The Wyoming Oil and Gas Conservation Commission voted Tuesday on a compromise with a bankrupt coal bed methane company that has pleaded for patience for more than a year over its failure to post $10 million worth of bonds.
The state will not recoup the total amount that Denver-based Storm Cat Energy owes for 2,432 wells in northern Wyoming. But commissioners decided unanimously that if the company can reach court approval for the sale of its producible wells to Summit Gas Resources of Sheridan next month the state would come out with a better if unconventional deal.
Storm Cat and Summit, meanwhile, have a final chance to create a viable business out of bankruptcy.
“It looks like to me a reasonable resolution that puts the state in a better position than it is now,” said Gov. Matt Mead on Tuesday afternoon. “I’m supportive and appreciate the work to get it done.”
Storm Cat and Summit have until August to close the sale of 696 wells that can still produce gas. Sheridan-based Summit will post $2 million in bonds with the state within a month of the sale, and Commission staff is given the authority to pull bonds if the companies fail to meet their obligations. The state will focus on the 1,736 wells that are at the end of their lives. However, it’s unclear when it will begin plugging them.
It’s an unconventional trade-off. But after a full morning of testimony, the commission thought it was a better way to bring the Storm Cat saga closer to resolution.
The deal, made over lunch, was scrawled out on a sheet of legal pad by Summit and Storm Cat’s lawyer Tom Throne of Sheridan, after commissioners pushed back on the idea of pulling the bonds immediately.
If the sale of Storm Cat’s best wells is successful, production can resume in a field estimated to have 42 billion cubic feet of gas left to recover, the companies argued. If not, the state can pull existing bonds and add Storm Cat’s wells to the long list of orphaned wells Wyoming has to plug from the coal bed methane bust. Given the low price of gas, the companies’ petroleum expert said the field would be too expensive to redrill if the existing wells were plugged and reclaimed.
A victim of coal bed methane’s rapid boom and bust, Storm Cat, a subsidiary of Denver-based Battalion Resources, has languished in bankruptcy proceedings for more than a year. Its chief financial officer, Chris Naro, has been in the hot seat before the Commission on a nearly monthly basis since last spring, when commissioners first called the company to account for its failings, including unpaid taxes, a failure to do integrity testing on wells and the shortage of idle well bonds.
After a year of granting extensions, Commission Supervisor Mark Watson called for a resolution no later than May. That too was extended, with Tuesday meant to bring finality to the issue.
The hitch with the two companies’ plan is that Summit will not foot the full bonding obligation — at least not right away. It has acquired $2 million in funding for reclamation costs, part of which is already owed to the state for Summit’s wells. The $2 million bonds, to be posted in late summer, would be similar to a revolving stash of cash, passed on to cover each batch of wells that Summit brings back to life.
Three private landowners with Storm Cat wells on their properties submitted letters to the Commission saying they want the idle wells plugged and reclaimed.
Adding to the controversy is the fact that the wells are legacy wells, once owned by the J. M. Huber Corp.
In part a response to the chaos of the CBM bust, Wyoming law makes it possible to hold legacy owners accountable for orphaned wells, meaning Huber could find itself on the hook.
The Commission staff’s original argument that the bonds be pulled immediately was in part an end to the year of charitable extensions and in part a desire to work with Huber, which had expressed interest in freeing itself from liability by partially funding reclamation.
Storm Cat’s story is indicative of a larger drama that played out in Wyoming. Companies that bet big on drilling relatively cheap wells to tap coal bed methane were hit by a falling price of natural gas. The Storm Cat wells were first drilled in the early 2000s, when the spot price was averaging $6. That price has dropped by half, with no promise of a near-term rise.
After the CBM bust, thousands of wells were left on state, private and federal land. A program set up to plug those wells and reclaim the surface was started by the governor and the Oil and Gas Conservation Commission. A tax is levied on operators to feed an orphan well fund to pay the hefty cost of cleaning up the bust.
That job is ongoing.
There were 2,909 wells left for the state to plug, convert to water wells or reclaim as of May. If all of Storm Cat’s wells were added to that list, that would add another 2,432 wells in one fell swoop.