To hear Bob Mitchell tell it, coal-bed methane is on the cusp of a revival. The industry has been in disarray ever since natural gas prices plummeted several years ago and thousands of wells, which sprouted up across the Powder River Basin during the early 2000s, were abandoned.
But the industry’s fortunes are looking up thanks in part to a new technology called the Gazmo. At least that is what Mitchell says.
When a typical coal-bed methane well produces natural gas, or methane, water is a byproduct. The Gazmo keeps the water in the ground while bringing the gas to the surface, considerably lowering an operator’s production costs, Mitchell says.
“We can make money at present gas prices or even at lower gas prices,” Mitchell said.
He predicts that High Plains Gas, a Sheridan-based company where Mitchell is a consultant, will soon have 3,000 producing coal-bed methane wells.
Mitchell has many doubters, but his prediction carries enormous implications for Wyoming and the landowners who have signed agreements allowing High Plains to drill on their property.
The collapse of the coal-bed methane industry around 2010 saw some operators file for bankruptcy and abandon their former wells. Many landowners never received the mineral royalties promised to them, and the state was saddled with the task of cleaning up the wells left behind.
Gov. Matt Mead announced a $7.7 million plan last year to close some 1,200 of these so-called orphaned wells over the next four years.
And those numbers could easily rise if more companies file for bankruptcy. Cleanup costs could reach as high as $31 million if all of the approximately 3,100 at-risk wells are added to the list of what the state is already responsible for plugging, according to a report released by the governor’s office last year.
Many of the at-risk wells belong to High Plains. The company now owns 3,000 nonproducing coal-bed methane wells. By its CEO’s own estimate, High Plains is $50 million in debt. And the Gazmo is commercially untested, state regulators say.
The company is scheduled to appear before the Wyoming Oil and Gas Conservation Commission next month to explain its plans for the wells.
Ed Presley, High Plains CEO, says the company is working on a plan to restart production. The plan would get the state off the hook for closing High Plains’ wells and bring a windfall in tax revenue and royalty payments, he says. It would also help the company avoid what regulators say amounts to $5.7 million in additional bonding payments.
The state requires oil and gas companies to pay a bond on all wells they drill. The bond is almost like an insurance policy for the state.
Its intent is to cover the costs of plugging a well and reclaiming the land if a company should run into financial troubles and not be able to pay for the cleanup itself.
If production at a well stops, the state requests an additional bond because the risk of a company running into financial trouble is higher.
The additional bond can sometimes be avoided if a company can produce a plan to either bring the wells back into production or plug the wells. That is what Presley hopes to present to the oil and gas commission next month.
“It will be exciting that we can prove these wells are an asset to investors and to the treasury of the state of Wyoming,” Presley said.
But state regulators are wary. A company can sometimes avoid an additional bond payment on its idle wells if it has a demonstrated track of following through on its plans to restart production or plug them, said Tom Kropatsch, natural resources program supervisor for the oil and gas commission.
“I guess we’ve had a lot of calls from landowners and mineral owners previously involved with High Plains about unmade payments that were due for surface use agreements,” Kropatsch said. “We take that into account, along with the plans High Plains has previously provided to us. That is the background we come into with High Plains with their plans going forward.”
Bob Mitchell is at the center of a messy drama involving another coal-bed methane producer, Black Diamond Energy. The facts of what happened in that case are fiercely contested, but the end result is this: Last week the oil and gas commission issued Black Diamond an ultimatum. The company has 30 days to come up with nearly $4.2 million to pay the state in additional bonds.
If it fails to do so, the state is going to pull the bonds Black Diamond has already paid and use the money to close the company’s 340 wells.
Black Diamond, a Buffalo-based company, already faced its own woes prior to the decision. Johnson County has issued an $812,000 lien against the company for failure to pay taxes. One ranch with Black Diamond wells on its property filed a request with the oil and gas commission to bar the company from its land for failure to honor the terms of a surface use agreement. Another landowner has requested the oil and gas commission pull the company’s bond and close the wells.
Black Diamond says it is only in this position because of Mitchell, who purchased Black Diamond’s debt after the company defaulted on a $32 million loan from S&T Bank of Pittsburgh.
The two parties entered a tentative agreement in 2011 that would have seen Mitchell receive $65,000 and some of Black Diamond’s wells in exchange for the coal-bed methane producer’s debt. Eric Koval, of Black Diamond, says Mitchell proposed selling Black Diamond’s debt back to the company for $1 million.
The deal was never reached.
Black Diamond says Mitchell tried to foreclose on the company and seize its assets. Mitchell says he only tried to foreclose on Black Diamond after it refused to meet the terms of their agreement. Each accuses the other of foul play.
The dispute remains tied up in court.
From the perspective of state regulators, the legal drama has played out long enough. When wells change hands, both parties are required to sign a document approving the transfer, they say. That has not happened to date, meaning the wells still belong to Black Diamond. And, regulators say, Black Diamond is not complying with state regulations.
“We can continue to let the court issues play out, but I’m not sure we have confidence in either party’s ability to post the bond,” Kropatsch says.
Mitchell’s company, Mitchell Resources LLC, is owned by High Plains Gas Inc.
Much to prove
High Plains Gas today faces $50 million in debt obligations in the form of bond payments to federal and state governments, back taxes and royalty payments to landowners, Presley said.
Much of that debt was accumulated by previous owners, said Presley, who bought High Plains in March 2013.
A High Plains subsidiary, CEP M Purchase, was threatened with a $533,520 fine by the Interior Department's Office of Natural Resources Revenue last week for not reporting production at its wells on federal land.
The company cannot meet its debt obligations today but intends to in the future by bringing its wells back online with the Gazmo technology, he said.
Retrofitting a well with Gazmo technology costs about $50,000. Presley said. He expects about 1,000 wells to be back in production within the next year. The cost of starting those wells would be $50 million based on Presley’s projections.
But the cash flow would be greater than the cost, Presley said. He expects each well pad to net $100,000 based on previous levels of production and the lower production costs wrought by the Gazmo. If 1,000 wells each produced $100,000, that would equal $100 million.
Presley also pledged to spend $10 million each year for the next 10 years on reclamation, adding that the company plans to continue acquiring nonproducing coal-bed methane wells. High Plains’ goal is to own 5,000 wells, he said.
There are doubts as to whether the company will succeed. Mark Watson, the Wyoming Oil and Gas Commission supervisor, said the Gazmo technology has never been proven on a commercial scale.
Presley agrees but says High Plains has perfected the water and gas separation technique.
“This is the first time it is going to be deployed for a company to produce commercial quantities of gas into the sale line,” he said.
The High Plains CEO says the state faces a choice over what to do with his company’s wells.
“There are only three things that can be done: put them into production; find somebody who will pay millions and millions of bonding -- that does not exist. And the third one is the horrific deal of plugging and abandoning. There is no money for that, except taxpayer money,” Presley said.
Taxpayers likely would not be on the hook. Wyoming pays the cost of plugging abandoned gas wells through production taxes on oil and gas companies.