Western, Williams Settle Powder River Dispute

Western Gas Resources and its subsidiary, Lance Oil & Gas Co., have agreed to settle a legal dispute with Williams Production RMT Co. over each company's share of their joint operations in the Powder River Basin of Wyoming.

The dispute arose out of William's purchase of Barrett Resources, Western's original partner in the basin, in 2001. The companies are two of the largest coalbed methane producers in the Powder River with more than one million acres of leasehold.

Western spokesman Ron Wirth said it was too early to determine whether the settlement would lead to gas production growth in the basin. However, he did say that it probably would lead to more efficient operations. "At this point in time we are not prepared to come out and say 'we were going to drill X number of wells but now we are prepared to drill X-plus number of wells,'" said Wirth. "But certainly we believe this is a much better streamlined structure for developing the basin and should certainly increase the efficiency of the whole process. Exactly how that may translate into specific numbers or dollars, I can't speak to."

On Nov. 3, the two companies will file motions to dismiss a Western Gas lawsuit filed late last year against Williams in the District Court, County of Sheridan, WY (see Daily GPI, Oct. 28, 2002; May 8, 2001). The lawsuit concerned a 1997 development and operating agreement between Western and Barrett. Western claimed that it had a preferential right to purchase the Powder River properties that were acquired by Williams. It also claimed that consent was required before Barrett could transfer the assets. As a result, Western concluded that Williams should no longer operate the properties because of the transaction.

Under the terms of the settlement, Western and Williams will each operate the drilling and production on half of the jointly owned leasehold (one million acres). Western will begin operating its half of the properties on Nov. 1. The parties also have agreed to an expanded area of mutual interest, and Western will assume an expanded area of dedication in its gas gathering operations. The parties have also agreed to modifications to the fee schedule.

"The settlement of this long standing dispute will further allow the two companies to maximize the value of this tremendous resource," said Western CEO Peter Dea. "We believe that splitting the operations into two areas will encourage a more effective and timely development. Additionally, we have expanded our gathering area and will be positioned to aggressively connect and deliver to market the natural gas developed in this basin."

Wirth said that previously Western was drilling about one-third of the wells in the basin, while Williams was drilling two-thirds. After the wells were drilled and then hooked up, Western would then turned over complete to Williams. "Under the new scenario, we are basically splitting the basin up on a 50-5- basis where we will each both drill and operate after the wells are completed in each of our respective areas, so I think it's much more streamlined way of developing our combined acreage," said Wirth.

He said that Western is expecting 8% production growth this year, most of which will come from the Powder River. Western hasn't released its projections for 2004. It produces about 122 MMcf/d from the Powder River. Western and Williams together produce more than 300 MMcf/d in the Powder River.

However, the basin is going through a transition this year. A lot of the state fee acreage has been drilled, and many operators have been waiting for months for permits to drill on federal acreage. The federal government finally complete its decision in April on the environmental impact of drilling on the federal acreage. But it took several months for the Bureau of Land Management (BLM) to begin issuing drilling permits.

"Although [the BLM] hasn't yet gotten up to speed, we ultimately think they will," said Wirth. "We're making this transition this year of moving from the state fee acreage, which was largely in the Wyo-Dak coal which is a little shallower, to the Big George coal, which is deeper and we think has up to twice the reserves. As we transition and begin to get more permits on federal acreage and can do more drilling in the Big George, I think you'll see more of the drillers out here getting back on our growth track again."

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