BEFORE THE CORPORATION COMMISSIO OF THE STATE OF OKLAHOMA F CONTINENTAL RESOURCES, INC. POOLING REPORT OF THE ADMINISTRATIVE LAW JUDGE

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1 APPLICANT: BEFORE THE CORPORATION COMMISSIO OF THE STATE OF OKLAHOMA F CONTINENTAL RESOURCES, INC. 1 L E SO COURT CLERK'S OFFICE. OKC CORPORATION COMMI5N OF OKLAHOMA RELIEF SOUGHT: POOLING CAUSE CD NO LEGAL DESCRIPTION: SECTION 33, TOWNSHIP 20 NORTH, RANGE 3 WEST, GARFIELD AND LOGAN COUNTIES, OKLAHOMA REPORT OF THE ADMINISTRATIVE LAW JUDGE This matter came on for hearing before the undersigned, William L. Peterson, Administrative Law Judge for the Oklahoma Corporation Commission for the State of Oklahoma in the Commission's Courtroom, Jim Thorpe Building, Oklahoma City, Oklahoma, pursuant to notice given as required by law and the rules of the Commission, for the purpose of taking testimony and reporting to the Commission. HEARING DATE: April 4th, 2012 APPEARANCES: DAVID E. PEPPER, Attorney at Law, appeared on behalf of Applicant, Continental Resources, Inc. GREGORY L. MAHAFFEY, Attorney at Law, appeared on behalf of Respondent, Interra Natural Resources. EXHIBITS: Exhibit No. 1 is an Authority for Expenditure (AFE) for the Vergie 1-33H well located in Section 33, Township 20 North, Range 3 West, Garfield and Logan Counties, Oklahoma. It estimates dry hole costs will be $1,173,000 and completed for production costs will be $2,775,000. Exhibit No. 2 is Pooling Order No entered January 5, 2012, covering said Section 33 for the Mississippi common source of supply, The 1

2 order is based on a hearing held on December 20, 2011, naming as respondent, inter alia, Culebra Oil & Gas, L.L.C. ("Culebra"). It provides for fair market values in lieu of participation of $200 per acre plus a total royalty of 3/l6ths. Exhibit No. 3 is a proposal letter dated January 4, 2012, for the Vergie 1-33H well as described above, from Pamela J. Drake of Continental Resources to Interra Natural Resources and offering participation or in the alternative, $ per net mineral acre, delivering to Continental 81.25% net revenue interest, or assignment for no cash bonus and delivering to Continental a 75% net revenue interest. Exhibit No. 4 is a Release of Oil and Gas Lease dated January 25, 2012, filed (in Garfield County) February 2, 2012, releasing Oil and Gas Leases from Wilbur R. Murphy to Nationwide Oil and Gas Corporation dated January 13, 1981, covering Lots 5 and 6 and the S/2 of SE/4 of Section 33, Township 20 North, Range 3 West, Logan and Garfield Counties, Oklahoma, containing 160 acres, more or less. (The release gives the book and page of the recording of the lease in each county.) The release was executed by Brad Sutherlin, Managing Partner of Culebra Oil & Gas, L.L.C. Exhibit No. 5 is an Oil and Gas Lease from Leslie E. Harmon and June M. Harmon, husband and wife to Interra Natural Resources covering the SE/4 of Section 33, Township 20 North, Range 3 West, Garfield and Logan Counties, Oklahoma. The term is three years and so long thereafter as oil and gas is produced in paying quantities. It was recorded in Logan County on February 24, 2012, and in Garfield County on January 27, Exhibit 6 is a Form 66 Oil and Gas Lease dated January 5, 2012, between Joan Murphy, Trustee, etc., Lessor and Interra Natural Resources, Lessee, the SE/4 of Section 33, Township 20 North, Range 3 West, Garfield and Logan Counties, Oklahoma. The monetary consideration is not stated but the royalty is an additional 1/16th for a total of 3/ 16ths. The term is three (3) years and so long thereafter as oil, gas, casinghead gas, casinghead gasoline, or any of the products covered by this lease is or can be produced. It was filed in both Garfield and Logan Counties on January 17, Exhibit 7 is Pooling Order No covering Section 4, Township 19 North, Range 3 West, Logan County, Oklahoma, wherein Kirkpatrick Oil & Gas, L.L.C. as applicant caused the pooling of said Section 4 with in lieu fair market values stated to be: $400 per mineral acre; $350 per mineral acre and excess royalty of 4.167%; and $300 and 1/ 16th. The order was entered December 19, Section 20 is two miles north of this pooled section and, therefore, not a part of the eight sections surrounding the relevant section. 2

