AN INDUSTRY PERSPECTIVE ON COALBED NATURAL GAS (METHANE) UNITS

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 20A
AN INDUSTRY PERSPECTIVE ON COALBED NATURAL GAS (METHANE) UNITS
Gregory R. Danielson
Attorney
Davis Graham & Stubbs LLP
Denver, Colorado
Jamie Jost
Attorney
Davis Graham & Stubbs LLP
Denver, Colorado

Gregory R. Danielson

Greg received his undergraduate degree from the University of Colorado in 1979 and obtained his J.D. in 1983 from the University of Denver. Since graduation, Greg has represented oil and gas companies in a variety of matters including business transactions, title examinations and bankruptcy law. Greg is currently a partner in the law firm of Davis Graham & Stubbs LLP.

Greg is an active participant with the Rocky Mountain Mineral Law Foundation. He is member of the Executive Committee and co-chaired the 2002 Special Institute on the Regulation and Development of Coalbed Methane and a 2004 Special Institute on the development of unconventional gas. Greg has been a lecturer and author for various industry groups. His published papers include: "Title Examination of State and Federal Lands," Mineral Title Examination III, Paper No. 4 (Rocky Mt. Min. L. Fdn., 1992); "Liability Associated with Federal Record Title Leasehold Rights," 32 Public Land Resources L. Dig. 283 (1995); "Due Diligence for the Purchase of Pipeline Systems," Institute on Rights of Way, Paper No. 14 (Rocky Mt. Min. L. Fdn., 1998); and "Lease Maintenance and the Development of Coalbed Methane," 46 Rocky Mt. Min. L. Inst. 5-1 (2000) and "The Perfect Oil and Gas Lease: Why Bother!" 50 Rocky Mt. Min. L. Inst. 19-1 (2004).

Greg is a member of the Colorado Bar Association (Chair, Natural Resources and Energy Law Section, 2003-2004), American Bar Association, American Association of Professional Landmen and the Denver Association of Petroleum Landmen.

Jamie L. Jost

Jamie L. Jost joined Davis Graham & Stubbs in 2005 as an associate in its Natural Resources Department. Since joining Davis Graham & Stubbs, she has worked on various issues affecting the oil and gas industry. She has represented clients in federal and state courts as well as in proceedings with the Colorado Oil and Gas Conversation Commission. Her practice also emphasizes transactions involving energy projects and companies in both the United States and internationally.

Ms. Jost is a member of the bars of Colorado, Wyoming, the United States District Court of Colorado, the United States District Court of Wyoming, and the Tenth Circuit Court of Appeals. She is active in the Rocky Mountain Mineral Law Foundation, the Colorado Bar Association, and the American Bar Association.

Ms. Jost received her J.D. from the University of Wyoming in 2002 and her undergraduate degree in Environmental Science from Indiana State University in 1998. She began her legal career with the Cheyenne, Wyoming law firm of Dray, Thomson & Dyekman working primarily on renewable energy issues as well as general civil litigation matters. In 2003, Ms. Jost became an associate with the Roswell, New Mexico law firm of Hinkle, Hensley, Shanor & Martin where she focused her practice on oil and gas related matters. While at the Hinkle law firm, Ms. Jost represented clients both in court and in front of federal administrative agencies on oil and gas royalty issues, subsurface trespass issues, and oil and gas company employment related matters.

TABLE OF CONTENTS

1. Introduction

2. CBNG Development Issues

3. Lease Extension and Maintenance

4. Infrastructure and Access

4.1 Authority Regarding Surface Access Within A Unitized Area

a. 43 C.F.R. § 3180 , et seq.

b. Bureau of Land Management Instruction Memorandum No. 80-716

c. 30 U.S.C. § 226(m) (1981)

d. Kysar v. Amoco Production Company, 379 F.3d 1150 (10th Cir. 2004); Kysar v. Amoco Production Company, 93 P.3d 1272 (N.M. 2004)

