Over the past several years, coal-bed methane gas operators in the Powder River Basin have idled thousands of wells due to low natural gas pricing, and a handful of operators struggle on the verge of bankruptcy.

Black Diamond Energy Inc. and Loral Operating, for example, each have failed to put up the full amount of state-mandated “idle well” bonding. Each has also failed to perform required “mechanical integrity testing” to ensure their idle wells do not create environmental or human health hazards.

In all, the fate of some 11,800 idle coal-bed methane wells in the basin remains uncertain, creating a potential liability that could cost millions of dollars to address.

However, industry and state officials say the situation isn’t as grim as it may appear.

Most of the idle wells are owned by big players such as Anadarko Petroleum Corp. and Williams Production Co. — companies with the financial wherewithal to perform mandated maintenance on the wells, and to properly plug and abandon wells that have reached the natural end of their productive life. Industry leaders expect many of the idle wells will be brought back into production when the price of natural gas rebounds.

Just how many of those wells will eventually go back into production is anybody’s guess.

Meanwhile, companies such as Black Diamond hope to sell off some of their properties to bigger operators in order to gather the cash needed to meet long overdue state environmental requirements. This “hunkering down” by cash-strapped operators has put the Wyoming Oil and Gas Conservation Commission in the difficult position of deciding whether to continue granting extensions to meet environmental standards, or to cash in company-posted bonds and begin plugging and abandoning hundreds of wells.

“I’m not, by any means, in any kind of a panic. It’s just a matter of can we get through this downturn in pricing and not end up inheriting a large number of orphaned wells,” said Oil and Gas Conservation Commission supervisor Tom Doll.

Doll comes from the same coal-bed methane gas industry he his now in charge of overseeing for the state. He was a manager for Williams Production Co., overseeing the company’s coal-bed methane gas operations in the Powder River Basin from 1997 to 2008. He was appointed Oil and Gas Commission supervisor in March 2009 by Gov. Dave Freudenthal. Doll earns an annual salary of $140,400.

POTENTIAL AND REAL LIABILITY

“Orphaned” wells are those left behind after a company has gone bankrupt and no other operator wants to take over the facilities. The state typically cashes in any bonds posted by the company to help cover the cost to permanently “plug and abandon” and otherwise reclaim the wells. But the amount of bonds posted by a company that has failed financially often isn’t enough to cover the entire cost.

The Oil and Gas Conservation Commission can dip into the state’s “orphan well fund” to cover the balance. The fund comes from a “conservation tax” mill levy imposed on all oil and gas producers in the state. Currently, the fund’s balance is $1 million. The commission’s board can vote to increase the mill levy if it appears in danger of being tapped dry.

Drilling rigs sat idle in Gillette in 2008 as coal-bed methane activity in the Powder River Basin declined sharply. (Dustin Bleizeffer/WyoFile — click to enlarge)

So far, there’s no talk of raising the mill levy. Yet the number of orphaned coal-bed methane gas wells that the state has had to plug and abandon may continue to increase.

Doll admits that if the price of natural gas doesn’t rebound soon, or if the basin’s coal-bed methane play continues to lose favor to other natural gas plays in the nation, the state could find itself drawing heavily from the orphan well fund to plug and abandon hundreds — perhaps more than 1,000 — wells.

“What we need to be alarmed about is, all of a sudden, I’m going to, instead of having to plug 100 wells, I’m going to have to plug 800 wells. And instead of spending $1 million I’ve got to spend $8 million,” said Doll.

In 2010, the state had to plug and abandon — and “partially reclaim” — 122 coal-bed methane gas wells in the basin at a cost of $867,700, according to Doll. Of that, $321,000 came from bonds posted by the responsible permittees to the state. The remainder, $546,700, came from the orphan well fund. More orphaned wells are already under order to be plugged and reclaimed by the state.

By comparison, the state plugged and abandoned a total 280 wells statewide from 1997 through 2009, according to the Oil and Gas Conservation Commission.

Between Black Diamond Energy and Loral Operating, the fate of some 970 idle wells is uncertain. Other operators in the basin face financial difficulties as well, but it’s unclear just how many wells may become orphaned.

Adding to the uncertainty is the fact that a handful of companies are actually buying coal-bed methane properties in the basin, making a bullish bet that the field will enjoy a renaissance. High Plains Gas Inc. was recently formed by longtime Gillette businessmen Joe Hettinger and Mark Hettinger, and it began buying properties from Marathon Oil Corp., J.M. Huber Corp. and others, betting it could buy low and enjoy a payout when the price of gas rebounds.

“Like any boom and bust thing, the time to get in is during the bust period,” said Tim Ondrak, vice president of finance for High Plains Gas.

Brent Cook, High Plains Gas CEO, said the company has had success in picking up hundreds of coal-bed methane wells that had been dismissed as non-commercial, and retooling them to become commercial producers.

“We’re coming back in with what I’d call a major reactivation program,” said Cook. “The bottom-line is it’s in everyone’s interest for these wells to be producing.”

