Farmers Tom and Marcia Roland look west across their fence at a humming industrial site with a producing natural gas well just 300 yards away.
Another producing well in the Willow Creek field, the center of Idaho’s developing oil and gas industry, lies just 500 yards to the south. The Rolands raise cattle and irrigated crops and operate a small dairy on their 500 acres in the rich Willow Creek valley. They’re excited oil and gas production has begun all around them and resulted in royalty checks for them and their neighbors.
But they don’t think the way Idaho structures its mineral rights, a process called integration, is fair. The way it’s done today, the state divides up mineral lands into 640-acre spacing units drawn along section lines.
“Because we’re on the wrong side of the section lines on a map, we derive very little payment or benefit from these wells,” said Tom Roland, standing at his fence. “Proximity to a well doesn’t really make a difference. It’s what side of the section line you’re on.”
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The Rolands’ concerns come as Texas-based Alta Mesa Idaho has invested $150 million in developing oil and natural gas in Idaho, discovered in commercial quantities for the first time in 2010. Production began in 2013, and became more intensive in August 2015, and many hope the discovery will generate revenues to help pay for Idaho schools and boost Western Idaho’s largely agricultural economy.
But other oil and gas companies say Alta Mesa has steered Idaho decision-makers to write rules and laws that keep out competitors who would invest more in the state and who would bid up the prices of mineral rights owned by the state and Idahoans.
MANAGING MINERAL RIGHTS
Idaho’s default size for mineral rights units are 640 acres, which critics say make it easy for one company with history and infrastructure to dominate the industry. Units a fourth that size would make it easier for newcomer companies to get into Idaho’s fledgling gas industry, bid for drilling rights and avoid the expenses and complications of having to obtain permission from multiple rights owners — and then the state — to drill the big units.
At the heart of the issue is the process called “integration,” also called mandatory pooling, which is designed to protect mineral-right holders and ensure gas is not wasted. The process organizes how owners are paid for mineral rights by the company that owns the right to drill. Idaho generally divides drilling units by 640 acres along the legal section lines. If the company has agreement from all of the mineral right owners in the section, it can begin drilling without going through a formal integration process. It can also change the spacing units without going through the process if it controls all of the mineral rights in the area.
But if mineral rights holders object, the company needs to get 55 percent of the rights under its control and then go to a hearing before a examiner who decides on whether to permit drilling, which is then reviewed by the Idaho Oil and Gas Commission. This time-consuming and complicated process has slowed Alta Mesa’s development of wells in Fruitland; newcomer drillers want smaller units to reduce the need to get commission approval before drilling.
Many oil companies would simply just not come to Idaho. Some that are here now would have to consider pulling up stakes to go to a state where their resources are not drained by this spacing and their bottom line is not adversely impacted by this competitive disadvantage.
C.J. McDonald, Lone Tree Petroleum
Jim Classen has been an exploratory geologist for 50 years and serves on the Idaho Oil and Gas Commission. He took the unusual step of testifying in a hearing June 16 at the Capitol on two 640-acre units in Fruitland.
Classen, of Boise, said he decided to testify and recuse himself from deciding on the integration because he thought it was important to show why the state should offer leases in smaller units and not permit 640-acre units that are bigger than they need to be.
“I reviewed submitted proprietary seismic data, logs, test data, pressure data and up to 10 months production,” he said. “The data clearly indicates that these wells are draining considerably less than 640 acres.”
Classen told the hearing examiner that Alta Mesa has shown it knows a lot about about the subsurface geology by drilling six straight wells that turned out to be productive. Alta Mesa’s success is based on state-of-the-art seismic data, which cost the company millions, that mapped the subsurface geology of the Payette Basin of Southwest Idaho and into eastern Oregon.
Classen shared the Rolands’ view that the spacing of units should be calculated not by the section line but from the drill hole, which is aimed at an underground reservoir of natural gas, oil and other liquid petroleum products, such as condensate.
Oil and gas is found in porous and crackled rock formations, called reservoirs, thousands of feet below the surface. Classen explained that for a reservoir to be commercial, an underground “trap,” such as a fault, must exist to keep the oil and gas in place. That is the spot that becomes the target for the driller.
“The spacing unit should be a box around the trap,” said Classen.
DRILLING AND SPACING
Alta Mesa’s attorney Michael Christian said Classen’s proposal is outside of Idaho law.
“I will submit to you that there is not evidence in the record to support downspacing, even if there was a process for doing it at this time.” Christian said. “We are equally concerned about making sure everybody who should be paid is paid.”
He said Alta Mesa simply doesn’t have enough data to do the spacing the way Classen advocates.
Alta Mesa’s success and sophisticated data suggests Alta Mesa has very specific data that would allow it to lease much smaller units, said former Idaho U.S. Sen. Larry Craig, who previously lobbied for a competing Montana-based oil and gas company and now is an independent consultant.
“For any oilman who has run 3-D seismic to tell you he just doesn’t know, just simply isn’t telling the truth,” said Craig.
His position is supported by other industry representatives who commented during recent Idaho Oil and Gas Commission negotiated rulemaking by the Idaho Department of Lands.
The Idaho Statesman examined all of the drilling permits issued by the commission to Alta Mesa and its predecessor, Bridge Resources. In many of the permits, the company applied to the commission and received waivers from the requirement to drill in the center of the unit and instead drill in “exceptional locations.”
