Abandoned Wells May Complicate New Marcellus Leases - Business, Government Legal News from throughout WV

Abandoned Wells May Complicate New Marcellus Leases

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Pollution of surface and groundwater may not be the only potential harm from the 13,000 abandoned gas wells across the state.

For some mineral owners, an abandoned gas well may complicate the possibility of negotiating a more profitable lease in the Marcellus shale.

"Lots of leases are being held by non-producing wells, and people don't know it or don't have the knowledge or means to terminate that old lease so they can lease again," said David McMahon, a lawyer and founding member of the West Virginia Surface Owners' Rights Organization.

McMahon gives the example of a mineral tract leased to a gas producer by a previous owner.

"The Marcellus leasing boom hits," he said. "You could now lease that (tract) for a $1,000- to $5,000-an-acre signing bonus, depending on where you are and your knowledge and bargaining skill. And you could get a royalty higher than 12.5 percent, the traditional ‘standard' one-eighth."

One hitch: There is an old well under a lease that is "held by production."

But if the mineral owner is receiving a flat-rate royalty, the well may be producing nothing, without the mineral owner's knowledge, or producing less than the "paying quantities" required by law to hold a lease.

Or if the mineral owner is receiving a typical $1 per year shut-in fee, it's possible the well is done producing and should be plugged.

Does Plugging Free Up the Lease?

Not really, in the mind of James Martin, chief of the Office of Oil and Gas at the West Virginia Department of Environmental Protection.

If the producer isn't living up to the terms of the lease, the mineral owner can simply take the producer to court, Martin said.

Technically true, McMahon said — but that puts mineral owners at an unnecessary disadvantage.

"In most legal disputes it is David versus Goliath when [an] owner takes on a gas driller," he said.  "If the state had the money to do its job and the well was plugged, then there could be no legal issue because there could be no argument whether the well is or is not producing in paying quantities."

Bona Fide Future Use is Unused

State regulations say that if a well doesn't produce for 12 months, the operator has to plug the well or receive a designation from the OOG of "bona fide future use."

Bona fide future use, according to Martin, can include temporarily inadequate pipeline capacity for carrying the gas away or shut-down during coal mining or other disruptive activity nearby. Longer term, it can be that the targeted zone is pumped out but the well could be drilled deeper or recompleted in a shallower zone at another time.

Ideally, the OOG permits database would list mostly active and plugged wells. It would have some number of wells inactive under future use designation that lasts up five years with the possibility of renewal. And it might have an unavoidable but small number of abandoned wells — wells that are no longer active and haven't received future use designation, but have not yet been plugged.

The reality is a little different.

In a database with 60,000 wells identified as active and 21,000 plugged, 13,000 are abandoned. Only 14 are listed under future use — only eight of those dated in the past five years.

"If you're trying to figure out, out of the 13,000, are there only 14 that have bona fide future use, the answer is no, but unfortunately, that's how it looks in the database now," Martin said.

"There are wells that in all likelihood probably do have a future use and unfortunately perhaps we haven't been supplied that information," he said. "Or because of constraints we have internally, we might not have reviewed that information to provide that designation to those wells."

For all practical purposes, bona fide future use is unused and any abandoned well could be plugged.

About 8,000 abandoned wells have names associated with them, some with and some without plans for plugging. The remaining 5,000 fall to the state, which plugs the ones that pose environmental or safety threats as funding comes available, Martin said. The portion of the gas well permit fees going to the Oil and Gas Reclamation Fund for this purpose in fiscal 2011 came to $234,000, enough to plug perhaps five and likely fewer than 10 wells.

Enforcement of well plugging has not been the OOG's highest priority, Martin said.

"It comes down to, largely, a matter of being able to dedicate the resources to do some of the things we might want to do in those areas," he said. "We're trying to address areas on a daily basis that likely would be considered more critical in terms of environmental issues. Sometimes the abandoned well situation maybe doesn't get the attention that it should have."

Mineral Owner Remedy

What can a mineral owner who suspects a languishing gas well do to create the opportunity for a new and better lease?

Before trying anything, it's useful to gather some information. Get the API numbers for all wells in question — those may appear on royalty or shut-in fee check stubs, but also may be found in the OOG's online "Oil and Gas Wells" database.

Check "well status" on the database. Active? Abandoned? Future use?

And check the West Virginia Geological and Economic Survey's Pipeline database to find out how much each well has produced in the past 12 months. Data are entered by the calendar year and are available with a time lag.

With that information in hand, McMahon suggests several strategies.

First, for non-producing wells, asking the OOG to order the companies to plug them may be enough, he said. If OOG says the operator is claiming a bona fide future use, ask for a copy of the document and review it to be sure it is current and correct.

Second, some producers are willing to pursue new leases when existing leases are questionable. The county courthouse record room or the OOG database are places to find out which companies are active in your area.

"It may depend on how hot your area is or how little you are willing to take as a signing bonus," McMahon said.

If these measures fail, legal means may be necessary — and may be the only strategy for wells that are producing but only in minimal, non-paying quantities.

This is probably only worthwhile if your aim is simply to terminate the lease or if you know producers are signing new leases in your area, McMahon said.

Any of these approaches may prompt a producer to release or renegotiate a lease, he said.

A document on the West Virginia Surface Owners' Rights Organization website describes these strategies in more detail.

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