Bankruptcies and orphan wells are a concern on federal mineral leases in the basin, as well. In February, the U.S. Government Accountability Office issued a report suggesting that the Bureau of Land Management needs to increase its minimum bonding requirements for oil and gas wells nationwide.

SECOND CHANCE

Doll insists that although companies such as Black Diamond and Loral have not met all their bonding requirements, there’s plenty of money in the orphan well fund to plug and reclaim any number of wells that are ultimately orphaned. In the meantime, the commission’s board has granted extensions to both Black Diamond and Loral, hoping to give them time to find buyers for wells that may still have some productive life.

At an Oil and Gas Conservation Commission hearing earlier this month, Gov. Matt Mead — who serves  on the five-member commission — set a compassionate tone, thanking Black Diamond president Eric D. Koval for answering questions under oath and agreeing, at Koval’s suggestion, that the state could calculate Black Diamond’s idle well bonding requirement below the maximum possible rate of $10 per foot of well-depth.

Commission staff estimate the actual average cost to plug and abandon coal-bed methane gas wells in the basin is $7.31 per foot.

Mead, and other commissioners, also entertained Koval’s suggestion of finding a less costly way of meeting the state’s current mechanical integrity testing requirement.

“What do you think the state should do to protect itself?” Mead asked Koval.

Koval asked for more time — perhaps two years, he said — and he pointed out that it’s in the state’s best interest to help companies like his find buyers in order to avoid tapping the orphan well fund and to avoid permanently closing wells that may still be productive under better pricing.

The commission gave Black Diamond 60 days to present a satisfactory plan to the Oil and Gas Conservation Commission staff. At the same March hearing, commission board members granted a short extension to Loral to do the same, despite the fact that the company was requested to appear before the commission on March 8, but failed to do so.

“We’re a little surprised Loral is not here today,” said commission attorney Eric Easton, at the March 8 hearing.

BUST OR REBIRTH

There’s a recognition among industry and state leaders alike that gas field plays tend to gather momentum either toward boom or bust given the use or retirement of shared infrastructure such as roads, pipelines and power lines — and that this scenario will play out in the Powder River Basin.

“One success begets more, and people get behind it, and the next thing you know we get a couple thousand of these wells back on line,” said Doll.

Or the momentum could shift in the opposite direction.

“None of us want to go out and plug wells unless they truly are orphaned,” said Doll. “I think what the commission was trying to do was send a message to some of these investors that have liens on these properties, or have assets, and say, ‘Hey, you know, you could lose this if we go plug those wells.’”

Doll said the state would like to see banks and investors be more aggressive in either marketing their coal-bed methane gas assets in the basin or getting the wells returned to production.

“You know, do something. Not just sit out there on your hands,” said Doll. “We’ll see how successful that is.”

However, one significant challenge to the state’s hope for a coal-bed methane gas renaissance may be the dozens of Powder River Basin landowners who are fed up with companies like Black Diamond for failing to keep up their facilities and failing to make surface damage payments, and fed up with the state for not forcing them to do so.

The state requires that an operator have a surface damage agreement in place with affected private landowners whose minerals are publicly owned before granting permission to construct, or in this case, return a well to production.

In his testimony before the commission this month, Koval said Black Diamond may not be able to strike agreements with some landowners and may instead invoke the state’s bond-on option, which allows an operator to force itself onto private surface by instead posting a nominal bond with the state.

“The surface use agreements are a problem because landowners haven’t been paid, and we’ll have to bond-on to produce again,” Koval testified before the commission.

BIG GEORGE

Amazingly, coal-bed methane operators in the Powder River Basin have maintained production at nearly 1.5 billion cubic feet of gas per day for several years running, despite the thousands of wells that have been idled and the fact new drilling has been minuscule in recent years.

The basin maintains the same level of production today with only 7,700 actively producing wells as it had several years ago with more than 18,000 wells.

Doll attributes this to two factors. First, a large number of idled wells were marginal producers anyway, and were likely near the end of their productive life, meaning they were not contributing much to overall production in the basin. Second, many of the last wells to be drilled in the basin tapped the Big George coal seam near the Powder River, notoriously the basin’s most gas-rich coal seam.

“Big George wells come on strong and they don’t decline as quickly as wells in the Wyodak (coal seam),” said Doll.

Many coal-bed methane operators blamed the steep decline in drilling in 2008 and 2009 on increasingly stringent federal regulations, particularly seasonal stipulations to protect sage grouse and raptors. However, environmental groups argued the downturn had more to do with market prices. The industry came under more federal regulations, in part, because drilling had steadily progressed westward from mostly private lands in central Campbell County to more federally-owned lands in Johnson and Sheridan counties.

“I think it (Powder River Basin coal-bed methane) just kind of stagnated and people got nervous about long-term pricing, sage grouse (federal stipulations) and permitting. Those are real issues that slowed this play down,” said Doll.

Contact Dustin Bleizeffer at 307-577-6069 or dustin@wyofile.com.

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Published on May 10, 2012

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