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32 This chapter reports on the original research conducted in connection with this synthesis. The panel identified 13 airports to interview that have experience with oil and gas development. Five of the airports declined to participate, not wanting to put a spotlight on oil and gas activity, reporting a lack of knowledge about leases that were signed several years ago (new airport managers), or indicating that there was currently no oil and gas development on airport property. The research team subsequently contacted two additional airports and one agreed to participate, for a total sample of eight airports. Table 3 lists the airports that agreed to participate. Five of these airports offer commercial service and three serve general aviation and business aviation customers. TABLE 3 AIRPORT CASE STUDIES Commercial Airports Hub Size Organization 2015 Enplaned Passengers Dallas/Fort Worth International Large Multi-city/county 31,589,839 Denver International Large City/county 26,280,043 Elmira-Corning Regional Non-hub County 155,936 Pittsburgh International Medium Authority 3,890,681 Sloulin Field International Non-hub City 102,345 General Aviation Airports NPIAS Airport Organization Est. 2015 Operations Arlington Municipal Airport National/regional City 88,222 Denton Enterprise Airport National/regional City 164,797 Greeley-Weld County Airport National/regional Authority 122,500 Source: Prepared by KRAMER aerotek, FAA Passenger Boarding Data and 5010 Reports. Note: NPIAS = National Plan of Integrated Airport Systems. OVERVIEW OF THE CASE STUDIES Arlington Municipal Airport, Texas (GKY) Arlington Municipal, a city-owned airport, serves as a reliever for Dallas/Fort Worth International. In the early 2000s, oil and gas activity in the area was widespread because of valuable gas reserves. Hydraulic fracturing technologies enabled the exploitation of natural gas from the Barnett Shale, one of the largest onshore natural gas fields in the United States, located in the Dallas/Fort Worth area. The City of Arlington prepared methodically to put in place permits and ordinances that govern drilling within city limits. In 2008, the city negotiated a gas lease to drill under airport property from an off-airport location. Dallas/Fort Worth International, Texas (DFW) DFW is one of the nationâs largest airports in terms of land area (26.9 mi2). In 2006 it began a competitive bidding process to develop its oil and gas reserves. DFW drafted a lease that has since served as an example for other airports engaged in oil and gas extraction on their property. The lease allowed Chesapeake Energy to drill anywhere on DFW property, although not all land is available for surface use. Because gas prices were high in 2006, the airport sponsor received a large bonus payment ($10,000 per acre) plus a royalty rate of 25%. With the decline in natural gas prices, Chesapeake plans to release its rights to approximately half of the acreage of the airport. CHAPTER FIVE AIRPORT EXPERIENCES WITH OIL AND GAS DEVELOPMENT
33 Denton Enterprise Airport, Texas (DTO) Denton Enterprise, a city airport, also serves as a reliever airport for DFW. Like its counterpart Arlington, the city is located on the Barnett Shale and has used its land use authority to control surface development (well pads, roads, ingress/egress) as well as to regulate the surface location of gas wells. The city developed an extensive application, permitting, and lease process for natural gas extraction that is enabled by city ordinances. Denver International Airport, Colorado (DEN) Denver International is the largest airport in the United States by acreage (33,531 acres) and has many acres devoted to non- aeronautical activities. The airport owns its mineral estates, including oil and natural gas reserves, gravel, and sand, as well as water rights on its property. DEN has invested in both solar and geothermal energy systems. The history of oil and gas extrac- tion is interesting and long. Well before the new Denver airport was built, oil and gas wells were operating on the property. When the land was acquired, the sponsor also acquired the subsurface rights, making adjustments to well activity so as not to interfere with airport operations. In the 1990s, Denver leased out its oil and gas lands. In 2010 the City and County of Denver exercised its right of first refusal when the lessee wanted to sell its leasehold, thereby giving the city and county a working interest in the wells. Today DEN contracts with a single operator, selected through a competitive bid and qualification process, to manage the oil and gas operations. Elmira-Corning Regional Airport, New York (ELM) In 2005 a number of firms began exploring natural gas deposits in Chemung County, and in 2007 one of those firms proposed to drill six natural gas wells on ELM property. Chemung County and the FAA entered into discussions to identify the federal regulatory issues related to obtaining approval for the development. While the FAA was considering the issue of oil and gas development on airport property, the developer withdrew its offer to develop the six airport wells and moved on to other, more accessible sites off the airport. Per New York statutes, the airport sponsor entered into a pooling agreement with adjacent landowners for the purpose of natural gas extraction. In this way, the sponsor was able to participate in a royalty interest and avoid surface impacts of gas wells on airport property. In 2015 the State of New York banned high-volume fracturing at shal- low depths, and the ELM gas extraction program ceased. Greeley-Weld County Airport, Colorado (GXY) GXY is an example of oil and gas development that has occurred both on and off airport property. Interest in oil and natural gas deposits in the Niobrara Shale formation in and around Greeley began in 2005. Initially, several firms proposed to drill wells on airport property. The airport authority issued a request for proposals and in 2007 it negotiated and awarded a con- tract to Petro-Canada. The contract allowed Petro-Canada to drill 14 straight wells; all