Thursday, September 26, 2013

Shell Gains Approval of Farisita Federal Unit

Despite its stated intent to leave the region, Shell Oil has been creating Federal Units in Huerfano County from its acquired federal, state, and private mineral leases. 

See the map below of the Farisita Federal Unit, an area of over 25,000 acres in the heart of Huerfano, approved by the BLM on August 21st.   You or someone you know may own land within the unit.  Federal Units facilitate oil and gas drilling by holding and extending individual leases and also holding the operator to a schedule of drilling 2 wells per year.  The details of the Farisita unit can be found in the Unit Agreements.  These and other documents are available from the BLM Public Room  in Lakewood, CO.

Here is an article detailing the unitization process submitted to the Huerfano World Journal by Roz McCain and Jeff Briggs on Sept 17:

We have been approached with questions by Huerfano County residents about the Farisita Federal Unit.  We have searched public documents and documents sent to mineral rights owners within the Farisita Federal Unit, and this is the information we have gathered.

On July 19th the Colorado State Office of the Bureau of Land Management, Dept. of Interior, US Government designated the creation of the Farisita Federal Unit for oil and gas development at the request of SWEPI, an entity of Shell Oil.  It comprises 25,301.05 acres, 29.67% BLM or federal lands, 11.38 % Colorado state lands, and 58.95% private holdings.  A federal unit must contain at least 10% federal acres.  The unit stretches from the Phase 4 Majors Ranch development to within a few miles of Gardner.  It includes 3 already approved Shell well sites:  the already drilled Freeman, the Seibert 4 miles west of Farisita, and the State well site 2 miles southwest of Gardner.

25,301 acres of land unitized for oil and gas development by the Bureau of Land Management for
SWEPI LP, Houston, TX
August 21, 2013

Authority for creation can be found in the unitization provisions of the Mineral Leasing Act (first written in 1872), as amended.  Additionally, BLM states that the action is in conformance with the Royal Gorge Field Office Resource Management Plan as written in January of 1995 (close to 19 years ago).

There are three stages in the creation of a federal unit.  The first is designation which follows an initial request from the operator, in this case Shell, which was made 3/31/13. This occurred even as Shell was holding citizen information forums detailing only single well development.  (A subsequent Shell forum scheduled for August was canceled.)  In order to obtain approval, the operators must have 85% of the area’s mineral leases under contract as a lease arrangement.  UnitSource was hired by Shell to notify all the lease holders in the area before designation, as required, asking them to join in the agreement. While Shell and the mineral rights owners were in lease negotiations, all information, planning, and decision-making by BLM was kept private until the federal unit was designated.  BLM explains that this is to protect the operator from other operator competition.  As is the case with applications for permits to drill oil and gas with the state through the COGCC (Colorado Oil and Gas Conservation Commission) one must contact the BLM directly for information about federal units.  (In this case Judy Armstrong, Land Law Examiner, BLM  303-239-3761)

The second stage is approval.  Approval requires that the operator secure at least 85% of all the leases within the federal unit.  Shell accomplished this task and the Farisita federal unit was approved by the  BLM 8/21/13. Approval also requires that BLM show that it it has complied with the National Environmental Protection Act.  In this case through the US Department of the Interior BLM CO State Office Decision Record, Categorical Exclusion Review, it decided that no Environmental Impact Statement process was necessary.

The third stage is validation.  In this case an obligation well, designated to be the Siebert site west of Farisita, must be drilled by 2/21/14.  If it comes in as a producing, paygrade well, the federal unit is validated.  If not, the operator must drill a new well within six months of the first.  If that second well does not produce, then another must be drilled within six months of the second and so on until there is a pay grade well to validate the federal unit.

Once the federal unit is validated, the operator needs to present a plan of development.  At minimum after 5 years from validation, a plan of development is required demanding that at least one well is drilled every 90 days within the federal unit.

Although Shell Oil has said it is divesting its holdings in the western United States, development on the Farisita Federal Unit is going full speed ahead.  Also, thousands of acres of new leases have been bought south and north of the Farasita federal unit by both Shell and III-Exploration II, the company that was reformed from Petroglyph, in 2013.

Along with two new applications for permits to drill at the Oakdale complex now owned by Tabula Rasa LLC and even rumors that Occidental will be drilling a new CO2 well, oil and gas development is expanding in Huerfano County.

Shell Fracks and Announces It's Pulling Out (or vice-versa)

Shell fracked the Freeman 3-24 well Tuesday August 13, 2013, its first frack in Huerfano County.  The production results should be made available publicly on the COGCC web site in February after the 6 month confidentiality period on this "wild cat" well expires.  The initial results of the logs from the drilling of the well in December 2012 are already currently available on the site.  You can contact the COGCC for help finding/viewing them.   Our analysis of the logs confirmed Shell drilled directly through dikes with their horizontal well bore.

Shell also announced it is pulling out of the region, and selling its assets, but meanwhile continuing business as usual.  The Huerfano World Journal ran a front page article on August 15 titled "Shell Oil Pulling Out of Region".  Based on the timing,  the decision to pull out was made before the Freeman well was fracked.

Huerfano is not the only location Shell has announced it is divesting from.  Quoting from an article in the Denver Business Journal August 23rd:

"The company on Aug. 1 reported a 60 percent drop in second quarter results — largely due to a $2 billion write-down of its North American shale assets due to 'the latest insights from exploration and appraisal drilling results and production information.'

The company said it planned to sell some of its North American assets.

A week later, a company spokeswoman confirmed that its assets in Routt and Moffat counties in northwestern Colorado, were on the market.

And now, so are Shell’s operations on southeastern Colorado, where it’s drilled a well in Huerfano County, Shell spokeswoman Deb Sawyer told me.

'We’ve drilled one well and fracked it, and we’ll continue with our program while the assets are marketed,' she said.

In an emailed statement, Sawyer explained the company’s decision this way:

'As part of ongoing activities to strengthen our onshore tight/shale oil and gas portfolio, Shell will market certain assets in the United States. This includes our exploration project in Southeast Colorado.'

'While this area has potential, other projects within Shell’s portfolio provide more growth opportunities. Our team will continue to focus on safe operations activities while the asset is marketed and will complete our previously planned 2013 drilling program,' she said."

Net-net it is clear that Shell has decided that Huerfano County has, relative to its other oil and gas projects and opportunities, LOW POTENTIAL.

Perhaps there are also increased costs due to the high risk geology, and an educated, aware, and vigilant populace, e.g. lawsuits, increased COAs/BMPs, increased PR requirements.

Huerfano County 'assets' being for sale by Shell opens the leases up to other/smaller operators which will likely come in more ignorant of the risks here. We will need to inform them about the problems that have already occurred and ask they explain how they will mitigate the same risks.