HE encountered two productive zones with approximately 35 feet of net pay in the Tex-Miss and F3 Frio sands. An initial production test from the Stoddard #1 well resulted in approximately 3.9 MMCF and 240 barrels of oil per day or an equivalent of 5.34 MMCFE/D. Optimal production flow rates to sales will be determined once hooked up to sales lines.
In July 2009, the SL19863 #1 well was spud and subsequently reached a contract depth of 9,300 ft. Productive zones have been identified with approximately 38 ft. of net pay and preliminary analysis indicates the well is commercially productive. Production from the well is expected to commence by the third quarter of 2009. Actual production rates from the well will be announced at that time. Under the terms of the participation agreement previously announced, USE paid a third of the costs to drill this initial well to earn a 25% after casing point working interest (17.625% net revenue interest).
Yuma Exploration and Production Company Inc.In April 2008, the Company entered into a four year Joint Exploration Agreement with Yuma Exploration and Production Company, Inc. ("Yuma"), a private exploration and production company based in Houston, Texas. Under the Joint Exploration Agreement, the Company has purchased a working interest in a seismic, lease acquisition and drilling program covering approximately 138 square miles in South Louisiana. Net acreage acquired will depend on the terms of leases acquired, but is expected to be in excess of 50,000 net acres. Yuma holds a 48% working interest and the balance is held by the Company (4.55%) and third parties (approximately 47.45%). For their working interests, the participants (other than Yuma) have paid 80% of the initial seismic, overhead and some land costs (total $1,390,000), and Yuma is paying 20%. All land and exploration costs going forward are to be paid according to the working interest percentages. A large 3-D seismic survey was conducted in first and second quarter 2009. Yuma is now utilizing the data to identify prospect areas and propose lease acquisition activities. The Company has the opportunity to opt in or out of any prospect leasing program, and also as to the initial well in each prospect. It is expected that the program will yield multiple prospects, with exploration activities continuing for a number of years.