the wells were to be located on airport property but outside the aircraft operations area. In 2009, Noble Energy purchased the Petro-Canada oil and gas interests at the airport; 4 years later Noble Energy proposed to drill four diagonal wells off airport property to reach on-airport oil and gas deposits. The authority entered into a royalty agreement with Noble Energy for the four off-airport diagonal wells in 2014. Pittsburgh International Airport, Pennsylvania (PIT) Pennsylvaniaâs key natural resources are coal and the Marcellus Shale, the largest natural gas field in the United States. The airport authority was alerted to the value of its oil and gas in early 2011, when a national energy company approached the authority at a time when the price of natural gas was at a high. The authority published an RFP to the drilling community,1 but the solicitation process was frustrated by unexpected economic circumstances. By the time the authority completed and issued the RFP, the price of natural gas had plummeted from $13.65/Mcf to $8.00/Mcf. As a result, only two drilling compa- nies responded to the RFP, one with a formal bid and one with an expression of interest. A deal was reached and the lease was finalized on February 28, 2013. The lease is exclusive for a 5-year term with renewal rights conditioned on continued extrac- tion of natural gas. Drilling operations began shortly thereafter and were ongoing as of April 2017. Sloulin Field International, North Dakota (ISN) Sloulin Field is located in the Bakken Shale formation, which is the largest continuous oil formation in the continental United States. In 2009 the City of Williston published an RFP for oil and gas exploration and development on 650 acres of airport property. In the same year, the city entered into a contract for directional drilling to tap oil and gas deposits lying under
34 airport-owned land from a wellhead located a mile from airport property. Because the wellhead is not on airport property, there is no airport lease, nor was the FAA consulted for approval of the transaction. INTERVIEW QUESTIONS The research team reviewed background information about each of the eight airports and customized the interview questions. Extent and Ownership of the Mineral Estate 1. What types of mineral estates exist on or near the airport? 2. When did the airport sponsor decide to develop the mineral estates? 3. In your state, does ownership of subsurface mineral estates belong to the surface owner (i.e., was the airport sponsor determined to be the owner of subsurface minerals)? 4. Please identify the state laws, rules, and regulations that apply to oil and gas development on your airport. What is the administrative agency that regulates oil and gas development in your state? 5. How many separate oil and gas leases exist on or near the airport property? 6. When was the original lease executed and what was its approximate duration? 7. How much airport land is involved and what is the airportâs total land area? Valuation of the Mineral Estate 1. Who estimated the quantity and quality of the mineral estate? 2. Who estimated its market value? 3. What are the qualifications necessary to make such a valuation? 4. What methods are available to estimate market value? 5. Which method did you use to determine the market value? Why? 6. Did the airport use consultants? If so, what kind and who? Issues for the Airport Sponsor and Airport Stakeholders 1. What were the main areas of concern that the airport had about oil and gas development on or near airport property? Can you comment on whether the following issues were critical to the development and how the airport addressed them? a. What procedures were established to ensure the safety of oil and gas workers, airport operations, and persons using the airport? b. Were there disruptions to regular airport operations? c. How were environmental hazards addressed, as well as cleanup and reclamation of wells? d. Was engagement and approval from state and federal regulators completed in a timely manner? 2. How did the airport communicate its plans to develop oil and gas to airport tenants, users, and the community?
35 3. Have any airport users/neighbors complained about noise, fumes, or odors associated with oil and gas development by the airport? If so, how did you respond to the complaint? Working with the FAA 1. What were the steps needed to obtain FAA approval of oil and gas development on or near the airport? 2. Did the FAA offer advice and guidance on airport oil and gas development? 3. Did the oil and gas development require a NEPA evaluation? 4. Did the development result in changes in the airportâs ALP? 5. How long did it take to get approval from the FAA to proceed? 6. After initial approvals, was the FAA engaged in oversight of development and management of oil and gas activity? 7. Do you have any suggestions to improve the FAA approval process? Finding an Exploration and Development Partner and the Leasing Process 1. How did the airport find a qualified developer or developers to extract the oil or gas? 2. Can you describe the leasing process? 3. What do you consider the most important provisions of the lease? 4. How is the revenue portion of the lease structured (royalties, bonuses, land rent)? 5. Can you provide a copy of leases and permits? Leasehold Interests 1. How many years remain on the lease? 2. Are the original parties to the lease still active on the leasehold? 3. If not, how has the leasehold changed over time? Oil and Gas Revenue 1. Can you estimate the annual revenue received by the airport from the oil and gas lease? 2. Does the airport authority or municipality maintain these revenues in a separate account? 3. Has anyone ever raised revenue diversion issues over revenue from oil and gas development? 4. Approximately what are the annual costs to the airport sponsor to have oil and gas development on the airport? Can you identify those costs by category? Managing Oil and Gas Activity 1. How active are airport staff in managing oil and gas development on airport property? 2. What are the critical management issues from the airportâs perspective?
