[February 25, 2020]

The Wyoming Oil and Gas Conservation Commission (“WOGCC” or “Commission”) received more than 22,000 Applications for Permit to Drill (“APDs”) in 2018 and far surpassed that number with more than 30,000 permit applications in 2019. The influx of APDs was caused by operators looking to lock up acreage. In response to the flood of applications, the WOGCC promulgated a new APD rule, which went into effect December 20, 2019. However, in attempting to resolve the issues created by the former rule, the new rule may raise new issues. Under the former rule, the first party to file an approvable APD secured their position as the operator of the drilling and spacing unit (“DSU”) and had two years to commence drilling operations. This led to operators securing more permits than feasible to develop, while effectively locking other potential operators out of the DSU for the life of the permit. The rule was criticized for resulting in an unfair advantage to larger operators with more capital, and as detrimental to the interest of mineral owners whose estates go undeveloped.

While retaining the vast majority of the old rule, the new APD rule seeks to undo gridlock created by the old rule and to encourage actual development. Through the addition of Section 8(l), the new rule limits who may file for a new APD or extension to the owner or operator having either a spud or completed well in the DSU or the oldest pending or approved APD. Under Section 8(m), the new rule creates a process whereby an owner or operator who does not meet those criteria can trigger contested case proceedings to determine operatorship of the DSU. Section 8(m)(i) requires the parties to provide a wealth of information in contested case proceedings, including a description of their technical ability and experience, details on the percentage of working interest held within the proposed DSU and the “area,” information on the wells operated by the applicant and protestant in surrounding lands, and other information. The Commission will consider all of the information, as well as “other relevant evidence.” If the parties are deemed “equal,” the Commission will grant the permit to the party with the largest percentage of working interest ownership “combined with working interest owners who have expressed written support.”

The various factors identified in Section 8(m) grant the Commission broad discretion and also raise questions about what information is most likely to sway the Commission. For instance, parties are to provide working interest ownership for both the DSU and the “area.” The scope of the word “area” is unclear. Does the rule contemplate working interest in the neighboring sections or some broader category, and why is that relevant to the APD under review? Alternatively, if operators are of disproportionate size, will technical ability and experience always favor larger operators? It is also unclear how operators may be “deemed equal,” triggering the tiebreaker of working interest ownership and partner support. As operators seek to distinguish themselves from one another, the broad standards on supporting evidence may result in floods of information with relatively unknown value. The answers to these questions and more will undoubtedly play out in the coming months.

Despite the uncertainty, the new rule should encourage actual development by raising the stakes associated with APDs. If an operator fails to diligently develop, they will likely face a higher risk of losing operatorship in the DSU. The costs associated with obtaining and maintaining APDs are also likely to increase as owners and operators apply for or defend their operatorship and APDs through contested cases. It remains to be seen whether the WOGCC has traded a flood of APDs for a flood of contested cases to determine operatorship.

Further information regarding the new APD rule can be found on the WOGCC website.