CHAPTER 2 DRILLING AND OPERATING IN THE URBAN JUNGLE

• Jurisdiction: United States

Development Issues and Conflicts in Modern Gas and Oil Plays
(Nov 2004)
CHAPTER 2
DRILLING AND OPERATING IN THE URBAN JUNGLE
James P. Wason
Kerr-McGee Rocky Mountain Corporation
Denver, Colorado

James P. Wason is the head of the Denver Julesberg Basin Land Department for Kerr-McGee Rocky Mountain Corporation. He manages all the land issues relative to the Wattenberg Field.

Mr. Wason received his B.A. Degree from the University of Denver in 1976 and attended the University of Colorado at Denver's graduate business program.

Mr. Wason has over 27 years of experience dealing with land related issues in the oil and gas industry. His career has been focused on oil and gas exploration and exploitation in the Rocky Mountain region. In the last ten years, he has concentrated on land issues specific to the Wattenberg Field.

Mr. Wason is a member of the Denver Association of Petroleum Landmen and the American Association of Petroleum Landmen.

I. Introduction

This paper will discuss the practical, legal and economic aspects of implementing and executing an aggressive drilling program in the Wattenberg Field, located in the center of the Denver Julesburg Basin. Although the author will refer to this field specifically, the problems and issues surrounding the field are applicable to other areas of the country where rapid urbanization is occurring.

The swift increase of the population in the West has caused encroachment conflicts where operators must meet new challenges to gain access to drill new wells, operate existing wells, and gather and produce the hydrocarbon products from the field. The traditional negotiations of surface damages, their economic criteria and the complex permitting issues that arise from these operations will be discussed.

II. Background of the Wattenberg Field

"The Wattenberg Field sits in the center of Colorado's Denver-Julesburg Basin, one of the classic tight-gas basins in the Rocky Mountain region. Discovered in 1970, the field has produced more than three trillion cubic feet equivalent (Tcfe) from multiple Cretaceous pays tapped by more than 12,000 wells". ¹ To bring this into perspective, the natural gas produced over the life of just one average J sand well is enough to heat 600 homes for the next 10 years.

"Wattenberg has enjoyed several boom cycles and also endured bust cycles. Nonetheless, the gas field, one of the 10 largest in the U.S., remains a formidable producer-it is actually making more gas and oil now than at any time in its long history". ²

Initial developments of the Wattenberg Field occurred in the early 1970's when Amoco began to develop the J sand formation. High gas prices continued the development of the J sand formation in the early 80's and throughout the 90's. Also in the 1990's, the Codell/Niobrara sands were developed in large part due to the Section 29 tax credit incentives.

In 1998, the Colorado Oil and Gas Conservation Commission (COGCC) passed Rule 318A. ³ This Rule change allows operators to commingle the production from different zones in one wellbore and drill five or more Cretaceous wells per 160 acre blocks. Rule 318A is a well location rule that defines where operators can locate and drill wells on the landowner's surface. At the same time, operators in the field discovered that you could put a second fracture stimulation on the Codell and Niobrara formations and substantially increase the production and reserves from that wellbore.

This prompted two different types of activities in the field that impacted the surface:

A. Many new infill wells, both J sand and Codell/Niobrara, have been proposed and drilled since 1998. During the drilling operations for the new wells, the operator requires a minimum of 2.4 acres of surface for this large equipment.

B. Many workover rigs have been moved on to existing wells to re-frac the Codell/Niobrara formations. The minimum requirement for this activity is 1.4 acres of surface.

Since the late 1990's, the COGCC has issued a record number of drilling permits ⁴ in Weld County, Colorado:

• 1999: 1010

• 2000: 1529

• 2001: 2273

• 2002: 2007

• 2003: 2245

At the same time, Denver and its surrounding area continued to grow and expand. "Recently released census data shows that "11 of the 15 fastest growing cities in Colorado are located in Weld County" ⁵ (Denver Post) in the heart of the Wattenberg Field. "The 26 cities and towns based in Weld County averaged 20.6 percent growth from 2000 to 2003. The county population tops 217,000. Greeley, the county seat is, is home to 83,414 people." ⁶

These small towns in Weld County were traditionally farming and ranching communities. The surrounding area was fertile ground used to grow wheat, hay, alfalfa, corn, sugar beets and vegetables. Today, much of that ground is in transition.

