Slower than expected development of coalbed methane (CBM) production in the Powder River Basin and higher than expected CBM decline rates have forced Northern Border Partners LP to record a $219 million, or $4.73 per unit, non-cash charge in the third quarter to reflect asset and goodwill impairments for its natural gas gathering and processing business segment.

“The impairment analyses involve long-term forecasting of our gathering and processing businesses, particularly the dynamics of the gas gathering business in the Powder River Basin,” said Chairman Bill Cordes. “Rates of decline in production from coalbed methane wells are greater than expected. Also, delays in developing overall production by Powder River area producers have caused us to reduce our long-term outlook for this segment.”

Cordes said the declines were first noticed in early 2003. “After we saw two consecutive quarters of decline in 2003 we then reviewed our outlook.”

The assets were purchased by Northern Border from CMS Energy in 2000 and provided contracts to gather gas from wells across 370,000 acres in the Powder River Basin. Gas production apparently peaked at about 970 MMcf/d in November 2002 and has been declining despite a favorable environmental ruling by the Bureau of Land Management (BLM) earlier this year.

Cordes said Northern Border bought the gathering system based on growth seen between 1997 and 2000. For example, during 1999 total Powder River gas production increased 209% with more than 1,000 news wells drilled. In 2000, production grew by 235% from more than 2,800 new wells.

“There is still a lot of acreage yet to be developed in the Powder River,” he said, but Northern Border expects much slower growth than previously predicted.

There are three main reasons for that, he said: steep decline rates, permitting delays and a more significant dewatering problem and greater environmental concerns in the newer areas of production growth in the Powder River area.

“Based on our detailed review of production data and CBM well data from the state of Wyoming, it’s clear that well production profiles have proven to be significantly worse than expected on almost all the systems that we’ve acquired,” Cordes said during a conference call. “Gathering throughput and the resulting revenues from that throughput has been less than expected.” He added that the well production curves for existing wells have shown much steeper declines than previously predicted.

The second issue is the delay of the environmental impact statement (EIS) by the BLM. It was initially expected to be issued in mid 2002 but wasn’t released until April 2003. In addition, within 30 days of he EIS being released, multiple lawsuits were filed and are now pending, which is slowing the BLM’s issuance of drilling permits.

“Even after the EIS record of decision was filed, the process of drilling new wells has taken longer than we expected due to the regulatory preconditions from the EIS and other factors that have become more complicated,” Cordes said. “It is now pretty clear that even though the EIS is out there, producers must file a detailed water disposal plan. They must resolve split-estate issues, which are issues that come up through the different ownership in Wyoming of surface rights versus mineral rights. And there are a number of other preconditions to drilling, which all boil down to the fact that the steps to actually get to a permit and start drilling wells have proven to be more complicated and time consuming than in the past and than we expected.”

He said the third major reason is the significantly longer dewatering period for the wells drilled in the newer areas of the basin.

Cordes said Northern Border is working to renegotiate gathering agreements with producers. “Future gathering agreements will be structured differently to provide greater assurance of capital recovery and reduce our exposure to the kind of volume risk that we have seen,” he said.

It also is implementing cost reductions and “evaluating asset redeployment opportunities.” The company already has reduced capital expenditures in the basin.

“For the long run we do think that Powder River production will grow significantly. However, we do think it will take longer than we originally expected due to the decline rates and the more complex permitting process,” Cordes said.

The company said the one-time charges would not impact the partnership’s earnings before interest, taxes, depreciation and amortization, which are projected to be in the range of $343 million to $346 million for the year, including $58 million to $60 million for the gathering and processing segment. Net income for 2003, exclusive of the impairment charges, is expected to be $131 million ($2.65 per unit) to $134 million ($2.71 per unit), which is slightly higher than the partnership’s previous guidance.

However, including the impairment charges, the partnership expects to report a net loss for 2003 of $85 million to $88 million, or a loss per unit of $2.02 to $2.08.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.