State royalties go up in smoke with gas flares
With Wyoming’s shale oil industry still very much in its infancy, a large volume of state-owned natural gas is going up in smoke, and along with it a small fortune in royalties that are supposed to fund our public schools.
According to the Office of State Lands and Investments — which has the fiduciary responsibility to maximize revenue from state-owned lands and minerals to fund Wyoming schools — some 411,789 thousand cubic feet (mcf) of gas (enough to serve 4,100 homes for a year) from state-owned mineral leases was flared from October 2009 to October 2011.
That’s an approximate loss of $200,000 to Wyoming’s K-12 students. Up in smoke.
Wyoming’s volume of wasted natural gas may seem tiny in comparison to the massive bleed from the Bakken shale oil play in North Dakota (up to 134,000 mcf per day, according to one estimate). What is regarded as a small flaring and royalty loss in Wyoming today could quickly balloon if the Niobrara oil play hits paydirt. And there’s concern that Wyoming’s leaders will submit to pressure from the oil and gas industry to ignore the lost royalties.
On Thursday, the state’s five elected officials declined to accept a staff recommendation to charge royalties on gas flared after 30 days of completion of a well. Instead, the board directed Harold Kemp, of the agency’s royalty compliance division, to further research the issue with the Wyoming Oil and Gas Conservation Commission, which has authority to permit flaring.
“They (Office of State Lands and Investments) should make them pay royalties on the gas they’re flaring. If you produce a mineral, it’s only going to be produced one time. Let’s get the state’s value for it,” said Dan Neal, executive director of the Equality State Policy Center.
When drilling into shale oil formations, a fair amount of natural gas and petroleum condensate (liquids) stream up the well bore with the oil for many days before steady oil production begins. Particularly in exploration or the early stages of a new oil play, there are not pipelines available to capture the gas for commercial sale, so the byproduct is set ablaze (or flared) until the finite resource is exhausted or facilities are constructed to capture gas and liquids for sale. It is in the 4-6 weeks after a well is completed that gas and oil flows tell the operator whether the well is going to be a commercially viable producer.
In fact, no pipeline company is going to invest in a collection pipeline to the well unless the well is allowed to flow and prove its productivity.
That’s the logistic and economic realities for the oil producer. But why should the state not apply its 16 2/3 percent royalty to a finite, state trust asset?
Steve Degenfelder, vice president of Casper-based Double Eagle Petroleum Co., said he agrees that the optimization of those state trust assets is the state’s priority.
“And you’ve got to allow someone the ability to test the well in order to prove that it’s economic,” Degenfelder told WyoFile. “Or if you don’t, then by your action you are discouraging the development of those lands, and that action is just as bad as wasting something.”
By their actions this week state officials appear to follow this reasoning, which leads to the question; what is a sufficient amount of time to test a well after completion?
The Wyoming Oil and Gas Conservation Commission allows for flaring up to 15 days after completion of a well. If an operator wants to flare beyond 15 days, it must request an extension from the commission. Currently, there are 29 such extensions in Wyoming for up to 6,725 mcf of gas flared per day, according to the commission.
Commission supervisor Tom Doll said that, at the direction of the commission board, he set a new flaring limit of 250 mcf per day for up to 180 days.
“I don’t set that (maximum) on every well. But those are my limits to allow those companies to test wells,” Doll told WyoFile.
Within those volume limits, some new shale oil wells in southeast Wyoming are approved to flare natural gas for months on end.
If a well has been proven commercial, why not turn off the spigot until tanker trucks or pipelines are available to take all the products to market? Industry officials say that turning off the spigot then trying to resume production is costly. But who should bear that cost?
“This is a property rights issue,” said ESPC’s Dan Neal. “This property happens to be owned by the state. And the people who oppose (the proposed 30 day royalty-free limit) are in the crowd who say the state should run more like a business.”
— Dustin Bleizeffer, WyoFile editor-in-chief, has covered Wyoming’s energy industry for 13 years. He can be reached at 307-577-6069 or [email protected].