Broke, out-of-compliance CBM operator asks for another chance

— July 12, 2014

It was one hell of a party in the Powder River Basin. The whole place burned brightly as big oil corporations and small-time operators alike drilled coal-bed methane gas wells at a pace of 3,000 new wells a year.

Ranchers saw second-cousins, third uncles and ex-brothers-in-law they never knew they had roll into Gillette with retooled water well rigs they’d purchased at auctions on their journey to Wyoming, and go to work. Some of them even got rich. But when the inevitable bust hit circa 2008, an ugly hangover quickly took hold for just about every company that wasn’t under the umbrella of a major oil and gas corporation. 

Workers were laid off, offices were abandoned, wells were left idle and unattended, bills unpaid. It re-ignited resentment among ranchers who appreciate what oil and gas brings to their rural economy but hate the fact that the party always gets too rowdy.

Today, there remain a handful of small operators — broke and long out of compliance with state and federal regulations — who scrape and borrow and promise to bring wells back to production, usually under shifting ownership and new company names. One of these is Patriot Energy Resources, passed back and forth like a 2002 Ford F150 driven hard and put away wet, well beyond its halcyon days of the Powder River Basin coal-bed methane gas boom.

Patriot’s new owner, High Plains Gas, says the outfit still has great assets. It has wells with gas, a pipeline gathering system, and a fancy new technology to lower the cost of production — “Gazmo” technology. Nary a drop of water will be produced with the gas, its promoters claim, a production savings that will overcome the extremely low wellhead price of maybe $4 per thousand cubic feet (mcf) of gas.

High Plains CEO Ed Presley says he understands perfectly that his plan to revive his new subsidiary Patriot — and in turn re-ignite coal-bed methane — is met with cynicism.

“There are people who are disgusted and outright mad and have a right to be. And we’re going to work to mend those fences, and work to be a good corporate citizen,” Presley told WyoFile late last week.

On Tuesday, Presley and his attorneys will make their case to the Wyoming Oil and Gas Conservation Commission, explaining why the commission should waive an increase in idle well bonding and allow them to gradually begin putting Patriot’s wells back into production, beginning with Phase 1 this summer. (Story continues below this graph.)

Yes, both Patriot and High Plains are deeply in debt — some $50 million, by Presley’s estimate. Both companies are out of compliance with, and owe money to, at least six different state and federal agencies. Presley says the companies’ credit is too toxic for banks to put up sureties or cash bonds to meet increased bonding demands from state and federal agencies. But they do have investors willing to put up the money needed to enact Gazmo and Phase 1. 

Rather than force the forfeiture of existing bonds and plugging the wells for good, Presley says it’s in everybody’s interest that Patriot’s wells are put back into production, creating a cash flow that will go toward bonding, mechanical integrity testing on long-idled wells, reclamation, and paying off debts to government and private parties alike.

“We think once gas production starts and successful application of our technology gets known out there, confidence will be regained,” said Presley. “The alternative is they reject (our plan), and the wells … Well, there isn’t really another option other than belly up.”

The plan, or plea, to the Wyoming Oil and Gas Conservation Commission (OGCC), is not an original. The commission’s staff has gone to extraordinary lengths to aid and encourage several broke coal-bed methane operators to get their idle and orphaned wells in order. In April 2013, after several years of giving the company more time to straighten its house, the five member commission (chaired by Gov. Matt Mead) finally forced forfeiture of $154,000 in bonds posted by USA Exploration & Production for failing to test and/or plug more than 100 idle coal-bed methane gas wells in Campbell County.

Others have met a similar fate in the past couple of years. So why is Patriot — and its parent company High Plains — deserving of another chance?

OGCC staff notes that at least one recent extension in the Patriot case was due to complications in the March 2013 purchase of Patriot by High Plains. Patriot’s former owner, Luca Technologies, failed to transfer files to High Plains, so the new owners had to comb through government databases to compile their own records of wells, well logs and other critical information related to the coal-bed methane gas facilities.

“Prior to these factors, and throughout this period, Commission staff has worked diligently with everyone involved to bring these companies into compliance,” said Tom Kropatsch, OGCC natural resources program supervisor.

It’s important to note that the five-member commission — not OGCC staff — ultimately bears responsibility for the agency’s decisions on matters of bond forfeiture and fines. And the commission faces sharp criticism for what some describe as a tendency to ignore the concerns of landowners while coddling broke, out-of-compliance operators instead of enforcing rules and regulations, enabling a bad situation to become worse.

“It’s such a gigantic morass of unpaid bills, of multi-millions of dollars in unhonored contracts — it’s inconceivable and nearly laughable that it could last to this point and that the state could take them seriously. … How does this happen?” said Jill Morrison, organizer for the Sheridan-based landowner advocacy group Powder River Basin Resource Council (PRBRC).

The PRBRC represents many landowners in northeast Wyoming where thousands of coal-bed methane wells have been left idle and orphaned — for more than five years, in some cases. In their role as government watchdog, the PRBRC deserves much of the credit for forcing the state to finally take action in a years long pandemic of orphaned wells in the Powder River Basin.

In December 2013, Gov. Mead asked for, and subsequently got, a $3 million appropriation toward the state’s long-existing orphan well fund — a fund paid for via a mill levy, or conservation tax, among all state oil and gas producers. The state can use the money to plug and reclaim orphan wells and related facilities. At the time, the state listed 1,220 wells in its expedited orphan well plugging and reclamation plan, acknowledging that another 2,300 idle coal-bed methane gas wells “at risk” of being abandoned/orphaned — Patriot’s and High Plains’ wells among them — may be added to the roster, adding another $18 million to the total plugging and reclamation liability; again, paid for via oil and gas operators through the conservation tax.

At Tuesday’s hearing, the OGCC commissioners could impose thousands of dollars in fines and demand forfeiture of about $3 million in bonding posted by Patriot. That doesn’t take into account similar actions the commission — or that the Wyoming Office of State Lands and Investments and a host of other entities — could take against both Patriot and High Plains in the future. According to documents obtained by WyoFile, the companies likely owe millions more in unpaid mineral royalties to the state and feds, which split authority and jurisdiction among several agencies for wells on state and federal minerals.

In addition to those debts, Patriot Energy and High Plains Gas also face claims by several landowners of unpaid mineral royalty payments and surface use payments. In some cases, landowners say they will not allow access to the wells until the operators make good on surface use contracts. There’s also a question of whether the companies have electrical power service to operate their wells.

But Patriot, and High Plains, deserve another chance, says Presley. He says they have a buyer for the gas — United Energy Trading. While the wells have sat idle, the coal formations have recharged with water, according to Presley, spurring the microbial stimulation of methane gas, and most all of the workings are there to breath new life into what was one of the brightest burning gas plays in the nation (before the shale gas revolution busted Powder River Basin coal-bed methane).

“We think putting the wells into production is the answer,” said Presley, adding that the companies would dedicate $10 million per year of the new cash flow toward bringing wells and other facilities into compliance. “We had the boom and we now have the bust. Those wells are there. The company owns those wells, and the question is what to do?”

The PRBRC’s Jill Morrison, and many of the thousands of landowners they represent, have heard many similar pleas and bargains since long before coal-bed methane kindled a boom in the Powder River Basin.

“The state just coddles these companies and holds their hands for years,” Morrison told WyoFile. Meanwhile, taxpayers, mineral owners and landowners are left unpaid, and wondering if idle and orphaned wells pose a threat to their health and agricultural operations.

— Dustin Bleizeffer is WyoFile editor-in-chief. He has covered energy and natural resource issues in Wyoming for 15 years. You can reach him at (307) 267-3327 or email dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer

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