CHAPTER 2 JOINT PARTICIPATION AGREEMENTS FOR COALBED METHANE

• Jurisdiction: United States

REGULATION AND DEVELOPMENT OF COALBED METHANE
(Nov 2002)
CHAPTER 2
JOINT PARTICIPATION AGREEMENTS FOR COALBED METHANE
Carleton L. Ekberg ¹
Poulson, Odell & Peterson, LLC
Denver, Colorado

I. INTRODUCTION

In 1991, Kurt Peterson made a presentation to the 37th Rocky Mountain Mineral Law Institute pertaining to legal issues and operational concerns for coalbed methane gas (CBM) development in the western United States.² In the paper, he noted that CBM developers were focused on two major legal issues because of the increased activity surrounding CBM. One of those issues is whether "traditional oil and gas agreements [are] adequate for coalbed gas development."³

In his presentation, Mr. Peterson addressed various clauses within the conventional oil and gas lease to determine what adjustments or changes need be made to the oil and gas lease with respect to CBM development.⁴ Subsequent articles have addressed issues regarding provisions which can or should be included in leases involved in CBM development.⁵ In addition, articles have been prepared addressing the needed modifications or adjustments to a standard joint operating agreement used primarily for development of CBM.⁶ Other papers have addressed agreements related to the purchase and sale of CBM properties.⁷ Some of those same issues are revisited in this Special Institute.

It has now been over ten years since the flurry of CBM development spawned by Section 29 tax credits occurred in the late 1980s and early 1990s. Several special institutes were sponsored by the Eastern Mineral Law Foundation and the Rocky Mountain Mineral

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Law Foundation dealing with various issues encountered in development of CBM.⁸ Since 1993, approximately 14,300 CBM wells have been drilled in the Powder River Basin alone,⁹ not to mention an additional 3,600 CBM wells drilled elsewhere in the Rocky Mountain region.¹⁰ Given the additional development which has occurred, the purpose of this paper is to address the question raised in 1991 as to whether traditional oil and gas agreements are adequate for CBM development.

II. WHAT'S THE FUSS?

In most respects, development of a CBM project is similar to development of a conventional gas project. In a conventional gas project, leases must be obtained; surface use agreements and access agreements must be put in place; permits to drill wells must be obtained; drilling operations must be conducted in accordance with local government regulations and in accordance with the terms and provisions of the applicable leases; arrangements must be made to dispose produced water; and arrangements must be made to gather, compress and transport any produced gas to market. The agreements between joint participants¹¹ involved in the development of a conventional gas project must address the relationships of the parties in all of these respects.

The agreements between joint participants in the development of a CBM project likewise must establish the arrangement and understanding of the parties for the conduct of all operations, for the allocation of costs and liabilities from the commencement of operations through plugging and abandonment of any and all wells drilled, and for the ownership of equipment purchased and facilities constructed. However, there are several special considerations which arise in the context of development of a CBM project which must be taken into account in preparation of agreements among joint participants.

First, CBM is a type of natural gas which is generated and stored in coal beds. The CBM, which is held in place by water pressure, is released by dewatering the coal seam to reduce the pressure, allowing the CBM to escape.¹² Water to gas ratios usually decline dur-

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ing the dewatering stages, then increase during the final stage of production.¹³ Thus, if the water pressure in a newly drilled CBM well has been reduced by dewatering a prior adjacent well, the dewatering stage takes significantly less time for the newly drilled CBM well.¹⁴ Developers should consider the potential impacts and benefits of dewatering adjacent acreage as they dewater their specific well.

