Sunday, October 4, 2009

Slant drilling remains controversial in Fayetteville Shale natural-gas area

Drilling method sparks dispute
Gas panel, firm spar over rule
By Seth Blomeley
Sunday, October 4, 2009
LITTLE ROCK — The Arkansas Oil and Gas Commission wants to slow down some natural-gas drilling in the Fayetteville Shale, a move opposed by one of the largest producers in the shale, Southwestern Energy Co. of Houston.
“Our biggest fear is not protecting the royalty owner,” said Commission Chairman Chad White of Magnolia. “The commission is the only thing standing between the royalty owner and the [production] company to make sure the [royalty owner] is not ripped off in some way.”
But some county officials question whether the commission’s proposal would lead to more wells being drilled and heavy equipment causing more damage to roads.
“The less wells we have dotted all over the landscape the better [for the roads],” said Faulkner County Judge Preston Scroggin.
The nine-member commission unanimously passed a rule during its July meeting aimed at monitoring types of wells in the Fayetteville shale.
But Southwestern, county officials and some others stood ready to voice opposition during a Sept. 15 meeting of a legislative committee that reviews agency rules and regulations and decides whether to sign off on them.
Anticipating a roughreception in the committee meeting, Larry Bengal, the executive director of the Oil and Gas Commission, asked for the rule to be taken off the agenda, and it was.
Bengal said Southwestern opposes the rule change because it could slow down production in some wells by a month or so.
He’s now working with Southwestern to find a middle ground to present to the commission during its Oct. 28 meeting in Fort Smith.
The Fayetteville Shale natural-gas deposits, located in north-central Arkansas, have been an economic boon to the state, and some officials, including Gov. Mike Beebe, have credited the drilling activity for cushioning the blow of the recession in the state.
From 2008 to 2009, the number of wells in the shale grew from 679 to 1,388.
The disagreement between the commission and Southwestern is over what’s called “cross-unit” drilling.
Much of the drilling in the Fayetteville Shale is horizontal, crossing property boundaries at times.
“The average [cross-drill] is now up to 4,000 feet,” Bengal said. “Some are proposed for 6,000 feet or so.”
That can mean that multiple landowners, gas producers and royalty owners are due proceeds from the sale of the gas.
Bengal said the commission in 2006 developed a way to allow cross-unit drilling using a formula that divides up proceeds on a percentage basis depending on the well.
“We’re the only state that does this,” he said. “It’s a unique methodology. Although I cannot say with absolute certainty no other state has adopted a similar cross-unit-well approach, I am not aware of the issue being addressed similarly in any other major oil- and gasproducing state.”
Officials with the Interstate Oil and Gas Compact Commission in Oklahoma City and the Gas Processors Association in Tulsa didn’t return messages last week.
Arkansas’ cross-unit drilling procedure was established with the purpose of facilitating development of the Fayetteville Shale, but since then it’s brought complications as the industry started drilling longer wells with different types of angles, Bengal said.
In March, the commission started drafting ways to revise the cross-unit drilling rule. Since then, it has gone through nine drafts, according to commission files.
The 2006 rule allows Bengal to make the call on whether to approve cross-unit wells. Parties on the losing end can appeal to the commission.
Now, with the proposed change to the rule, the commission wants to hear each of those cases.
“It’s very hard to write a rule that covers every nuance and every scenario,” Bengal said. “At the commission level, testimony from witnesses can be questioned and you can be more flexible in decisions as opposed to a strict regulatory rule.”
Natural-gas producers would prefer that staff members handle those decisions because it would take less time, he said.
In a Sept. 18 e-mail to thecommission, Southwestern Energy attorney Mark Boling said the “real problem” with the commission’s rule-change proposal is that it “does not allow director the necessary latitude” to approve each application.
Boling, through company lobbyist Danny Ferguson, declined to answer questions from the Arkansas Democrat-Gazette.
Instead, Boling issued a statement that Southwestern’s goals are to “minimize waste” of natural gas, protect rights of royalty owners, “minimize surface disturbance,” and “promote efficient development” of natural gas in the Fayetteville Shale.
A form letter to the commission from opponents, including Southwestern and several county judges, touted cross-unit drilling as a way to reduce the number of wells being drilled, and the access roads and heavy equipment needed to drill them.
The commission countered in papers prepared for the legislative committee that it wasn’t against cross-unit drilling but only wanted to change the approval process.
But White, the commission chairman, said the commission also wants to require that a well be drilled on each drilling section, which is one square mile.
That’s only fair to royalty owners, he said.
Without a well to himself, one royalty owner could only get a percentage of the revenue from the “little sliver” of the cross-unit well coming onto his land from a neighboring section, he said.
What about road and environmental concerns of drilling more wells?
“We’re trying to allow as many wells drilled off the same pad as we can,” White said.
He described a pad as a place where heavy equipment can drill wells in several locations, including other sections, with separate wellheads. He said that would eliminate road damage. But he said more pads may have to be built in some cases.
It’s unclear how another major shale driller, Chesapeake Energy of Oklahoma City, feels about the commission’s plan. White said the company was OK with it. Bengal said they opposed it.
A Chesapeake spokesman, Danny Games, said he was unfamiliar with the issue.
White said he understands the industry seeking to maximize profits, especially with the low price of natural gas. It’s down to $4.64 per 1,000 cubic feet but the price needs to get up to $8 to $10 for the high cost of horizontal drilling to be profitable, he said.
Beebe said last week that he’s studying the issue and has been kept apprised by staff of the debate.
“I hope the commission would be very mindful and protective of the landowners,” Beebe said. “[Royalty owners] don’t normally have as much day-to-day background and knowledge as the [production] companies do.”
The governor said the commission must be the “guardian” of the rights of royalty owners.
Of the nine commissioners, five have either been appointed or reappointed by Beebe, who took office in 2007. The other four were appointed or reappointed by former Gov. Mike Huckabee.
Arkansas, Pages 17, 19 on 10/04/2009

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