Among these waivers were wells Kauffman 1-9, ML Investments 1 and ML Investments 2, which sit in adjacent Sections 9 and 10 along the Willow Creek Road (wells are named after the landowner and the investors). Usually, the specific target data is redacted in the drilling application so the public can’t see what’s beneath the surface.
But in the case of the ML Investment 2 drilling permit, the affidavit of petroleum geologist David M. Smith was in the file with his explanation why Alta Mesa wanted to drill a second well in the unit in an “exceptional location.” Specifically, he said, two faults combine to create traps and isolated the ML1 from the ML2 target reservoirs.
Idaho Department of Lands officials said the Smith affidavit and the seismic data were Alta Mesa’s proprietary information made public by mistake.
One fault generally goes north and south and the other goes east and west toward the Kauffman 1-9 well location, just below the section line. Above the section line lie mineral resources owned by the Bureau of Land Management.
Alta Mesa’s success demonstrates the information is available to the company and the state to do more precise spacing, wrote C.J. McDonald, of Lone Tree Petroleum, a Wyoming company interested in competing in Idaho.
“It defies logic for an operator to know precisely where to drill an exceptional location, but then claim it doesn’t have the data to do so after the fact,” wrote McDonald, whose company holds some Idaho drilling rights and commented on Idaho oil and gas rules. “Not only does this affect their landowners and neighbors in a negative way, but it also affects any other operator in the state.”
Alta Mesa officials say it doesn’t care how a unit is sized or spaced, since the company will pay the same in the end. But it doesn’t want to have to change now, after spending more than four years of getting oil and gas into production under the current system.
“As someone who has invested $150 million in this state, I’ve got some real problems with that,” said Richard Brown, owner of Snake River Oil and Gas, an Alta Mesa partner in Idaho.
But former Sen. Craig said that by buying sweeping 640-acre units and then picking where it wants to drill within the unit, Alta Mesa is seeking to keep companies like McDonald’s from coming into the state and investing millions more to compete. He wants the commission to reduce the unit size to 160 acres.
“When one well can control 640 acres, that is monopolistic in character,” Craig said.
Idaho Department of Lands Director Tom Schultz said 16 out of 35 oil-producing states use 640-acre units based on section lines like Idaho as a default. Drillers have the option to use smaller units and Alta Mesa already has, he said.
Legislation passed earlier this year also requires a company that wants to use an “exceptional location” for drilling to go through a hearing and notice so interested parties can input on the decision.
Using oil-industry lingo, Alta Mesa Idaho spokesman John Foster said that Idaho is a wildcat, or frontier play, and the rules need to reflect that the industry is at the pioneering stage.
“Companies operating in these sorts of plays in other states are afforded reasonable protections for their intellectual property and investments,” he said.
(Alta Mesa has) spent significant amounts exploring for oil and gas in Idaho. We recognize others in industry may do the same and would support their efforts. But we believe the state has made reasonable judgments and set standards which preserve the competitive context in Idaho.
John Foster, Alta Mesa’s Idaho spokesman.
But David Heinz, President of Trendwell Energy, which drilled one well in Canyon County in 2014, said the state should “find a middle ground” between protecting Alta Mesa’s investment and encouraging newcomers’ efforts to bring investment to the state.
Roland the farmer doesn’t know how big a spacing unit should be, but logic and fairness dictate that units should be drawn as a circle with the well in the middle, he said.
“I don’t know if it would benefit me at all,” Roland said. “I don’t know if it would make me a nickel or it might even cost me money compared to how I’m paid right now.
“If they do that way, it will be more right and more fair to the landowners,” he said.
Drilling on and around federal land
The location of the Kauffman 1-9 well, just below the unit section line dividing private and Bureau of Land Management land, suggests BLM resources are being drained by the well, although there is no clear evidence.
That’s potentially significant for Idaho taxpayers, because half of the royalty payment to the BLM goes to the state.
In 2015, Alta Mesa asked for and got approval from the Idaho Legislature to drain BLM mineral resources — to pump oil or gas out out of an area owned by the BLM without paying — because the federal agency could not sign leases or allow drilling until it had completed its Resource Management Plan.
After the Idaho bill became law, the BLM came up with a novel program that allowed its Western Idaho resources to be leased, with the stipulation that no drilling would be permitted into its resources from the surface or directionally from adjacent land, until the BLM had completed its plan, which BLM Geologist Karen Porter said is expected in two years.
That approach might still allow some BLM oil to be drained, even with the limits on drilling. The leases allow the BLM to be paid where drilling has taken place on other lands in the unit.
So is BLM having its resources drained?
Not under current Idaho law and the 640-acre spacing, Porter said.
“It’s the lessee’s responsibility to prevent drainage of its federal mineral resource from their lease,” Porter said. If it is drained, the BLM can get compensatory royalties or a future new well drilled in the BLM unit.
The BLM does not have to follow state law for spacing, but has chosen to do so in Idaho.
Alta Mesa’s Foster also said the Kauffman 1-9 well is not draining the BLM lands.
“You are the only person we have heard make that suggestion,” Foster said. “That aside, the state has abundant rules in place to prevent drainage.”