Oklahoma Energy Jobs Act of 2017

(This post originally appeared on www.oklahomaminerals.com on April 19, 2017)

All,

House Bill 1613 and Senate Bill 284, together known as the The Oklahoma Energy Jobs Act of 2017 (“OEJA”), were introduced on January 18, 2017 and January 19, 2017, respectively. The intent of the proposed legislation is to modify the 2011 Shale Reservoir Development Act (“SRDA”).

The SRDA provided two new tools for the development of shale reservoirs. Tool one allows the drilling of a horizontal well in shale reservoirs across existing unit boundaries (i.e. the drilling of a multi-unit well) and provisions to distribute costs, production, and proceeds to each of the affected units. Tool two, which sofar has been seldom utilized, allows for the unitization of a shale reservoir.

The end state of the OEJA is to allow operators to drill multi-unit horizontal wells in all formations. Currently, under the SRDA, operators are only allowed to drill multi-unit horizontal wells in shale formations. The mechanism to achieve the proposed end state is to redefine the definition of “targeted reservoir” from a shale to include any formation potentially suited for development through a horizontal well.

Horizontal operators are clearly in support of this legislation. By drilling multi-unit wells, the operator and its partners can realize huge savings. Your columnist would be speaking out of school if he opined on the specifics of the drilling and completions disciplines, but for example, if an AFE for a one mile lateral ia $5m, then is would cost an operator $15m to develop three sections. If an AFE for a 1.5 mile lateral is 6.5m, then it would only cost $13m to develop the three sections. These savings are partly realized through the efficiencies of pad drilling, decreased rig and other rental costs and production facility centralization.

Vertical operators are opposed to this legislation. The differences of opinion between horizontal and vertical operators have caused a rift in the Oklahoma Independent Petroleum Association, the largest lobbying organization for the oil and gas industry in the state. Vertical operators are concerned that increased horizontal activity in the formations in which their wells currently produce will have a large impact on their operations. Drilling and completions undoubtedly may affect the production and future production of producing wellbores and reservoirs.

With current activity in the state so dramatically tilted in the direction of horizontal drilling, your columnist believes the OEJA will be enacted over the objections of the vertical operators, but the Oklahoma Corporation Commission is likely attempt to protect the rights of the vertical operator through administrative rulings as a type of consolation prize. A student of economics would argue that this is clearly an example of what Schumpeter coined, “creative destruction,” and an anticipated consequence of technological innovation and progress.

More to follow,

Berlin