36 3. Does the airport use contractors or consultants to manage the oil and gas development? If so, what kind of consultants and what are their qualifications? Lessons Learned and Advice to Other Airports 1. Has the airport learned lessons that would change how it would handle oil and gas development in the future? 2. Any advice to other airports contemplating oil and gas development? The interviews provided interesting perspectives on airport oil and gas extraction programs, regulatory experience, and revenue results. The case studies are presented in the following sections. ARLINGTON MUNICIPAL AIRPORT (GKY) Based on research and an interview conducted with Roger Venables, Assistant Director of Community Development/Real Estate, City of Arlington Background Arlington Municipal Airport (GKY) is a city-owned, public use airport in Arlington, Texas,2 designated as a reliever airport for Dallas/Fort Worth International Airport. The airport spans an area of 500 acres and has a single 6,080-ft runway that had approximately 88,000 operations in 2015,3 primarily general aviation flights (see Figure 8). Thirteen helicopters and 252 fixed-wing aircraft are based at the airport. FIGURE 8 Arlington Municipal Airport Airfield and Proximity Map. Source: Arlington Municipal Airport. Arlington Municipal Airport ⢠Reliever airport for DFW ⢠Off-airport drilling site for on-airport gas extraction.
37 Arlington Airport recently opened its west taxiway, which allows for the planned development of additional maintenance facilities, hangars, and aviation businesses. The airport hosts 20 businesses on site. Among the larger airport tenants are Bell Helicopter and Van Bortel Aircraft Inc. Mineral Estate and Subsurface Rights in Texas The Texas Railroad Commission is the state administrative agency responsible for regulating oil and gas development. Under Texas law, ownership includes two distinct sets of rights or estates: the surface estate and the mineral estate. Initially, these two estates may be owned by one entity; however, it is common for the mineral estate and the surface estate to be owned by different entities. The division, or severance, of the two estates occurs when an owner sells the surface and retains all or part of the minerals or sells the minerals and retains the surface. If an owner does not explicitly limit the transfer of land owner- ship to âsurface onlyâ or explicitly retain the minerals when selling the surface, the mineral estate is automatically included in the sale.4 Extent and Ownership of the Mineral Estate in Arlington Arlington Airport sits atop the Barnett Shale, argued to offer the largest producible reserves of any onshore natural gas field in the United States; it underlies 5,000 mi and 17 counties throughout West Texas (see Figure 9). FIGURE 9 Barnett Shale in the Fort Worth Basin. Source: Geology.com. The development of hydraulic fracturing and horizontal drilling technologies enabled the exploitation of natural gas from the Barnett Shale. Arlington Airport is located south of downtown Arlington, Texas, in Tarrant County, an active site for drilling operations. As of April 2016, the city and surrounding area had 197 active/producing leases and 387 drilled wells, and was producing over 4 million Mcf of gas per month. Arlingtonâs Approach to Addressing Market Opportunity As interest in the exploitation of natural gas from the Barnett Shale grew, operators were actively seeking out drilling sites. By 2003, drilling activities were already taking place in nearby Fort Worth, and Arlington saw an opportunity to participate in the industry and benefit from a booming market. Beginning in 2003 and continuing in the years that followed, the city passed a series of ordinances to respond to the growing interest.5 The ordinances established the process for the management of drilling and production of gas within city limits. A city ordinance created a gas well permitting process, requiring opera- tors to (1) apply for and obtain gas well permits before conducting any drilling activities in the city; (2) meet ongoing annual inspection and reporting obligations; (3) obtain requisite insurance and show proof of fiscal feasibility; and (4) follow various technical, cleanup, and maintenance requirements. Shortly after the ordinance was enacted, the city began to enter into leases with operators for the commencement of drilling activities within city limits.
