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BLM issues preliminary approval for 5,000-well drilling oil, gas project in Wyoming

Highlights

Powder River Basin rig count plummets to zero

Production forecast shows continue decline

Denver —

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After more than five years in the making, several producers moved a major regulatory step closer to developing a potential 5,000-well oil and natural gas project on federal land in Wyoming, but current market realities present new risks.

"This proposed amendment would allow for sustainable development of the area's oil and gas resources, while balancing the conservation of wildlife in the area and providing important economic benefits to the State of Wyoming," said Casey Hammond, US principal deputy assistant secretary for land and minerals management, in a statement.

Occidental Petroleum, Chesapeake Energy, Devon Energy, EOG Resources and Northwoods Energy collectively submitted the proposal to develop oil and gas wells on about 1.5 million acres in Converse County, Wyoming, located over the Powder River Basin, back in 2014.

The federal Bureau of Land Management opened a public comment period on July 31 concerning ts final environmental review and resource management plan amendment on the massive project. A 60-day Governor's Consistency Review also began July 31. Upon resolution of the reviews, the BLM will issue a Record of Decision on the project. If approved, the final environmental impact statement and resource management plan amendment would allow the five oil and gas companies to drill 5,000 wells over the next decade, with about 500 total wells drilled each year.

"This 5,000-well project, which allows for year-round drilling, will serve as a critical source of jobs and economic growth for Wyoming as we continue to recover from COVID-19," said US Representative Liz Cheney, Republican-Wyoming, in a separate statement.

Although drilling activity and production had been on the rise in the Powder River Basin over much of the past year, operators quickly halted development following the commodity price collapse and onset of the demand destruction related to the coronavirus in March.

That month, operators averaged a total of 20 rigs across the basin, which is located primarily in northeastern Wyoming and southeastern Montana, according to S&P Global Platts Analytics. The count plummeted to one rig in May and zero by June. Production in the basin has dipped accordingly. After averaging 748 MMcf/d over the first three months of 2020 it has since fallen by 24% to 567 MMcf/d.

The cessation in activity occurred despite the Powder River Basin climbing into the top five of internal rates of return in the US at 9%. It trails both sub-basins in the Permian as well as well as the Bakken and Haynesville shales, respectively, according to Platts Analytics. It has held on better than others due its wells producing high volumes of associated gas, which was not hit as hard as WTI by the price crunch.

However, Platts Analytics finds most producers will reign in drilling and completion activities when IRRs dip below 20%. Platts Analytics' IRRs are based on a half-cycle, after-tax analysis, which excludes sunk costs such as acreage acquisition, seismic activity and appraisal drilling.