Thursday, November 10, 2011

School Trust Lands and Gas Flaring

Trust responsibilities spur state action on industry's gas burning

State Lands Office may impose royalty without sale of natural gas extracted from Trust lands

Flaring of natural gas extracted from new wells on state School Trust lands means the value of that gas and the royalty revenues it would generate to the Common School Fund are lost.

Worries about the losses prompted the Office of State Lands and Investments to propose limiting flaring from wells on its lands to 30 days beyond completion of a well before the company would have to begin paying royalties on gas it burned. Ryan Lance, the director of the Office of State Lands and Investments (OSLI), proposed the changes to the state Board of Land Commissioners last month. But the board postponed a decision and directed Lance to coordinate his regulatory planning with the Wyoming Oil and Gas Conservation Commission.

The Equality State Policy Center has been tracking the handling of mineral extraction from School Trust lands and advocating for a higher royalty rate, one more in line with the market value of the minerals. The minerals are public property and the royalty revenues support Wyoming’s public schools. Decisions that affect those revenues, such as allowing flaring, should be made openly to enable the public to understand and evaluate the rationale used to justify them.

A quick primer on School Trust Lands
Marguerite Herman of Cheyenne is the president-elect of the Children’s Land Alliance Supporting Schools (CLASS), an organization that tracks how states manage their trust lands. Wyoming’s trust lands, Herman says, encompass 3.5 million surface acres and 4 million acres of subsurface mineral rights.
“As trustee, not owners, the Land Board is bound by its fiduciary responsibility to make money from the land and to have undivided loyalty to the beneficiaries,” she has written. The trust beneficiaries are the children of the state who attend its public schools.

This graphic from the CLASS website shows income generated for public schools from state land trusts.

Meeting at the OGCC in Casper
Acting as directed, Lance and his assistant director Harold Kemp met with Tom Doll, director of the OGCC. They set up a meeting of members of the commission, and representatives of the oil and gas industry Monday (Nov. 7) to discuss the issues around flaring and figure out some initial steps. (Lance also serves as a member of the OGCC.)

The meeting got the attention of the industry and media. The Wyoming Petroleum Association sent its top staff. Companies represented included Anadarko, BP, Chesapeake, Devon Energy, Double Eagle, Fidelity Exploration and Production Co., Marathon, Noble Oil, and Yates Petroleum. Both WyoFile and the Casper Star-Tribune reported the meeting.

Doll asked attendees to gather around a pair of long tables in the OGCC conference room to lay out their issues. He passed out a sheet that noted the state now allows companies to flare a total of 6.96 million cubic feet of gas per day. Of that total, Doll noted, 1.77 million cubic per day comes from state lands. He pointed out that North Dakota, where production is booming in the Williston basin, presently allows flaring of 207 million cubic feet of gas per day.

Many issues were raised at the table, including a fundamental question about how to define a well completion, especially in the active play in southeastern Wyoming where horizontal wells may be “fracked” several times to stimulate production. Bruce Hinchey of PAW said there are other variables, particularly testing, that add to the completion time. Some company representatives said that wells producing oil may generate enough value to justify flaring the gas.

That prompted Lance to point out that the Board of Land Commissioners has a fiduciary responsibility to the School Trust. The Trust does not “get another shot at this gas stream. I don’t want completion to go on forever,” he said.

The Trust can’t have high quality gas going to the flare “whether you can sell it or not,” Lance said. If the state continues to allow burning without assessing its royalties, Lance argued, producers may not see a shared interest to work together to finance the pipelines necessary to get gas to market.

OGCC obligated to prevent waste
The OGCC’s interest in the flaring is its statutory obligation to prevent waste of the state’s valuable natural resources. One of its high profile actions to prevent waste was taken years ago when it ordered the Exxon plant at LaBarge to end venting of CO2. The company, which had argued it had no place to sell the gas, subsequently developed a market and now supplies carbon dioxide that is used to force more oil out of a number of old Wyoming oil fields, including the famous Salt Creek Field at Midwest.

The commission regulates uncompensated disposition of resources. Commissioner Bruce Williams said that while there may be some question about when a well is completed, “after 15 days of flaring, you’d better have a permit.”

The OGCC wants to put an end to past practices of allowing multiple extensions of flaring permits. Doll said some companies file requests for permission to continue flaring well before the end of the initial period of 15 days the state allows following completion. It has allowed requests for subsequent periods of flaring, but requires companies to report the volumes of gas burned.

“We’re worried about continuing on and continuing on,” Doll said Monday. The OGCC now is “telling people we’re not going to go (and allow additional periods of flaring) that third and fourth time.”

To industry worries that an operator might have to wait weeks for a hearing before the full Board of Land Commissioners, Lance noted his office could seek permission to grant exceptions to allow continued flaring after 15 days until the matter came before the board. If the board ultimately determined that charging a royalty was in order, however, the company might be required to pay royalty retroactively, back to the day it got the OSLI exception, he said.

Lance promises a proposal
Before the group adjourned, Lance said he would put together a proposal for review that would include:
  • Working with OGCC to determine when completion has occurred;
  • After completion, requiring a company to request permission for royalty-free flaring;
  • Allowing administrative approval of continued flaring, a decision that would depend on “the functional parameters’ of each individual well;
  • Retaining a full range of options for OSLI including requiring payment of a full royalty, requiring the state statutory minimum royalty of 5 percent, or allowing royalty-free flaring of gas so long as the operator traps valuable liquids;
  • Recognizing the Board of Land Commissioners’ full control of its duty to the School Trust.

When the proposal goes to industry, Lance said he wants “an iterative process” that protects the trust asset both short- and long-term.

“We’ll go back, craft something up and we’ll circulate it,” he told the group.