38 In 2005, a small operator approached the city, seeking to exploit the gas resources located under a city landfill. The city decided to wait another year or two before allowing such drilling operations. The city was waiting until the marketâs rising tide crested and lease bonuses paid by drilling operators reached $7,500 per acre. (The tide would continue to rise; by 2009, lease bonuses reached $30,000 per acre.) During this time, the city took certain steps, which it offers as best practices for municipalities interested in allowing drill- ing operations on city property. First, the city conducted in-house research to determine the extent and value of the mineral estate on which Arlington was located. Engineers, legal consultants, and real estate professionals came together to identify and evaluate any large contiguous tracts with mineral interest under city property. Second, the city decided to reject the standard lease that was being circulated by drilling operators, known as the Producers 88 form.6 Instead, the city hired outside counsel to develop a standard lease to offer to operators interested in drilling on city property. The standard lease would serve as a model for any drilling, exploration, or production activities that involved city- owned minerals, allowing for slight variations based on the location of the drilling (for example, whether on park, landfill, or airport property). The lease granted rights to the lessee (operator) for subsurface exploration and production activities only, which meant that the operator had to use omnidirectional drilling techniques to access the cityâs minerals. The lease further limited these activities through a depth clause that restricted production to 100 ft below the Barnett Shale. Any drilling, exploration, and production activities (including the construction of pipelines and surface locations for drilling and production activities) that required use of the cityâs surface estate were permitted by a separate use or license agreement. During this same period, the city established a sealed-bid auction process whereby tracts of city land would be advertised as ripe for drilling and bidders would be invited to submit sealed bids simultaneously, with the bid being awarded to the high- est bidder provided the lease terms were accepted. Factors Taken into Account by the City in Making a Decision to Conduct Drilling Activities at Arlington Airport As with other municipalities across Texas, the market dictated the value of the natural gas resources in the city. In 2008, the city made a determination to exploit natural gas at Arlington Airport. The approach was similar to the proactive approach the city had taken when it first decided to pursue drilling operations within city limits. Arlington Airport put together a map of all contiguous tracts of shale underneath its property and made that map avail- able to operators. The city then invited interested drilling operators to submit development proposals. The city evaluated the proposals based on (1) whether a drilling operator could develop all or nearly all of the available acreage and (2) the location of the proposed surface drilling activities. Ultimately, the city selected Chesapeake Energy as the winning bidder to develop the Arlington Airport mineral estate. Subsequently, Chesapeake acquired 55 acres adjacent to Arlington Airport. This acquisition benefited the airport because of a shared roadway that was constructed by Chesapeake, allowing for easier ingress/egress to and from airport property. The city also benefitted from this arrangement, because it received a much-needed 90-ft right of way along the western boundary of the airport, which became a driver for land development in that area. The Cityâs Approach and the Lease The city entered into a no-surface-use oil and gas lease that it developed with Chesapeake at the end of 2008. The lease placed the obligation on the drilling operator to obtain a license/permit under the cityâs ordinance to conduct drilling activities on lands adjacent to Arlington Airport. The lease also required Chesapeake to obtain the necessary approvals, licenses, and permits from the RRC, the FAA, and any federal and state environmental protection authorities. In addition, the city required Chesapeake to follow certain FAA airport setback requirements for the well pads and to obtain city approval for a plan for how the extracted gas would be transported away from the well pads. This plan was required to show the location of pipelines and specify the common carrier hired to transport the gas. Chesapeake was required to obtain a seismic license from the city separate from the lease. After approximately 5 months, Chesapeake presented its final plan to the Arlington City Council and the Planning and Zoning Commission. Market conditionsâand the fact that Arlington had taken the time to establish a seamless process for oil and gas activities in the cityâmade it possible for the bidding, lease, and approval process to be completed in under a year.
39 Once the plan was approved, Chesapeake began implementing the development of the well pads adjacent to Arlington Airport; within 9 months, the wells were producing and the airport received its first check. The wells are still producing, even though the price of natural gas has dropped dramatically. The final lease between Chesapeake and the city for drilling operations at Arlington Airport resulted in the city receiving 27% of the royalties from production free of all costs of any kind, including but not limited to production severance taxes; federal income tax; Texas ad valorem taxes or any other tax; or the costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking, or other expense directly or indirectly incurred by Chesapeake, whether as a direct charge or a reduced price or otherwise (collectively, post-production costs). Chesapeake agreed to bear 100% of all post-production costs. Later the city pursued litigation with Chesapeake over improper deductions from the cityâs royalties and the unauthorized sale of gas to a Chesapeake affiliate, which was prohibited under the lease. The city ultimately prevailed and the case was settled. Pursuant to the terms of the lease, the management of drilling operations at Arlington Airport was the responsibility of the drilling operator. The drilling operator was also responsible for any environmental cleanup and maintenance issues. Lessons Learned On the basis of its experience with Arlington Airport, the City of Arlington offers the following advice to other airports that are interested in exploiting any minerals under their property: ⢠The cityâs proactive approach in addressing a growing market opportunity served it well. The cityâs decision to carefully draft drilling ordinances and a permitting process, perform its own market analysis, draft its own (city-friendly) lease, and conduct a sealed-bid process allowed it to retain maximum control through the bidding, negotiating, and planning processes. ⢠Once the lease was signed, the city and Arlington Airport became royalty recipients, and their attention was focused on compliance with specific lease terms. ⢠Arlington Airport received noise and nuisance complaints. It is important to consider and set the times of operation of any drilling activities in advance. It is also important to implement noise abatement measures, including noise reduction screens and limited times of operation. ⢠The location of drilling sites and pipelines is critical. Efficiencies were created because the city required that common carrier pipelines be installed within the public right of way whenever practical to preserve development opportunities on adjacent lands. The pipelines had to be deep enough to avoid conflict with other public utilities, sometimes as much as 60 ft deep, depending on site-specific circumstances and bore length. ⢠A number of city residents were opposed to any drilling activities in the city and were vocal in their opposition. The city considered its mineral estate market research to be proprietary information. This approach shielded the city from having to disclose any information about the oil and gas development activities involving the cityâs mineral interest until a lease was signed and the transaction closed. It also shielded the city from having to disclose information about its mineral estate pursuant to any requests under the Texas Public Information Act. On the other hand, the land planning process to address well site locations, truck transportation routes, pipeline access, and surface operations was made public, and public comments were actively solicited. Timeline of Events ⢠2002 â City passes ordinance establishing permitting and licensing process for oil and gas drilling activities on city property. ⢠2005 â City is approached. ⢠2003â2007 â City conducts its own market assessment, develops its own lease form, and establishes a sealed-bid process. ⢠2008 â City invites bids for drilling at Arlington Airport. Winning bid awarded to Chesapeake, lease signed, planning process submitted to county council. ⢠2009 â Production at Arlington Airport begins; revenues collected. ⢠2016 â Operations continue.
