Why So Many Permits?

Each month, oil and gas companies submit hundreds of Applications for Permit to Drill (APDs) to be approved by the Wyoming Oil and Gas Conservation Commission (WOGCC).  At first glance, this might look like an unprecedented number of wells are going to be drilled in the near future in Wyoming.  However, there is more behind this approach than meets the eye.  

Right to operate

When a company applies for an APD, it does not necessarily mean that they intend to drill the proposed well right away, if at all.

The race to file APDs with WOGCC, which has received in excess of 1,000 permits a month, is the result of oil and gas companies wanting to secure their position as the operator in a drilling and spacing unit (DSU). Any party who holds a working interest within a DSU is considered an Owner, defined as a party who has the right to drill and is allowed to file permits. That working interest could be a minority interest or majority interest.  Any Owner can file permits within a DSU; however, it is the Owner which files all the authorized spots first that will be granted the opportunity to drill and operate the authorized DSU wells. By doing this, they beat out all the other Owners who filed permits subsequently, and take control over the entire unit.  In other words, tick tock the DSU is locked and no one else can drill for the life of the permits (typically two years)!

Here’s how that works

If the company that has an approved APD in a DSU elects to drill, all interest owners will receive an Authorization for Expenditure (AFE), which is a detailed list of the projected costs of the well, and will have an opportunity to be a participating or non-participating party. Those who elect to participate in the well will pay their proportion of the drilling, completion, and operating / maintenance costs of the well, and will receive their proportion on production profits. Those who do not elect to participate in the well will take a penalty on their production payments if and when the well becomes productive, thus eliminating risk of paying for a non-economic well. If the well is economic, their payments will begin once their percentage of the well costs and penalties have been met. This is referred to as the pooling of interests in a well. 

Conclusion

These days, horizontal and vertical wells can cost several million dollars to drill and complete.  When a company secures the right to operate wells in a DSU, they become the operational “decision-maker” on the wells being drilled, completed, and produced. Other non-operating interest-holders help foot the bill for these decisions even though they do not get to take the lead on how those costs are generated.

To be able to control how the well will be drilled and completed (which can influence how successful and prolific a well turns out) while having the other interest owners help carry the costs of the drilling program carries extreme incentives.  As well, those who hold approved and authorized permits in the DSUs, even if they are not intending to drill the wells, may see increased leasehold values and potential acreage acquisitions exponentially more profitable. 

The outcome?  An unprecedented number of permits being filed with WOGCC to secure the right as an operator.