Oil industry navigating uncertainty in lesser prairie chicken habitat

09/03/2014 6:49 PM

09/04/2014 3:03 PM

Kansas oil and gas industry members say that, to them, the lesser prairie chicken looks less like a grouse and more like a problem.

The federal government’s listing of the lesser prairie chicken as a threatened species under the Endangered Species Act in May has injected uncertainty and raised costs in their business operations and forced the cancellation of drilling jobs, say some in the industry.

It also promises to devalue the mineral rights of thousands of acres of land across 45 western Kansas counties, said one driller.

But others say that with time the industry will adjust to the new rules. The timing of the announcement was terrible, they say, and forced a lot of people to halt their activity to avoid risking fines, but they say next year a lot of the stress will go away as companies get their questions answered and make decisions.

Oil and gas drilling is just one of the activities affected, along with wind towers, cell towers, road construction and maintenance, off-road vehicle use and a number of other uses.

Drillers have three options:

They can enroll in a state-authored plan, called the Rangewide Plan, that requires potentially hefty mitigation fees, but absolves them of fines or criminal charges.

They could deal with the U.S. Fish and Wildlife Service on an individual project basis.

Or they could risk fines.

The suddenness of the arrival of the new regulations caught most producers by surprise this spring, leaving them confused and angry.

“It’s early, there are a lot of emotions driving this,” said Monica Smith Griffin, CEO of Reagan Smith Energy Solutions, an Oklahoma City consulting company. “Things will settle down. Every time there is a change in regulations, there are a lot of emotions, but then they come up with a workable solution.”

The new plan

In 1998 the U.S. Fish and Wildlife Service determined that the lesser prairie chicken should be listed under the federal Endangered Species Act because the numbers of the bird were down 90 percent from its historical population, but the service never completed the process.

In December 2012, the service announced it was considering listing the bird as threatened across its habitat in Kansas, Colorado, Oklahoma, Texas and New Mexico.

In an attempt to head off the listing, the five states wrote the Rangewide Plan, which creates a voluntary conservation mechanism, called mitigation, in which companies that operate in the lesser prairie chicken habitat could pay to have land elsewhere revert to native prairie to provide habitat for the bird.

The plan is administered by the Western Association of Fishing and Wildlife Agencies, based in Cheyenne, Wyo.

The Fish and Wildlife Service approved the states’ Rangewide Plan in November. Just 25 companies signed up, said Jim Pitman, upland game biologist for the Kansas Department of Wildlife and Parks and an author of the plan.

Since the federal listing was announced in May, the number of companies has jumped to 130 companies, he said.

How mitigation works

There are four levels of intensity in the mitigation plan. Level 1 is where birds are actually documented as living. Level 2 is land that connects the Level 1 areas together. Level 3 is potential lesser prairie chicken habitat. Level 4 is land that acts as a buffer around the first three zones.

Land classified as within the first three levels must be surveyed for leks, the mating and chick-raising areas for the lesser prairie chicken, before engaging in the activity. The biggest problem is that leks can only be surveyed in April.

If a company wants to drill, and it hasn’t surveyed the land or it wants drill within 1.25 miles of a lek it found in its survey, there are special rules that apply during the breeding season – March 1 to July 15.

Machinery can run 24 hours a day, but people must avoid the location between 3 a.m. and 9 a.m. Newly installed machinery must be muffled, while existing machinery does not require muffling. Power lines must be buried. Off-road travel within 1.25 miles of the lek should be avoided.

In the level 4 area, surveys are not required and there are no breeding season rules.

The cost of mitigation can range from nothing to $100,000 per well, and typically are $40,000 to $50,000 in Level 1 areas, according to Griffin. These fees are aimed at grasslands where the chickens live.

On the other hand, if a driller works in established farm fields, it might cost only a few hundreds dollars in mitigation, because lesser prairie chickens are very unlikely to nest there.

Because the mitigation fees can be so big, some companies may risk drilling without using that process – risking violations of the law.

Kansas’ industry is filled with small players who can’t, or won’t want to, pay the mitigation fees, Griffin said. She said she expects most won’t enroll.

“Most of them want to do the right thing and use best management practices, but when you make it so difficult to comply with – that is a deterrent,” she said.

Drilling interrupted

Val Energy has seven rigs, most are doing contract drilling for other companies.

Todd Allam, one of the owners, said the company has had to cancel seven or eight jobs, of seven to 12 days each.

Drilling a well is expensive, roughly $500,000 for a completed well. It takes a week or two – working 24 hours a day – and requires close coordination of workers, machines, equipment, utilities and contractors to make sure the operation runs as efficiently as possible to avoid expensive down time. Drilling crews typically move from one well site to the next.

“This is a moving machine in every aspect with cash on the line,” Allam said. “But everybody’s schedule is being blown up because of this. It’s totally disruptive.”

He said he has scrambled to find other jobs to replace the canceled ones, so that has disguised some of the impact, which he said is real and sizable.

The number of rigs drilling in Kansas in June, July and August was about the same as in previous months, according to oilfield services company Baker Hughes.

Dale Rufenacht, president of Questa Energy, is drilling in an area where it’s costing $200 a well for mitigation.

He has just shot 3D seismic imaging of 2,000 acres of land in Gove County and had planned to start a drilling program in March, when the announcement came down. He had an estimate, under the mitigation program, of $50,000 in mitigation fees per well to drill. He’s still trying to decide whether it’s worth it to drill there.

One thing that’s clear, he said, is that if he hadn’t already invested in the seismic imaging, he would have avoided Gove County and worked only in areas clear of the prairie chicken habitat. That’s a calculation that oil drillers all over Kansas will be making this year and in years to come.

“The real loser is the owner of the mineral rights,” he said. “Nobody will be leasing out there. That is too high a cost. That’s 10 percent of the cost of a completed well.”

Give it time

Some say it will take most of a year for the uncertainties to shake out and for the industry to get a better handle on costs and rules.

Once drillers have figured out exactly what the rules are, where not to drill, whether they can get a lek survey done, and how fast WAFWA will complete its approvals for the wells, then they can factor all of that into their business operations.

Griffin, of Reagan Smith Energy Solutions, said that it’s still too early to tell how much this will affect the industry in Kansas.

And it could be that the new rules and mitigation costs make the risk of operating in parts of western Kansas too high.

“Kansas has a lot of small operators who drill vertical wells, which don’t pay out like the horizontal wells, and they’re having a hard time swallowing the mitigation fees, which makes some of their wells uneconomical,” she said.

Michael Pisciotte, land manager of Murfin Drilling, said most of western Kansas hasn’t actually been surveyed yet. He suspects wildlife officials and oilmen will discover far more leks out there than they expect, which will compound the problem for drillers.

Some drillers will be able to keep drilling in lesser prairie chicken habitat, but many won’t.

“Once we figure out how to work within the constraints of the law, we will continue to operate there,” he said. “It will increase costs, decrease the number of ventures, and the risk will be higher. Fortunately there is ample ground outside.”

Reach Dan Voorhis at 316-268-6577 or dvoorhis@wichitaeagle.com. Follow him on Twitter: @danvoorhis.

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