40 DALLAS/FORT WORTH INTERNATIONAL (DFW) This case study is based on research and interview questions with Paul Tomme, Esq., airport legal counsel, and Jim Jackson, airport oil and gas development. Both are involved in negotiating the leasing of drill- ing rights to the mineral estate of the Dallas/Fort Worth International Airport. Information was also obtained from Weijermars (2013). Background Dallas/Fort Worth International Airport opened in 1974 and is the primary international airport serving the Dallas and Fort Worth areas. DFW is nearly 20 miles from downtown Dallas and 24 miles from downtown Fort Worth. The airport is owned and operated by the cities of Dallas and Fort Worth. DFW is ranked third in the United States in terms of operations and 10th in terms of passengers. Twenty-six passenger airlines serve the airport to 209 destinations. The airport covers more than 26.9 mi2 and consists of over 18,000 acres of real property.7 Ownership and Extent of Development of the Mineral Estate Texas produces more crude oil than any other state; daily production accounts for 29% of U.S. refining capacity. Addition- ally, the state has abundant mineral resources, including natural gas, salt, helium, and sulfur.8 In 2006, DFWâs 18,543 acres of airport property were estimated to hold 470 billion cubic ft of technically recoverable gas resources (Weijermars 2013). In 2006, DFW began a competitive bidding process for the mineral estate beneath its land. At the time, technically recoverable gas resources were estimated at 470 billion cubic ft. The airport received one bid and signed a lease of the mineral estate with Ches- apeake Energy. The duration of the lease is indefinite, as long as production continued. The lease covers all airport land, although not all the land is available for surface use. (Other airports, such as PIT, followed DFWâs lead and created their own leases.9) Chesapeake Energy originally planned to drill 330 wells; however, the company has drilled just over 100 wells. Technical challenges, higher than expected development costs, and falling gas prices combined to make the shale gas project unprofit- able for Chesapeake. Currently, owing to lack of production, Chesapeake is releasing its rights to approximately half of the acreage at the airport. Figure 10 compares the original development plan with actual wells drilled at DFW. FIGURE 10 Barnett Shale Gas Well Project at DFW. Source: Weijermars 2013. Mineral Estate and Subsurface Rights in Texas The Texas Railroad Commission is the state administrative agency responsible for regulating oil and gas development. Under Texas law, ownership includes two distinct sets of rights: the surface estate and the mineral estate. Initially, these two estates may be owned by one entity; however, it is common for the mineral estate and surface estate to be owned by different enti- ties. The severance of the two estates occurs when an owner sells the surface and retains all or part of the minerals or sells the minerals and retains the surface. If an owner does not explicitly limit the transfer of land ownership to âsurface onlyâ or explicitly retain the minerals when selling the surface, the mineral estate is automatically included in the sale.10 In this case study, the DFW mineral estate was not severed by the lease. DFW International Airport ⢠Multi-city/-county jurisdiction ⢠One of the early airport gas leases ⢠Demonstrates the importance of market tim- ing on contract terms and of gas prices on actual drilling activity and royalties
41 Factors Taken into Account by DFW in Making Oil and Gas Decisions Valuation of the DFW Mineral Estate After DFW decided to pursue exploitation of its mineral resources, the airport hired DeGolyer and MacNaughton, an inde- pendent appraiser, to estimate the quantity and quality of the mineral estate and evaluate its market value. DeGolyer and Mac- Naughton is based in Dallas and offers petroleum consulting services, resource evaluations, field studies, reservoir simulation studies, and many other services for energy and financial services companies worldwide. The firm employs more than 150 professional petroleum engineers, geologists, petro-physicists, statisticians, and energy economists.11 DeGolyer and Mac- Naughton was able to estimate the natural gas reserves and undeveloped reserves for the airportâs unconventional reservoirs.12 DFW used JP Morgan and Bank of Texas for assistance in royalty management services. Other Concerns In making its decision to allow gas extraction, DFW was particularly sensitive to potential interference with ongoing airport operations. After the lease was put in place, however, the gas extraction caused only limited and minor disruptions. To achieve this goal, DFW employed practices to limit the impact on airport operations, electric drilling rigs were used to reduce noise complaints, and âno flaringâ rules were employed to reduce fumes and odors. Issues of safety to oil and gas workers, airport operations, and persons using the airport were also addressed in the lease, including environmental hazards, cleanup, and reclamation. Finally, the airport communicated its plans to develop oil and gas to airport tenants, users, and the community through coordination with the corporate communications departments of DFW and Chesapeake Energy. DFWâs Approach Regulatory Approval Part of the planning process included obtaining the necessary approvals from the FAA, which took less than 12 months. The process also required a NEPA evaluation. The Lease Though DFW initiated a competitive bidding process to evaluate potential developers, the airport received only one bid, from Chesapeake Energy. The lease was then negotiated. From DFWâs perspective, the most important provisions of the lease were the bonus and royalty provisions. Other important provisions were the costs that can be charged to the lessor, which market to use for calculating revenues in the event the buyer is not at armâs length from the producer, the definition of acreage retained through production, and the reclamation of well sites after plugging and abandonment. Under the lease, the airport received a bonus of $10,000 