CHEYENNE — State officials have approved a new policy to limit extensions on idle coal-bed methane drilling leases in the wake of plummeting natural gas prices.
The new procedure by the Office of State Lands and Investments will allow lease extensions without production for up to five years.
When a company gets to the fifth year, the Wyoming Board of Land Commissioners will authorize its staff to send a letter to the lease holder asking it to justify an extension.
The state board members can then decide whether the extension is warranted. If they decide it is, they can increase the amount of the lease holder’s reclamation bond and require a higher royalty fee, a higher rental fee, or both.
The state board includes Gov. Matt Mead, Secretary of State Max Maxfield, Auditor Cynthia Cloud, Treasurer Joe Meyer and State Superintendent of Public Instruction Cindy Hill.
“This is a heads-up to those operators,” Office of State Lands and Investments Director Ryan Lance said during a recent state board meeting.
In the past, the Office of State Lands and Investments and the state board almost routinely allowed extensions even though there was no production on the leases.
“We have taken a new look at it with the development in the Powder River Basin,” Lance said. “We’ve had companies with 10, 12 suspensions.”
The new policy, he said, gives the companies in their sixth year of suspension a one-year grace period to look at their deep rights and decide if they can justify another extension.
During the meeting, Meyer said the state board must look out for the welfare of the public schools, which receive income from the state trust lands.
“I think we ought to be charging more money for the schools,” he said.
Under the new policy, if the board grants the extension, the state lands office, in some cases, will ask for higher bonds to cover the costs of reclamation to ensure any open well bores are fully covered so the state doesn’t get stuck with the cost, Lance said.
The Powder River Basin Resource Council believes the number of wells and the cost of bonding can be a serious problem, said Jill Morrison, a council organizer.
“This is a boom-bust industry,” she said. “We go into the bust as we have now and the bigger companies see it and the higher cost of reclamation coming, so they sell off their wells at a very cheap price.”
The smaller companies that buy the wells frequently are in poor financial shape, she said.
“We believe that if they’re not adequately bonded, they will walk away,” Morrison said.
She estimated that half of the 25,000 to 30,000 wells drilled on state and federal land in the Powder River Basin during the past 15 years have been shut in.
Inadequate bonding by the federal government, she said, is a much larger problem than the state’s policy.
Harold Kemp is an assistant director of the Office of State Lands and Investments. He oversees mineral leasing and royalty compliance. Kemp said as a result of the new policy, more than 835 wells on state leases have been shut in.
The staff also has had to pull up bonds posted by some companies and transfer them to the Wyoming Oil and Gas Conservation Commission. The commission uses the proceeds to bid out the seeding and other reclamation work to contractors.
According to the Oil and Gas Conservation Commission website, the state spent more than $5 million to reclaim orphan wells between 1997 and 2011.
The money comes from a conservation fund established for reclaiming wells.
Lance’s staff has been working with the Wyoming Petroleum Association and several coal-bed methane operators on the new policy.
State and industry officials don’t expect the coal-bed methane play to perk up again until the price of natural gas hits $5 per thousand cubic feet. The price of natural gas at the Opal Hub on Wednesday was $2.05 per mcf.
At these prices, the producers in the Power River Basin aren’t making any money because of the cost of pumping water from the coal-bed methane wells, said Bruce Hinchey, executive director of the Petroleum Association of Wyoming.The water has to be pumped out ahead of the gas. But it costs money for the pumps and the electricity to run them.
A coal-bed methane well, Hinchey said, doesn’t produce huge quantities of gas, as other, deeper wells do. So producers need multiple wells or a higher price to justify continued production.
A few years ago, gas producers said they needed $3 or $4 per mcf just to break even, Hinchey said.
“It’s unfortunate,” he said. “We drill so much we created this surplus that has to be eaten up before the price will go back up.”