Second, large volumes of water may be produced by dewatering in a CBM project. For preparation of the Draft Powder River Basin Environmental Impact Statement, the Bureau of Land Management assumed average water production to be 9.5 gallons per minute per well over the life of the well.¹⁵ This water may be disposed onto the surface of the ground pursuant to a water disposal permit, or collected by a water collection system for containment, or injection. Thus, significant time and costs are incurred in the administrative process required to obtain necessary permits for water production and discharge and in the construction of the infrastructure related to collection and disposal of produced water.¹⁶

Third, in a CBM basin such as the Powder River Basin, development can occur on a relatively small spacing pattern. For example, spacing for the formations producing CBM in the Powder River Basin has been established at one well per 80 acres per pool by a basinwide regulation,¹⁷ although parts of the basin were developed on 40 acres prior to approval of the regulation.¹⁸ Given the number of wells that are drilled in such a circumstance, sub-

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stantial infrastructure of low pressure gas gathering systems is required to collect CBM from the wells and deliver the CBM to compressor stations.¹⁹

Fourth, gas produced from the CBM wells requires both dehydration to remove the water vapor in the gas and substantial compression from field pressure. The CBM which is produced from typical wells in the Powder River Basin is produced at approximately five pounds per square inch (psi).²⁰ The CBM must be compressed before it can be delivered to a high-pressure gas transportation line.

When preparing a farmout agreement, exploration agreement, development agreement, participation agreement, joint operating agreement, or any other agreement which pertains to development of CBM by joint participants, the joint participants must allocate all costs and expenses incurred in development, including any facilities which may be purchased or constructed, and must account for the ownership of any facilities purchased and constructed.

III. COALBED METHANE GAS CONSIDERATIONS FOR JOINT PARTICIPATION AGREEMENTS

The operators of a majority of the CBM wells drilled in the Powder River Basin in the past five years have graciously permitted the author to review the joint participation agreements they have used in the exploration and development of CBM projects.²¹ The ideas presented in this paper are concepts which have already been addressed in one or more agreements related to joint participant development of a CBM project, or ideas expressed verbally to the author by representatives of one or more operators involved in joint participant development of CBM projects.

The purpose of this paper is not to discuss all of the terms and provisions that are generally contained in farmout agreements, exploration agreements, development agreements, and joint operating agreements used in development and exploration of oil and gas, including CBM.²² Numerous articles have already addressed these issues.²³ Instead, the

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purpose of this paper is to present a compilation of the various issues which have been addressed by CBM developers in the various agreements that have been used in joint participation exploration and development of CBM projects.

This paper begins the discussion by review of the current lay of the land. It then addresses joint participation agreements for development of CBM which grow in scope, starting with a single spacing unit farmout agreement and a limited well farmout agreement, and ending with broad scale exploration agreements and joint participant development agreements.

A. Lay of the Land

Many CBM project areas presently being developed are located in areas producing oil or gas from deeper formations. For example, in the Powder River Basin CBM is being developed in areas in which the leases are held by production from the Muddy Formation or from the Minnelusa Formation. In areas of southwestern Wyoming, CBM is being developed in areas included in producing federal units with participating areas established in deeper formations. In such areas, it is likely that the oil and gas leases under which CBM development is occurring are already subject to existing joint operating agreements, unit operating agreements, or other similar agreements which govern the relationship between joint participants in the leases or the area. This possibility may impact the manner in which joint participation agreements are constructed between joint participants involved solely in the development of CBM.

In the development of a CBM project area, ancillary facilities are required to drill and produce CBM wells. Those facilities include:

access roads; pipelines for gathering gas and produced water; electrical utilities; facilities for measuring and compressing gas; facilities for treating, discharging,

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disposing of, containing, or injecting produced water; and pipelines for delivering gas to high-pressure transmission pipelines.²⁴

The level to which these ancillary facilities have been constructed in a CBM project area will have an impact upon the terms of the agreement between joint participants of a CBM project area.

In this discussion, the extent to which joint participants are required to construct water facilities for the purpose of collecting, transporting, treating, discharging, injecting, containing or disposing produced water will play a significant role. The same is true with respect to construction of facilities for measuring, gathering, dehydrating, compressing and transporting produced CBM. In the case of both produced water and produced CBM, one or more of the functions in the process may be performed by a...