per acre plus a royalty of 25%. Once the lease was finalized, the drilling plan was put into effect. The parties to the lease have changed over time. The lessee was a joint venture of Chesapeake Energy and various Minor- ity and Women Business Enterprises investors. All these investors sold their interests after market prices fell, and another company, Total, bought a 25% interest from Chesapeake Energy. As of 2016, Chesapeake Energy was planning to sell all of its interests in the Barnett Shale. Most of DFWâs revenue from the project came in two installments in 2007 and 2008 as a signing bonus. The annual rev- enue DFW has received from the lease has varied, ranging from a high of $31.4 million in 2007 to $3.8 million in 2015. All the revenue goes into DFWâs Joint Capital Account, according to bond covenants. Before signing the lease, DFW obtained permission from the FAA to use about $19 million of the bonus money to repay the initial capital investment of the owner cities, Dallas and Fort Worth. Otherwise, all revenue has remained with the airport. The approximate average annual cost to the airport sponsor to have oil and gas development on the property is $500,000 to $700,000. Management of Drilling Operations and Environmental Cleanup From the airportâs perspective, critical management issues include ensuring that natural gas production operations do not interfere with airport operations. Airport staff are involved in managing the oil and gas development on a day-to-day basis
42 when disruption or interference with airport operations is a concern. Chesapeake Energy is solely responsible for the develop- ment operations. Summary of Laws and Regulations for Airport Oil and Gas Drilling Operations in Texas All Texas oil and gas activities are subject to multiple laws and regulations. The Texas Railroad Commission13 is the main body responsible for regulating permits, proration and allocation of production, spills and leaks, and many other aspects of oil and gas operations. The RRC does not, however, adjudicate mineral or real property disputes or oil and gas contract dis- putes, so parties must take those disputes to court. The RRC also regulates environmental issues associated with exploration and production, but the Texas Commission of Environmental Quality regulates air emission and disposal wells. The state is separated into groundwater conservation districts that maintain limited authority over water use in oil and gas operations, but the areas of the state not within a district follow the common law of water use. Texas oil and gas property law covers (1) ownership of the oil and gas in place and (2) capture, which is the doctrine that gives an owner the right to produce all the oil and gas from the land.14 The surface rights and mineral rights can be separately owned and conveyed.15 Once severed, the mineral estate can be owned for as long as the parties intend.16 Typically, the mineral rights are severed through an oil and gas lease, which is the document that transfers the real property interest. This lease is interpreted under contract law principles, and it conveys the property for the stated term of the lease, leaving the lessor with a possibility of reverter and a royalty interest.17 The term specified in the lease is usually fixed in years, and Texas law implies that the lease may continue as long as oil and gas are produced (or a substitute for production occurs).18 Production, according to Texas courts, means profit, however small, over day-to-day operating and marketing expenses.19 If there is no profit from production over a reasonable time, the second prong of the test is triggered; the court must determine whether a reasonably prudent operator would continue to operate with the expectation (not speculation) of making a profit.20 Water rights issues also come into play. The lessee has an implied right to use groundwater in operations on the lease.21 Under Texas law, the lessee has the right to use as much of surface as is reasonably necessary, even if use destroys the sur- face.22 Moreover, no obligation exists for the lessee to pay damages to the surface owner unless the mineral estate uses more of the land than was reasonably necessary or commits specific acts of negligence.23 Finally, the mineral estate owner has no implied duty to restore the surface to its original condition after operations are completed.24 In general, oil and gas operations are additionally subject to federal laws such as the Airport and Airways Improvement Act of 1982,25 the National Environmental Policy Act of 1969,26 and others, which include various airspace and environmental laws. Other regulatory bodies may be involved as well, such as the EPA27 and the Federal Energy Regulatory Commission (pipeline regulation).28 Lessons Learned DFW has set an example for other airports in their oil and gas lease negotiations. Advice from DFW to other airports centers on pricing methodology for royalty payments, which DFW insists must be agreed to prior to development and contained in the lease. When an airport ensures that all requirements for operations and royalty payments are contained in the lease, this leaves no gray areas for future operations. When negotiating a lease, it is important for the airport to keep Texas law in mind in order to contract for rights it would not otherwise have under Texas common law. For example, DFW was sensitive to the risk that drilling might interfere with airport operations and negotiated with Chesapeake Energy all requirements for such operations. DFW suggests making the lease as specific as possible to help prevent disputes after the mineral extraction begins. With a well-negotiated contract, both the airport and the mineral estate owner can form a long-term, mutually beneficial relationship. Timeline of Events ⢠2006 â DFW opens competitive bidding process, receives one bid, and issues a lease to Chesapeake Energy with an indefinite term as long as production continues. ⢠2007 and 2008 â DFW receives a signing bonus in two installments. ⢠2007 â First well drilled in May. ⢠2008 â 70 wells drilled with five rigs. ⢠2009 â 31 wells drilled with five rigs.
