Coal Bed Gas Law Puts Producers Back on Track; Or Does It?
Many western producers believe the coal bed methane legislation
signed into law last week by the president puts drilling operations
in the Powder River Basin and other basins heavy in coal gas back
on track. Not so, said Amoco Production Co., warning the
legislation (S. 2500) doesn't accomplish what was intended.
"The law leaves in question the one thing it was expected to
solve," said Margaret Laney, regional manager of public and
government affairs for Amoco in Denver. "We think the bill was very
well intentioned. It just doesn't work."
It was designed to grandfather all existing leases between coal
bed methane producers and private landowners. Royalty ownership of
coal bed gas was transferred when an appellate court decision in
July changed 90 years of federal policy by concluding the gas
within coal is part of the coal itself and is owned by the coal
owner, which in most cases out West means the federal government,
rather than the landowner. The court decision directly impacted
about 260 Amoco wells (90 MMcf/d of production) and acreage of
other smaller producers and landowners in La Plata County, CO, in
the San Juan Basin. But it also established a precedent that
indirectly impacted 20.6 million acres across five western states.
The new law specifically excludes the Amoco leases in the San
Juan Basin that were shredded in Amoco Production v. the Southern
Ute Indian tribe. "Nothing here helps Amoco," said Laney. "It very
specifically excludes anything involved in the court case. Congress
didn't want to resolve litigation through legislation."
The new law also diminishes support for Amoco's Supreme Court
battle to get the appellate court decision overturned. Amoco
attorney David Brody said the company is concerned the legislation
may harm its court case by making the Solicitor General think the
issue has been resolved. The Solicitor General will submit a review
of the Amoco appeal Nov. 18 when Amoco files its case with the
In addition, Amoco said on its face the law appears to help
those leases indirectly impacted by the court case, but it fails
because it applies to lease contracts rather than the ownership of
the gas being leased, which is what the court actually changed. "We
felt the language was wrong in the beginning and we tried to get it
amended," but the need for quick work in Congress because of the
waning session took over and blocked out any chances the bill might
be changed, said Laney.
This law "leaves loopholes" that still endanger Powder River
Basin leases, she said.
In the Powder River Basin of Wyoming and Montana, gas production
was expected to more than triple its current 210 MMcf/d level over
the next five years with the potential to reach 1.4 Bcf/d
eventually if all the existing leases are fully developed. But the
court decision changed those forecasts and shut down some
producers' operations, threatening to put drilling companies out of
Convinced the new law accomplishes what was needed, Western Gas
Resources, along with partner Barrett Resources, last week praised
its passage, saying their plan to drill 400 wells in the Powder
River basin this year and 500 more next year will resume quickly.
"We are extremely pleased to have this issue resolved so we can
resume our activity in the Powder River coal bed methane project,"
said WGR President Lanny Outlaw. "The passing of this legislation
was an excellent example of our industry and landowners pulling
together and working cooperatively with government to resolve a
difficult issue in an effort to continue the orderly development of
our natural gas resources. We view this project as a substantial
growth opportunity, and under this bill, Western will be allowed to
accelerate its development of gas reserves and gathering pipeline."
WGR's Ron Wirth, director of investor relations, said the
company already started to sign up additional drilling rigs last
week. "[I]t would certainly be our intention to ratchet back up to
where we were before [the court decision] as quick as possible." He
conceded the companies probably will fall short of drilling 400
wells this year. However, 500 for next year is still the plan.
Wirth admitted the new law leaves a lot to be desired going
forward. "There's still an issue going forward with fee acreage,"
he said. "Looking forward for any federal leases there's still
really no issue. And most of the acreage in the current coal-bed
fairway owned by private landowners has been leased. But if the
[Powder River] play would extend outside the current fairway, then
you would get into additional private landowner holdings. For the
foreseeable future that's not an issue. There's plenty to drill
on." But over the long-term, additional legislation probably is
going to be required to ensure coal-bed methane exploration can
continue, he said. Amoco's Brody noted the federal government owns
the coal beneath more than two million acres in Wyoming, whereas
producers have leased less than 100,000 of those acres.
The problem is worse than many, including WGR, realize. The
law's language does nothing to ensure coal bed gas is owned by the
landowner rather than the coal owner. It's a fundamental flaw,
according to Brody.
Laney said the only thing other than additional legislation that
will resolve these issues is a Supreme Court decision reversing the
10th Circuit Court ruling, and Amoco is working diligently to make
that happen. The company has asked for an extension until Nov. 18
on filing its appeal. It expects an answer from the court in
January, a review of the appellate court ruling next spring and a
decision in June.