May 2019

The last barrel

Dangerous precedent
Craig Fleming / World Oil

When I started working as a petroleum geologist in Oklahoma City in the early 1980s, I realized most landowners at my company’s well construction sites were not entitled to royalty payments, because they did not own the mineral rights underlying their properties. And because they had no share in the production, most surface owners wanted to prevent or limit activity as much as possible.

But as a hardcore oil and gas guy, I was impressed by the Oklahoma Corporation Commission’s pro-drilling doctrine and willingness to permit virtually any drilling site. Oil companies did pay surface owners for damages caused to their land, so all was good in Sooner land, right? But even before the separation of minerals from the surface became the rule, the battle between landowners and oil companies, who leased drilling rights, had always been intense. “Not in my backyard” has been the eternal battle cry, but to little avail. However, some states and countries are starting to listen.

Pro-drill states. The Texas Railroad Commission does not regulate how close an oil or gas well can be drilled to a residential property. However, for a well within city limits an RRC cause states, “a well may not be drilled in the thickly settled part of a municipality or within 200 ft of a private residence.” The law in Oklahoma is similar. The setback of wells in municipalities must be at least 600 ft, unless the owner waives that requirement. But in rural areas without zoning ordinances, landowners have virtually no say in determining the placement of wells. Could the gross production tax revenues that these states receive on every bbl and Mcf sold be the incentive behind these “industry-friendly” permitting laws?

Colorado push-back. The Niobrara shale play has vaulted Colorado to the nation’s sixth largest oil producer. The industry contributes $31 billion in annual economic impact to the state’s economy, supporting 232,900 good-paying jobs, says Tracee Bentley, executive director of the Colorado Petroleum Council (CPC). In March, the state’s output hit 528,000 bopd, a record high. But proximity of development to Denver’s suburbs has raised concerns about safety after a gas line explosion in 2017 leveled a private residence. The incident caused a gross overreaction by state representatives that led to Proposition 112, which called for changing existing distance requirements, so that new oil and gas development must be located at least 2,500 ft from any occupied structure. If passed, the legislation would have effectively ended new oil and gas development in the state.

Fortunately, Prop 112 failed, but the Colorado General Assembly passed a watered-down version in Senate Bill 181, “which fundamentally altered the oil and gas industry’s future in the state,” according to Colorado Governor Jared Polis, who signed the bill on April 16. “SB 181 remains a threat to one of the foundations of Colorado’s economy,” said CPC spokesman Ben Marter. Under SB 181, city and county authorities can impose local setback rules for new wells and impose fines on operators for non-compliance. Its supporters say new laws are necessary to protect the safety of Colorado’s growing population along the Front Range. Despite the setback, “the debate over Colorado’s energy future is far from over, and our opponents have visions of exporting Colorado’s ongoing battle to other states. Yours could be next,” Bentley concluded. 

Wyoming federal land off limits. In March, a federal judge ordered a halt to exploration on more than 300,000 acres in Wyoming, saying the government must account for its cumulative effect on global climate change. The ruling came in a lawsuit filed by a pair of environmental conservation groups challenging BLM’s decision to lease federal lands for energy development in Wyoming, Utah and Colorado. It stressed the difference between assessing environmental impacts in isolation and measuring their collective impact. “It’s going to force the government to think more completely about climate consequences of land management,” said University of Pittsburgh law professor Joshua Galperin. “And it doesn’t stop drilling, even in this case.” The statute under which the groups sued merely promotes conservation but does not restrict specific actions.

“Given the cumulative nature of climate change, considering each individual drilling project in a vacuum deprives the agency of the context necessary to evaluate drilling on federal land before irretrievably committing to that drilling,” said U.S. District Judge Rudolph Contreras. While the judge stopped short of voiding the Wyoming leases, he ordered the BLM to reexamine nine of its environmental assessments. He also barred the BLM from authorizing new drilling in the state until it satisfies its environmental law obligations.

Norway blocking offshore development. To the dismay of Norway’s powerful oil industry, the opposition Labor Party decided to withdraw its support for offshore exploration around the Lofoten islands. The dramatic shift by Norway’s biggest party is a significant blow and could signal that the country is coming closer to the end of the pro-drill era. Equinor said that access to Lofoten is key, if the country wants to maintain production as resources dwindle. Estimates suggest that 1.0 to 3.0 Bbbl could be hiding under the archipelago. “The whole industry is surprised and disappointed,” said Karl Eirik Schjott-Pedersen, head of the Norwegian Oil and Gas Association. “It doesn’t provide the predictability we depend on.” It’s feared the drilling ban battle will now move to the Barents Sea.

Pay the piper? The flood of crude emanating from U.S. shale plays has apparently caused government officials to bend to the will of big-money environmental groups. Although the areal extent of the acreage affected by the various drilling bans is relatively small, the legislation sets a dangerous precedent that could adversely impact our industry, and energy consumers, for years to come. WO

About the Authors
Craig Fleming
World Oil
Craig Fleming
Related Articles
Connect with World Oil
Connect with World Oil, the upstream industry's most trusted source of forecast data, industry trends, and insights into operational and technological advances.