43 ⢠2010 â One well drilled. ⢠2011 â No wells drilled. ⢠2012 â No wells drilled, four wells taken offline; DFW seeks to clarify Chesapeake drilling commitments and royalty payments. ⢠2016 â Chesapeake Energy releases rights to half of its acreage at the airport. DENTON ENTERPRISE AIRPORT (DTO) Based on research and an interview conducted with Quentin Hix, director of aviation, City of Denton. Background Denton Enterprise Airport is a city-owned, public use airport in Denton, Texas. The airportâs history dates back to World War II, when it was used as a contract glider airfield. Denton Airport became a civil general aviation airport after deactiva- tion by the U.S. Army in 1946. Today, the airport spans an area of 940 acres and is controlled by the City of Denton. DTO has a 7,002-ft runway and is one of 11 reliever airports in the Dallas/Fort Worth area. In 2015, annual operations at the airport were 165,052; 409 fixed-wing aircraft, 24 helicopters, and two gliders were based at the airport. DTO is expected to open its second runway by 2018â19. Extent and Ownership of the Mineral Estate Denton Airport sits atop the Barnett Shale, which is said to offer the largest producible reserves of any onshore natural gas field in the United States and underlies 5,000 mi and 17 counties throughout West Texas. The development of hydraulic frac- turing and directional drilling technologies enabled the exploitation of the natural gas from the Barnett Shale (see Figure 11). FIGURE 11 Barnett Shale Gas Wells in Wise and Denton Counties. Source: Fort Worth Water Department. Mineral Estate and Subsurface Rights in Texas The Texas Railroad Commission is the state administrative agency responsible for regulating oil and gas development. Under Texas law, ownership includes two distinct sets of rights: the surface estate and the mineral estate. Initially, these two estates may be owned by one entity; however, it is common for the mineral estate and surface estate to be owned by different enti- ties. The severance of the two estates occurs when an owner sells the surface and retains all or part of the minerals or sells the minerals and retains the surface. If an owner does not explicitly limit the transfer of land ownership to âsurface onlyâ or explicitly retain the minerals when selling the surface, the mineral estate is automatically included in the sale.29 Denton Enterprise Airport ⢠Gas development on airport property and directional drilling from off-airport location ⢠City developed extensive land use ordinances, permit- ting, and leasing process.
