Oil and Gas Properties

9 Months Ended

Sep. 30, 2014

3. OIL AND GAS PROPERTIES

Oil and gas properties consisted of the following:

	September 30, 2014			December 31, 2013
Properties subject to amortization	$	48,896,901		$	25,551,336
Properties not subject to amortization		1,824,967			1,784,465
Capitalized asset retirement costs		4,151			3,659
Accumulated depreciation and depletion		(6,472,212	)		(2,606,243	)

Oil & gas properties, net	$	44,253,807		$	24,733,217

Depreciation and depletion expense for oil and gas properties totaled $1,548,710 and $3,865,969 in the three and nine months ended September 30, 2014 and 2013, respectively and $723,977 and $1,333,924 in the three and nine months ended September 30, 2013, respectively.

On December 12, 2013, Osage and Slawson entered into an agreement (the “Partition Agreement”) related to certain lands located within the Nemaha Ridge in Logan County, Oklahoma, and for the exploration and development of those leases by the parties.

Under the Partition Agreement and effective as of September 1, 2013, Slawson agreed to assign all of its rights, title and interest in and to the oil and gas leases and force-pooled acreage which are part of the Nemaha Ridge Project within certain sections to Osage and Osage agreed to assign all of its rights, title and interest in and to the oil and gas leases and force-pooled acreage which are part of the Nemaha Ridge Project within certain sections to Slawson, such that the net acreage controlled by the parties would remain substantially unchanged, but that the acreage controlled by each of the parties in undeveloped sections would be located in sections where the other party did not control acreage. The parties also agreed that the Participation Agreement would terminate as to all lands within the Nemaha Ridge Project except for lands within sections already developed by the parties which shall continue to be controlled by the Participation Agreement. In September 2014, Slawson sold its interests in its oil and gas properties in Logan County, Oklahoma to Stephens Energy Group, LLC and Stephens Production Company (Collectively “Stephens”).

As a result of the Partition Agreement, Osage has become the project operator on much of its acreage in the Nemaha Ridge Project. As of September 30, 2014, Osage operated or has the right to operate approximately 4,356 net acres (6,942 gross), and remains joint-venture or potential joint-venture partners with others in approximately 4,991 net acres (31,292 gross).

In 2011, the Company began to acquire leases in Pawnee County, Oklahoma, targeting the Mississippian formation. In July 2011, we purchased from B&W Exploration, Inc. (“B&W”) the Pawnee County prospect targeting the Mississippian, for $8,500. In addition, B&W is also entitled to an overriding royalty interest on the leases acquired and a 12.5% carry on the first $200,000 of lease bonus paid in the form of an assignment of 12.5% of the leases acquired. Subsequently, B&W shall have an option to purchase a 12.5% share of leasehold acquired on a heads-up basis. As of September 30, 2014, the Company had 3,934 net acres (5,085 gross) leased in Pawnee County.

In 2011, we also began to acquire leases in Coal County, Oklahoma, targeting the Oily Woodford Shale formation. The Oily Woodford Shale formation is located mainly in southeastern Oklahoma in the Arkoma Basin. The Oily Woodford shale lies directly under the Mississippian and started as a vertical play, but horizontal drilling techniques and multi-stage fracturing technology have been used in the Woodford in recent years with much success. At September 30, 2014, we had 4,367 net (10,106 gross) acres leased in Coal County.

At September 30, 2014 we have leased 17,648 net (53,425 gross) acres across three counties in Oklahoma as follows:

	Gross		Osage Net
Logan (non operated)		31,292		4,991
Logan - Osage		6,942		4,356
Coal		10,106		4,367
Pawnee		5,085		3,934
		53,425		17,648

OSAGE EXPLORATION & DEVELOPMENT, INC. 10-Q