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Coal Bed Gas Law Puts Producers Back on Track; Or Does It?

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 Supreme Court.

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 business.

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.

Rocco Canonica

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