3 Exhibit 8 is Pooling Order No covering Section 3, Township 19 North, Range 3 West, Logan County, Oklahoma, wherein Continental Resources, Inc. was the applicant. The order is dated February 28, 2012 (hearing was January 17th, 2012) and provides for fair market values in lieu of participation of $200 per acre with a 1/16th royalty bonus or no cash and a total royalty of 1/4th. Exhibit 9 is Assignment of Oil & Gas Leases With ORRI Reservation. The document was entered into between Interra Natural Resources, Inc. and Fisher Family Oil & Gas LLC. It purports to convey a "2.5% (2.5%) of Assignor's RIGHT, TITLE AND INTEREST in the borehole of the Continental Resources Vergie 1-33H ---" and reserves to the Assignor 25% of the interest granted. The exhibit also contains a photocopy of an "Official Check" payable to Interra Natural Resources Re: Blake Waldo, in the amount of $4, Exhibit 10 is Assignment of Oil, and Gas Leases from Interra Natural Resources, Inc. to Shakti Energy, LLC of Exhibit 5 and reserving an overriding royalty interest of between 21% and the existing burdens of record and further stating that the intent is to convey a 79% net revenue interest. It is dated the 24th of February, 2012, but stated to be effective the 1st day of January, Also attached are: cashier's check dated January 30, 2012, from Interra Natural Resources to Shakti Energy LLC in the amount of $22,500.00; and a Cashier's Check dated February 27, 2012, from City National Bank & Trust Co. transmitted by Sanjit Bhattacharya to Interra National Resources, Inc in the amount of $17, FINDINGS OF FACT: 1. This is the Application of Continental Resources, Inc. for Order pooling the interest and adjudicating rights and equities of oil and gas owners in the Cleveland Sand common source of supply. The Cleveland Sand is a 640- acre drilling and spacing unit established by Order No The Applicant called Michael Booze, a qualified Petroleum Landman. Mr. Booze has been qualified as a landman and also is a licensed member of the Oklahoma Bar Association, having been in private practice, and now a landman for six years. 3. Mr. Booze testified that Continental owned the right to drill, 100% of the unit, and has proposed a well to the three parties on Exhibit A to the Application. Mr. Booze further testified that all parties were being named as "Curative" parties. 4. Mr. Booze testified that Interra has asserted an ownership claim, and that Continental named Interra and the owners of the mineral rights who executed an oil and gas lease to Interra. 3

