Many western producers believe the coal bed methane legislationsigned into law last week by the president puts drilling operationsin the Powder River Basin and other basins heavy in coal gas backon track. Not so, said Amoco Production Co., warning thelegislation (S. 2500) doesn’t accomplish what was intended.

“The law leaves in question the one thing it was expected tosolve,” said Margaret Laney, regional manager of public andgovernment affairs for Amoco in Denver. “We think the bill was verywell intentioned. It just doesn’t work.”

It was designed to grandfather all existing leases between coalbed methane producers and private landowners. Royalty ownership ofcoal bed gas was transferred when an appellate court decision inJuly changed 90 years of federal policy by concluding the gaswithin coal is part of the coal itself and is owned by the coalowner, which in most cases out West means the federal government,rather than the landowner. The court decision directly impactedabout 260 Amoco wells (90 MMcf/d of production) and acreage ofother smaller producers and landowners in La Plata County, CO, inthe San Juan Basin. But it also established a precedent thatindirectly impacted 20.6 million acres across five western states.

The new law specifically excludes the Amoco leases in the SanJuan Basin that were shredded in Amoco Production v. the SouthernUte Indian tribe. “Nothing here helps Amoco,” said Laney. “It veryspecifically excludes anything involved in the court case. Congressdidn’t want to resolve litigation through legislation.”

The new law also diminishes support for Amoco’s Supreme Courtbattle to get the appellate court decision overturned. Amocoattorney David Brody said the company is concerned the legislationmay harm its court case by making the Solicitor General think theissue has been resolved. The Solicitor General will submit a reviewof the Amoco appeal Nov. 18 when Amoco files its case with theSupreme Court.

In addition, Amoco said on its face the law appears to helpthose leases indirectly impacted by the court case, but it failsbecause it applies to lease contracts rather than the ownership ofthe gas being leased, which is what the court actually changed. “Wefelt the language was wrong in the beginning and we tried to get itamended,” but the need for quick work in Congress because of thewaning session took over and blocked out any chances the bill mightbe changed, said Laney.

This law “leaves loopholes” that still endanger Powder RiverBasin leases, she said.

In the Powder River Basin of Wyoming and Montana, gas productionwas expected to more than triple its current 210 MMcf/d level overthe next five years with the potential to reach 1.4 Bcf/deventually if all the existing leases are fully developed. But thecourt decision changed those forecasts and shut down someproducers’ operations, threatening to put drilling companies out ofbusiness.

Convinced the new law accomplishes what was needed, Western GasResources, along with partner Barrett Resources, last week praisedits passage, saying their plan to drill 400 wells in the PowderRiver basin this year and 500 more next year will resume quickly.

“We are extremely pleased to have this issue resolved so we canresume our activity in the Powder River coal bed methane project,”said WGR President Lanny Outlaw. “The passing of this legislationwas an excellent example of our industry and landowners pullingtogether and working cooperatively with government to resolve adifficult issue in an effort to continue the orderly development ofour natural gas resources. We view this project as a substantialgrowth opportunity, and under this bill, Western will be allowed toaccelerate its development of gas reserves and gathering pipeline.”

WGR’s Ron Wirth, director of investor relations, said thecompany already started to sign up additional drilling rigs lastweek. “[I]t would certainly be our intention to ratchet back up towhere we were before [the court decision] as quick as possible.” Heconceded the companies probably will fall short of drilling 400wells this year. However, 500 for next year is still the plan.

Wirth admitted the new law leaves a lot to be desired goingforward. “There’s still an issue going forward with fee acreage,”he said. “Looking forward for any federal leases there’s stillreally no issue. And most of the acreage in the current coal-bedfairway owned by private landowners has been leased. But if the[Powder River] play would extend outside the current fairway, thenyou would get into additional private landowner holdings. For theforeseeable future that’s not an issue. There’s plenty to drillon.” But over the long-term, additional legislation probably isgoing to be required to ensure coal-bed methane exploration cancontinue, he said. Amoco’s Brody noted the federal government ownsthe coal beneath more than two million acres in Wyoming, whereasproducers have leased less than 100,000 of those acres.

The problem is worse than many, including WGR, realize. Thelaw’s language does nothing to ensure coal bed gas is owned by thelandowner rather than the coal owner. It’s a fundamental flaw,according to Brody.

Laney said the only thing other than additional legislation thatwill resolve these issues is a Supreme Court decision reversing the10th Circuit Court ruling, and Amoco is working diligently to makethat happen. The company has asked for an extension until Nov. 18on filing its appeal. It expects an answer from the court inJanuary, a review of the appellate court ruling next spring and adecision in June.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.