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Published April 21, 2020
The University of Wyoming’s Enhanced Oil Recovery Institute (EORI) says a focus on conventional oil and gas reservoirs is key for survival of the state’s oil and gas industry during the current economic downturn.
Additionally, an EORI-affiliated organization is offering suggestions for the state’s investment strategies to mitigate the long-term effects of a sustained downturn in coal, oil and natural gas, limiting the downturn’s impact while supporting Wyoming’s energy industry.
With oil prices plummeting amid the COVID-19 pandemic, EORI predicts that unconventional drilling will become less important, while improved and enhanced recovery methods in conventional reservoirs will be crucial for Wyoming’s oil and gas sector. The institute suggests changes be considered to Wyoming Oil and Gas Conservation Commission (WOGCC) policies regarding idle well bonds and approval of water flood and disposal well applications.
“Horizontal wells drilled in unconventional reservoirs experience rapid production decline and are only economic at relatively high oil prices. As long as oil prices remain low, there will be little, if any, significant drilling of unconventional reservoirs in the foreseeable future,” EORI says. “Without new wells to offset the rapid production declines characteristic of these wells, tax revenues from unconventional reservoirs will decrease substantially.”
Conventional reservoirs are capable of being economic at lower oil prices with a much higher recovery factor than unconventional reservoirs, EORI says, adding that conventional reservoirs are the key to Wyoming’s oil and gas future.
Recovering the bulk of remaining oil reserves in these conventional reservoirs, estimated at over 1 billion barrels, depends upon improved and enhanced oil recovery methods. Those include water floods, polymer floods, surfactant floods, surfactant/polymer floods, alkaline surfactant polymer floods, microbial floods, gas floods, steam and in-situ combustion.
EORI says WOGCC’s current idle well bond policy relies on the erroneous assumption that every idle well will become an orphan well and will become the responsibility of the state to plug. Changing the well’s status to idle forces the operator to pay the bond, at $10 per foot of well penetration, or plug and abandon the well, which is often less costly.
Companies purchasing older fields with the intention of reinstating and improving production have been assessed idle well bonds sometimes exceeding the cost of the field purchase, often hampering their ability to implement their plans for field improvement. Several operators have disclosed that they will not purchase any fields in Wyoming due to the current idle well bond policy, EORI says.
Many of the wells the state is ordering to be plugged still contain recoverable reserves. Losing these reserves will result in the loss of future tax revenue for the state, according to EORI.
“Capital tied up by the idle well bond policy is a severe strain on oil and gas companies, particularly small Wyoming-based operators, and prevents more constructive actions, such as implementing improved or enhanced oil recovery programs,” the institute says.
Since 2015, the WOGCC has taken substantially longer to render water flood and disposal well approvals, EORI says. Approval rate for these projects have decreased markedly.
EORI suggests these immediate changes to WOGCC to improve production in Wyoming:
-- Eliminate the idle well bond policy.
-- Consider establishing a tiered blanket bond.
-- Incentivize enhanced oil recovery activity.
-- Establish a maximum 60-day time limit for reviewing and acting on water flood and disposal well applications.
-- Extend the time period of inactivity before a well is considered “idle” to 24 consecutive months.
-- Before the state demands that a well should be plugged, it should be evaluated to determine if it has any remaining recoverable reserves.
“All of these options come at no out-of-pocket cost to the state. None of these suggestions require any additional spending by any agency. These options provide survivability options and can greatly assist the Wyoming oil industry,” EORI says. “The net result of enacting these suggested options would be a more appealing environment for oil and gas operators to initiate improvements to production and provide an increase in recoverable reserves. Wyoming jobs will be preserved, and tax revenue to the state can be maintained or improved, during these unprecedented low oil price and COVID-19 driven times.”
To read EORI’s full report on emphasizing conventional reservoir production, go to www.eoriwyoming.org/downloads/EORI-Suggested-Options-for-Wyoming-Oil-and-Gas-Sector.pdf.
‘A Quiver of Financial Tools’
Additionally, Open Water Capital Partners, founded by Robert “Robby” Rockey, a member of EORI’s Technical Advisory Board, has published a study titled “Mitigating the Potential Impact of COVID-19 and a Crude Oil Price Collapse on Wyoming’s Energy-Centric Economy Through Actionable Investment Strategies Available to the State.”
In the study, Open Water notes the importance of understanding why the current collapse in the energy sector is remarkable -- and that the rapid decline in energy market prices follows a “veritable golden decade” of rising oil and gas market prices; increased production and demand; advancement of new technologies; and access to vast resources. The increase in production outpaced global demand, resulting in OPEC production and price wars sending the energy sector plummeting through early 2020 up to the current impacts of COVID-19.
Due to Wyoming’s long history of natural resource development, state government budgets rely heavily on revenue from oil, gas, coal and other natural resources.
“As crude oil and natural gas settle at historic lows, there is heightened risk of a downward step-change in Wyoming energy jobs,” Open Water says. “Evidenced by the prior downturn, a substantial number of these jobs may not return, leading to negative effects throughout the broader state economy.”
To curtail this impact to Wyoming’s economy, Open Water suggests a three-pronged approach to provide “immediate financial relief to operators, access to longer-term liquidity amidst the volatility, and establish a platform to more broadly diversify state revenue streams.” The paper suggests legislative action to:
-- Amend WOGCC rules to extend the permitted allowable idle well period; defer idle well bonding requirements for wells shut in as a result of the current oil price collapse; and defer required mechanical integrity testing on idle wells.
-- As permitted by the state’s master investment policy, deploy the 5 percent opportunistic allocation of the Permanent Wyoming Mineral Trust Fund to acquire distressed credit positions of Wyoming oil and gas producers and restructure those loans with more flexible terms.
-- As permitted under the state Constitution, use the Authorized Revolving Economic Development Loan Program alongside the Permanent Wyoming Mineral Trust Fund opportunistic investment allocation to inject senior liquidity to oil and gas producers by extending new credit lines and backstopping existing loans.
“Wyoming has access to a quiver of powerful financial tools to manage through this cycle,” Open Water says. “By employing a proactive and thoughtful investment approach, the state could use the tools at hand to provide nearly $500 million of liquidity to the energy sector; all the while protecting jobs, generating new sources of revenue and furthering the diversification of revenue sources.”
The Enhanced Oil Recovery Institute is committed to working with Wyoming oil producers to increase oil production and, as a result, increase tax revenues to the state. EORI works to help the state and its energy producers to recover a large resource of stranded oil in depleted oil reservoirs as rapidly, responsibly and economically as possible. To learn more, visit the EORI website.
EORI has long-standing relationships with experts and professionals in the field of enhanced oil recovery. Through its Technical Advisory Board, EORI has access to varied expertise, experience and perspectives. The board is composed of leading practitioners in the energy space throughout the United States.
About Open Water Capital Partners
Before founding Open Water, Rockey most recently served in leadership roles at Fleur de Lis Energy. He led the underwriting, acquisition and integration of the firm’s largest transaction, a package of carbon dioxide enhanced oil recovery assets in the Rockies including upstream, midstream and power components. The Open Water team is composed of lifelong energy professionals with backgrounds in engineering, consulting, management and financial expertise. For more information, go to the Open Water Capital Partners website.