The towns have quickly annexed property into their communities. Real estate developers are building houses, schools and other related infrastructure.

In addition, a sand and gravel mining corridor exists next to the South Platte River which dissects the Wattenberg Field. Cement plants have sprung up to support all of the new construction activity. The housing and sand and gravel extraction boom has occurred at the same time that drilling and workover operations are setting statewide records.

This is the background of the climate we find ourselves in today.

III. Severed Estates -- "the real problem"

In the Wattenberg Field most of the oil and gas leases are fee leases and have been severed from the surface estate. The fee leases were obtained from the mineral owners in the early 70's and have been held by production by the 12,000 wells in Adams and Weld Counties. The real problem with the "split estate" is that in many cases, the surface owner does not comprehend that future oil and gas development can occur on the property he/she just purchased.

The severance of the surface and mineral estates is one of the most significant issues between the surface owner and the leasehold owner. In most cases, the surface owner does not derive any revenue from mineral development. The location of oil and gas wells on the surface can certainly impact future housing developments and current crop production.

The oil and gas leasehold in the Wattenberg Field, now more than 30 years old, has been segregated by depth as to different horizons. This has also increased the impact on the surface through additional drilling and requires additional tanks, meters, flowlines and other facilities.

1 Notice Provisions -- the practical solution

In the Wattenberg Field, the original oil and gas lease taken from the original mineral owner in the 1970's is buried in the county records under hundreds of documents and may be improperly indexed. To give effective notice of these leasehold interests and the prospect of further operations on the property, operators should file notice of their oil and gas lease interest describing the location of potential future wells that may be drilled on lease lands. The form of notice utilized by Kerr-McGee Rocky Mountain Corporation includes a plat depicting the 318A legal drilling windows so that surface owners can determine where future drilling operations can occur.

This notice provision should be recorded in each county where the operator has oil and gas leases to ensure that title companies will have adequate notice of the operator's interest. (A form copy of this notice provision is attached as Exhibit A.)

2 Legislative Solution -- Colorado House Bill 1088⁷

In 2002, the Colorado Legislature enacted House Bill-1088. HB-1088 is a notice statute which requires developers to identify and then send notice to mineral owners at least 30 days before the initial public hearing by a local government on an application for development. The statute is designed to provide a streamlined procedure for providing notice to owners of mineral interests concerning impeding surface development, as well as to include local governments in the notification process.

The result of this legislation continues to have a strong impact on communication between operators and the surface developers. The increase in communication between these parties has resulted in less conflict.

IV. Procedures For Drilling a Well

A portion of the COGCC Rules and Regulations ⁸ requires that the following occur in order to obtain a drilling permit for a new well:

1 Permitting Issues

A. 30 days prior to drilling, a notice letter is required to be sent to surface owner.

B. Stake and survey the well

C. On-site consultation to discuss well location, access, flowline installation, tank and separator location and pipeline hookup.

D. Attempt to negotiate terms of a Surface Use Agreement with the surface owner to address damages to the surface.

E. If no agreement is reached, the operator may rely on Operators Surface Disturbance Bond.

The operator must "make a good faith effort to consult" ⁹ with surface owners regarding the drilling of new wells on the surface owner's property. This gives the surface owner the opportunity to present his/her objections to the COGCC and protest the issuance of a drilling permit at the state level.

When drilling in local municipalities, a Special Use Permit is required in addition to the state permit. In most cases, the state drilling permit must be issued prior to the issuance of the Special Use Permit. If the stakeholders who live in these municipalities want to object to the drilling of the well they have the opportunity to protest both the state permit and Special Use Permit.

The operators must continue to consult with the surface owners and other stakeholders who will be affected by the drilling of the well. The key to these negotiations is to allow enough time prior to drilling the well to educate the surface owner. Operators should take the time to review with city officials and surfaces owners all of the operational issues that exist when drilling...