A Loophole in Wyoming Oil and Gas Regulations is Hurting Landowners

Published February 8th, 2019 by Budd-Falen Law Offices, L.L.C.

There is an artificial race in Wyoming being run by large oil producers to gain a competitive advantage in producing oil and gas. The race is not a race to find oil or to purchase or lease minerals from a landowner. Instead, companies are racing to be the only company allowed to drill in an area. This race, which is being artificially created by the rules of the Wyoming Oil and Gas Conservation Commission (the Commission), not only forces oil producers into a cut-throat game of monopoly, but it also harms the land and mineral owners who are caught in the middle of this conflict. If the Commission and the Wyoming Legislature continue to ignore this issue many land and mineral owners will continue to be taken advantage of by large oil producers who hold a government-created monopoly in the region.

Due to the rules and regulations of the Commission, it has incentivized oil and gas companies to essentially race to the Commission to get drilling permits for spacing units in an area (APD). In order to get an APD an operator need only show that he has a lease in place in part of the unit, and that the rest of the area should be pooled. Further there is no need to show an intent to drill in the near future. Once they are granted a permit, they are the only company allowed to drill in that spacing unit. Currently, the spacing units are 1280 acres, making them one mile wide and two miles long. Further, although the permit could expire if the company fails to drill within two years, the company can request an extension prior to the expiration date of the permit. So without any term limits as to how many times an operator can request an extension, owning the APD permit essentially gives these companies permanent priority in that area.

This is an issue because the current system incentivizes big operators like EOG and Anadarko to get APDs everywhere in Wyoming, basically holding a monopoly on the right to drill. They use this monopoly to then either force mineral owners to lease out their minerals to the company for well below market value, or to quash mineral development in the region until they decide they want to drill. So, when a company controls an APD, but never intends to drill, or allow any other company to drill, they are in fact harming a mineral owner’s right to produce their minerals. This issue also spreads to landowners without minerals due to the fact that oil and gas companies will not approach landowners for a surface use agreement if they do not believe that they can ever drill in an area.

The situation has become so extreme that our office has emails written from landmen who have essentially threatened our clients that if they do not lease with their company, our clients will never get their minerals drilled on their property because their company has the APD on the property. We have had other oil and gas companies also state that they were not interested in leasing another client’s minerals because another company had the APD on their property, and they were worried that they would never be able to drill. This came despite the fact that the landowner’s next door neighbor had very desirous minerals that were competitively leased.

Due to the widespread APD issue, a protest was filed to deny several Anadarko APD applications in Laramie County. The protest claimed that since Anadarko has not drilled in Laramie County for several years that their permits should be denied. Unfortunately, the protest failed. Although I wish that the protest would have won, the truth of the matter is that the ruling was correct. Although what Anadarko and other companies are doing might be morally wrong, it is not illegal under the current Wyoming Oil and Gas Conservation Commission rules.

Due to the fact that the Wyoming Oil and Gas Commission rules allow (and actually incentivize) oil and gas companies to practice this “race to the permit” we need the rules to be changed. There are several rule changes that could help protect landowner’s correlative rights. One way is to examine whether the width of the current spacing units is necessary, or if the width can be reduced. This would prevent someone in the northwest corner of a township holding a permit on someone in the southeast corner. Another way is to set term limits on renewals of APDs. This would prevent a company from holding an APD forever without drilling. Finally, there should be an examination as to whether there is actually an intent to drill and actual capital investment toward drilling within the term of the permit.

In the end, the rules that were created to protect the right to develop minerals are causing more harm than good. If the Wyoming Oil and Gas Commission and the Wyoming Legislature continue to ignore this issue, many land and mineral owners will continue to be taken advantage of by large oil producers who hold a government-created monopoly in the region. I hope that the Wyoming Oil and Gas Conservation Commission and the Wyoming Legislature will listen to the coalition of landowners coming from our office and others who are crying for change.

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