4 5. Mr. Booze testified that there had been a prior pooling in this unit and that the Order had issued in early January, Mr. Booze testified that he believes the interest claimed by Interra was pooled in the prior pooling, but that this Application did not address that dispute. 6. Mr. Booze testified that the well had been proposed to the Respondents in writing by Continental. The proposal letter contained an estimate of the expenditures, options to participate, and offers in lieu of participation. Mr. Booze testified that the cost to drill the well was $1,173, and the cost to drill and complete the well is $2,775, and that we well has been commenced. The well has been drilled but not yet completed. 7. Mr. Booze further testified that if in fact Interra owns a working interest, they are entitled to participate in the well by paying its share of the costs. If they choose not to participate, his recommendation for fair market value is a cash bonus of $200 per acre and a 3/16 royalty, or a no cash option and a 1/4 royalty. 8. Mr. Booze further testified that he recommended election periods of 20 days to elect, 25 days to make a prepayment, and 35 days for Continental to make a cash payment if necessary. Mr. Booze testified as to additional provisions such as escrow account language and subsequent well provisions. In the event it becomes necessary to drill a subsequent well, a working interest owner should submit a proposal in writing and by certified mail to the Respondents. The proposal should contain an AFE and the location, depth, and targeted formation for the subsequent well. Each party will then have 20 days to elect as to a subsequent well and 25 days to pay their share of the costs. Participation in a subsequent well would be limited to those who participated in the initial well. 9. Mr. Booze further recommended that Continental be designated as the operator, and since they have commenced the well, the Order should provide that they continue to operate in a normal and prudent manner. 10. When asked by the ALJ what transactions he was relying upon to establish Fair Market Value, Mr. Booze referred to a Broker's list of leases from the last year covering the subject Section 33 and surrounding units and stated as follows: a. Sections 28 and 27 - no new leases; Section 4, $400 and 3/16 that Mr. Booze says is not Fair Market Value and $300 and 3/16, which Kirkpatrick says is not Fair Market Value. Section 33 - $200 and 1/8 as well as the earlier forced pooling order for $200 and 3/16. Section 32 - $300 and 4

5 3/16 which David Swafford says was a multi section deal; Sections 4 and 5 - between $150 and $200 per acre and 3/16. b. The E/2 of Section 5 - a forced pooling order issued on December 8, 2011, for $400 and 1/8, $350 and 1/6, and $300 and 3/16. C. Section 3 - a Pooling Order obtained by Continental at $200 and 3/16 or No Cash and 1/4. DISCUSSION On November 21, 2011, Continental Resources filed an application in Cause No. CD to pool said Section 33, Garfield and Logan Counties, Oklahoma. Culebra Oil & Gas Company was a noticed respondent of the application. The matter was heard and recommended by the ALJ on December 20, Other than participation one option was allowed, elect $200 cash and a bonus royalty of 1/ 16th. Order No with this in lieu value was entered by the Commission on January 5, The Order was served in accordance with the rules of the Commission. Contemporaneously, Blake Taylor Waldo through Interra Natural Resources was sending out letters to mineral owners soliciting deals. Leslie Harmon responded that he had leased concerning the subject of Blake Waldo's inquiry, but perhaps had another deal for him. Waldo then learned that Harmon and wife owned substantial acreage in the SE/ of Section 33, etc. Apparently the balance of the acreage was owned by Joan Murphy, Trustee. He learned the properties had been leased by Culebra, but he was told that the well had not produced in several years. He checked the Commission records and other sources and found that the well had not produced since He then agreed to lease for $200 per net mineral acre and 3/ l6ths. He drew leases (Harmon lease on December 16, 2011) and recorded it in Garfield County on January 27, 2012, and in Logan County on February 24, The Murphy, Trustee lease was dated January 5, 2012, and filed in both counties on January 17, Mr. Waldo learned of the first pooling prior to the hearing on the 20th of December, 2011 and made effort to connect with counsel for Continental Resources. He then received a call from Pam Drake, landman for Continental on the 18th or 19th of December prior to the hearing on the 20th. Mr. Waldo then pursued Culebra for a release of the prior lease. This release, Exhibit 4, was provided with a date of January 26, 2012, and recorded on February 2, Ms. Drake and Mr. Waldo had discussions about resolving the issue of ownership throughout the first pooling. On January 4, 2012, Ms. Drake sent 5