4.2 Challenges to Access Rights

4.3 Effect Of Contraction Of Federal Unit On Right To Access Oil And Gas Facilities

5. Field-Wide Development Programs

6. Problems Associated With Development of CBNG Under a Federal Unit Agreement

6.1 Unitization Limited to CBNG Formations

6.2 Participating Areas

7. Alternatives

8. Unit Operating Agreements

8.1 Surface Facilities

8.2 Initial Wells

8.3 Non-Consent Issues

8.4 Completion Issues

8.5 Beneficial Interests

9. Conclusion

1. Introduction

Previous presentations at this conference have laid out the principles of pooling and unitization. With this paper, we will apply those principles to a drilling program focused on the development of coalbed natural gas ("CBNG"). This topic was previously addressed at a Rocky Mountain Mineral Law Foundation conference on Regulation and Development of Coalbed Methane where Fred MacDonald presented a paper titled "Coalbed Methane Units: Making the Square Peg Fit the Round Hole."¹ This paper provides an excellent summary of CBNG development issues and some of the problems faced by coalbed natural gas operators when trying to implement a CBNG development program under the terms of the traditional federal exploratory model form agreement. The paper also discussed the changes to model form agreements adopted by the Bureau of Land Management in Wyoming and Utah. Rather than summarizing that presentation, we have attached a copy of the paper for your review. Our goal is to supplement the discussion in that paper by discussing some of the issues that must be considered when determining whether to unitize a CBNG drilling program.

Each participant in a CBNG program must compare the numerous benefits to be derived from unitization with the cost of putting the unit together and the increased administrative burden and regulatory requirements that accompany a federally approved unit. This cost-benefit analysis has been addressed at this conference in a traditional development setting.² We will revisit that analysis and focus on the unique characteristics of a high-density drilling program for coalbed natural gas. Our premise is that a federal unit agreement, especially one using the

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Wyoming CBNG modified unit agreement form³ ("Wyoming CBNG Unit") may be a very attractive option because unitization can help limit the numerous uncertainties associated with developing CBNG under traditional oil and gas contracts. To understand these issues we will discuss the difficulties that arise in a non-unitized CBNG development scenario. We will consider how a unitization program addresses these problems and discuss the benefits derived from unit development in the following areas:

a. Maintaining and extending the primary terms of oil and gas leases;

b. Access for development of surface facilities and wells; and

c. Field-Wide Development.

We will also discuss the problems associated with unitized development such as depth restrictions and administrative burdens. As an alternative to a federal unit, we will also consider working interest pools under a modified joint operating agreement. Finally, assuming a joint development program is pursued we will discuss some of the terms that could be modified in the applicable operating agreement to address the CBNG unit issues.

2. CBNG Development Issues

To appreciate the issues associated with developing CBNG under a federal unit, we need to consider some of the factors that make a CBNG drilling program unique. The Foundation's Special Institute on "Regulation and Development of Coalbed Methane" and in particular a paper prepared by Randy Allen titled "Coalbed Methane Primer" provides a detailed description of a CBNG program.⁴

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Development of CBNG is not entirely different from conventional gas plays but there are certain aspects in the development scenario that create unique issues. Coal is both the source rock and reservoir rock for a coalbed methane well.⁵ Like conventional reservoirs, some gas is stored in the space between the solid particles; however, the interstitial or pore space represents a small portion of the overall available storage space within coal.⁶ Most of the gas is stored within the microscopic structure of the coal itself.⁷ The gas is adsorbed to the coal and held there by pressure.⁸ The gas remains in place until the pressure holding it to the coal's surface is reduced to a certain level at which point it will be released from the surface which is referred to as desorption.⁹ The coal cleats are generally filled with water.¹⁰ To allow desorption to occur, the water must be produced to reduce reservoir pressure.¹¹ This reduction in reservoir pressure to produce the gas is the fundamental difference between CBNG and conventional reservoirs and results in a different development scenario for CBNG.¹²

In a CBNG development program, the wells are located and drilled so as to enhance communication, for quick and efficient dewatering, thereby reducing rather than maintaining reservoir pressure.¹³ The dewatering stage is marked by increasing gas and steady or decreasing water production.¹⁴

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For the vast majority of CBNG wells the operator will decide to complete and frac the well before it is drilled.¹⁵ A typical CBNG drilling operation in the Powder River Basin has been described as follows:

Each producing well will be drilled for a depth of 350 feet to 1,250 feet or deeper and will have steel casings cemented from the top of the coal seam to the surface .... Each well will be drilled within a period of one to three days. In preparation for production of gas for the drilled, cased and cemented well, a well completion program may be initiated to stimulate production of gas and determine gas and water production characteristics. A mobile completion rig similar to the drilling rig may be transported to the wellsite, erected and used to complete a well. Completion operations are expected to average one to three days per well. Methane gas may be vented and water temporarily discharged for a very short a period of time during testing to determine whether...