Major oil development scrutinized: QEP plans to develop 25,000 acres in western N.D.
GRAND FORKS -- A proposal to develop a large swath of land in western North Dakota for oil production was scrutinized Wednesday during a state Industrial Commission Oil and Gas Division hearing in Grand Forks.
QEP Resources is proposing to develop the Grail-Bakken Unit, which totals 25,000 acres in McKenzie County, rather than develop smaller individual units. That would allow it to avoid setback requirements at the boundaries of individual units and, company officials said, increase oil recovery.
Its proposal will receive further review before the Oil and Gas Division makes a recommendation to the full Industrial Commission, which oversees certain utilities and industries in the state and is led by Gov. Jack Dalrymple.
Lynn Helms, director of the state Department of Mineral Resources, said that recommendation could come in January.
The location of the hearing on the University of North Dakota campus, more than five hours away from the proposed unit, was questioned from the get-go.
Dennis Johnson, a Watford City attorney representing about two dozen land and mineral owners, objected to the meeting being held in Grand Forks. He requested that the meeting be held in McKenzie County or Bismarck. The commission reserved judgment on the request but continued the hearing.
Helms said the hearing was held in Grand Forks at the request of UND officials for students to observe the proceedings.
“You have the law school, and of course oil and gas law have become a big deal in the state,” Helms said. “You have the petroleum engineering (program), you have the geological engineering school and the geology school. So those departments asked if we could bring a hearing here that involved witnesses and expertise from all of those areas.”
Oil wells in the Bakken formation are typically developed in 1,280-acre units and must stay away from 200-foot setbacks between units. By developing the unit as one large piece, an oil company can place wells at better locations.
QEP can drill an additional 26,000 feet and recover an estimated 2.7 million barrels of oil equivalent doing it this way, testified Elizabeth Sollee, a reservoir engineer for QEP. Such a development would mean fewer surface facilities and disturbances for landowners, QEP officials said.
Company representatives offered testimony and were questioned by attorneys representing mineral and landowners Wednesday during the daylong hearing.
Johnson said there are other alternatives to recovering the oil in the setback area without creating a unit. “You don’t have to create a monster 25,000-acre unit to do it.”
Developing the unit as one large area “severely impacts mineral owners’ rights and interests,” he said, adding that the proposal would affect their ability to negotiate with the company on an array of issues, as well as compensation.
“Because of a formula factor inserted into the unit plan, some of these people with very good wells will be giving part of their interest to other areas in the proposed unit where there might be poorer wells,” Johnson said.
But Charles Sherwood, QEP senior staff landman, said the formula the company used fairly distributes interest.
“We feel it’s one that most fairly allocates production to all the tracts and gives all the mineral owners their share of the enhanced production,” he said.
The unit requires approval by 60 percent of both the working-interest owners and royalty owners. At least 60 percent of working-interest owners have approved, but only 14.5 percent of royalty owners have approved the unit so far, Sherwood said.
Ed Vanover, a working-interest owner from Bismarck, testified that he opposes the unit because his analysis of oil production numbers indicates that he would lose money under the proposal.
He said he disagrees with QEP’s assertion that the unit will benefit the common good. “I think this is nearly a common disaster. It is for me.”
QEP attorney John Morrison said the company’s drilling plan is aggressive over the next two years and mineral owners should see revenue from flush production consistently through the unit.
Lyle “Rocky” Henderson, representing his family trust that owns about 2,600 mineral acres in the unit, testified that in the long run, his family should make more money under the unit plan.
But he estimates his family would lose about $9.5 million in revenue initially and it would take six to seven years before his family would make that up.
Henderson said he won’t ratify the agreement unless QEP would compensate his family trust for the “time use” of money that he’s giving up.