6 Mr. Waldo a proposal letter (Exhibit 3) offering $100 for a net revenue of 81.25%, or no cash delivering a 75% net revenue interest. This "clean-up" pooling was filed the next day, January 6, Mr. Mahaffey objects to the filing of a pooling application one day after a proposal letter is mailed. In an original pooling such an act would get the AI's recommendation for dismissal on jurisdictional grounds. However, in this case the parties had been in communication from the 19th day of December to the 5th day of January. The real controversy between the parties is whether the interest now claimed by Mr. Waldo was pooled in the hearing recommended on December 20, In the context of this case that question is a private law matter to be determined by a district court. Hence no amount of discussion could have prevented the pooling process which, in all events, was required to vet Mr. Waldo's escalating cost transactions. In circumstances of this case the actual discussions between the parties excuses the lack of a formal performance of the proposal procedure. It is fair to say that Continental had actual notice of Mr. Waldo's purchase of his lease for $200 per net mineral acre and 3/ l6ths royalty as of the 18th or 19th of December Thereafter Mr. Waldo sold a 2.5% wellbore interest in the Continental Vergie 1-33H well reserving an overriding royalty interest of 25% for what looks to be $4, This was done on February 11, 2012, the assignee being Fisher Family Oil & Gas, Inc.. The Release of Oil and Gas Lease by Culebra dated January 25, 2012, mooted the issue of whether Culebra's lease was held alive by production. Mr. Waldo also entered into a transaction with one Sanjit Bhattacharya on or about February 24, 2012, to sell and assign a 79% net revenue interest in 27 acres for $ per net mineral acre. This was done after the first pooling, after the second (present) pooling was filed, and after the Vergie 1-33H well was spud. The question is whether these transactions were open market transactions. In the opinion of the ALJ these transactions are more properly classified as speculative transactions brought about by the unique acquisition by Mr. Waldo of interest during the time of the first pooling and the actual drilling of the Vergie 1-33H well. Previous prices per net mineral acre in the 9 section area, as testified to by Mr. Booze, ranged from a low of $200 per net mineral acre and the statutory 1/8th to $400 and the statutory 3/ l6ths for non qualifying multi-section leases. Other than the drilling of the Vergie 1-33H well, which was not yet completed, the only event offered by Mr. Waldo for escalation in lease values was the reported blowout of a Kirkpatrick well at an unspecified location and the "report" that the well was producing 400 to 500 barrels of oil per day. The source of the report was not given. Mr. Booze testified that he found nothing in the record or in Continental's internal reports supporting a 400 to 500 barrel Kirkpatrick well. Mr. Booze did testify that Jeremy Fitzpatrick, a landman with Kirkpatrick, advised him that Kirkpatrick had paid $300 per net mineral acre n.

7 and 3/ l6ths for a lease in offsetting Section 4-19W-3W. Mr. Fitzpatrick also advised Mr. Booze that he did not think such was fair market value because the lessor was the surface owner and he wanted to keep him happy. At the Commission landmen who are qualified to render opinion on land values are allowed to testify concerning values wherein their employers have economic interest. It is also recognized that an expert may rely upon the opinion of another expert. It is, however, important to note the distinction between action and opinion. For his own business reasons Mr. Fitzpatrick was willing to pay $300 per acre and give an additional l/ 16th royalty bonus over the statutory 1/8th. His statement of why he did this does not amount to a reliable opinion for Mr. Booze's use. The willing buyer met the willing seller for a consideration of $300 per net mineral acre and 3/ l6ths royalty. Mr. Booze is otherwise of the opinion that a fair market value included a value of no cash and 1/4th royalty. RECOMMENDATION It is the recommendation of the ALJ that the values for a net mineral acre be established at $300 and an additional bonus royalty of l/ 16th, for a total of 3/ l6ths, or no cash and an additional 1/8th royalty, for a total of 1/4th. The parties are in agreement with all other terms to be included in the order to be drawn by Mr. Pepper and approved by Mr. Mahaffey. RESPECTFULLY SUBMITTED THIS 17th day of September 0 12 WP:js William L. Peterson Administrative Law Judge cc: David E. Pepper Gregory L. Mahaffey Office of General Counsel Commission file Oil-Law Records 7