44 Local Development of Natural Gas By early 2000, news of natural gas development from the Barnett Shale had spread to Denton, and before long an oil and gas operator approached the city with a proposal for natural gas extraction from city-owned land. That same year, the city entered into an agreement for the mineral development of the first well on city property. The city faced the challenge of regulating certain aspects of oil and gas extraction from its property without trampling on the jurisdiction of the State of Texas. To address this challenge, the city used its land use authority to create a process for platting commercial and residential property, which was to exist in addition to and on top of any state requirements regulating surface and subsurface oil and gas drilling operations. The theory was that Texas controlled the drilling operations but the city controlled surface development (well pads, roads, ingress/egress issues). The platting process allowed the city to control and regulate the surface location of wells but not the oil and gas development itself. The platting process enabled the city to control surface damage to its property from oil and gas development. In fact, the city required operators to bear the costs of any road damage remediation by requiring them to enter into a separate agreement with the city as a condition of receiving a plat for gas well development on city property. Factors Taken into Account by the City in Making Oil and Gas Development Decisions The market dictated the value of the natural gas resources in the city. After the initial leases were executed for oil and gas operations on city property, operators began looking to the Denton Airport to exploit its natural gas resources. At that time (2001â02), both the market and the oil and gas extraction process in the city were well developed. The price of natural gas was at an all-time high, and operators were competing against each other, enriching many municipalities and landowners. The plan to extract natural gas at Denton Airport was consistent with the cityâs development efforts, and the platting process enabled the city to retain control over operations to some extent, at least prior to the execution of the lease and com- mencement of drilling activities. The Cityâs Approach The key development issues the city faced were related to land use and the resulting impact of drilling on airport property. The city had to determine the following: ⢠Pipeline placement, including granting a right of way and easement, ⢠Location of the access road leading to well pads/drilling sites, ⢠Requirements for permitting and inspection of drilling operations, ⢠Municipal services required to ensure safety and environmental protection in connection with drilling operations, ⢠Any impacts drilling operations would have on planned future development of Denton Airport and surrounding city property, ⢠Increased costs associated with development, and ⢠City Improvement Plan issues resulting from drilling operations. The city addressed many of these development issues through the leasing process with the drilling operator, as well as the platting process and road remediation plan. The lease of airport property led to revenues for Denton Airport as well as revenue streams for the city, including revenue from ad valorem taxes, plat and permit fees, road damage remediation assessment fees, utility fees, and public property lease payments. Regulatory Approval The drilling operations plan required obtaining necessary approvals from the FAA, including a lease, airspace, safety, and the NEPA review and approval. The operator also was required to obtain drilling permits from the RRC. The drilling operator submitted a plat for compliance with the cityâs easement, street, water, wastewater, gas, stormwater, and park requirements and fees. The cityâs platting process specifically required the operator to obtain all necessary pipeline rights of way and easements, well pad setbacks, and approvals over pipeline, well pad, and access road locations. Under its authority to govern surface property, the city commissioned an engineering study to evaluate the potential impact of drilling operations on city roads and property throughout the course of the lease. The results of the study led the city to develop a
45 road remediation plan and agreement that became an additional requirement in the regulatory approval and leasing process. Indeed, the city conditioned its plat permit grant on the successful execution of the road remediation agreement. Largely because the city had fully developed its process for oil and gas drilling on city property well before drilling opera- tions were considered at Denton Airport, the regulatory process took only a few months to complete after the decision was made to commence drilling operations at the airport. The Lease The final lease between the operator and Denton Airport was similar to leases executed between the city and operators for natural gas extraction elsewhere on city property. Most of the federal, state, and local regulatory obligations were incorporated into the lease, which was conditioned on successful compliance with such regulations. The lease was further structured to require bonus payments, ongoing royalty payments, a surface lease price for the well pad site and pipelines, and additional miscellaneous costs related to remediation, cleanup, and other public safety activities. The initial lease was executed in 2002 (with multiple amendments following), and drilling operations commenced at Den- ton Airport in 2004. By early 2010, the wellheads began production and the city and the airport began collecting revenues. Ultimately, a lease was entered into for the development of three directional drilling gas well pads (hosting 10 wells), on Denton Airport property. A fourth vertical well was built in the interior of the airport property, but it was capped within a year and is non- operational. Figure 12 shows the location of the well pads. Figure 13 shows the path of directional drilling underneath the airport. FIGURE 12 Gas Well Pads, Denton Airport. Source: City of Denton, Texas. FIGURE 13 Directional Gas Wells Below Denton Airport. Source: City of Denton, Texas.
46 Gas Revenues The Denton Airport lease produced over $8.5 million in royalty payments between 2010 and 2015. The annual royalty pay- ments are ongoing, although payment amounts have dropped dramatically since the beginning of the drilling operations owing to the drop in the price of natural gas; the original anticipated 10-year forecast of $18 million in collected revenues will likely not be reached. In addition to the royalty payments and the one-time bonus payment at the signing of the lease, annual revenues are being collected for the property lease of the well pads and surface lease to the pipelines. Management of Drilling Operations and Environmental Cleanup Pursuant to the terms of the lease, the management of drilling operations at Denton Airport is the responsibility of the drilling operator. The operator is also responsible for any environmental cleanup, which would be undertaken only in the event that an issue arises. Under the lease terms, the drilling operator is further required to comply with the road remediation agreement and meet any ongoing, newly adopted, or required FAA clearances, NEPA requirements, and state and local requirements. Lessons Learned The cityâs approach was deemed such a success that it became a model embraced by municipalities across Texas. However, the process of developing the approach and the results that ensued were not without challenges, questions raised, and lessons learned. A few of these are described here: ⢠A key lesson learned from the approach taken by Denton Airport and the city to oil and gas operation is that special care is required to ensure that the lease â anticipates as many potential issues as possible, and â contains language that allows the city or the airport to exert some level of control over drilling operations once they commence. ⢠Once a lease is signed, a city will typically lose much of its ability to control the drilling operator and ongoing drilling operations. Under the current regime in Denton, the drilling operator has little added incentive to respond to city or airport concerns or to address issues not covered by the lease terms. ⢠Another example of the importance of structuring lease terms arose in 2009, when the city renegotiated its lease with the drilling operator to change the calculation of royalty payments. The method of calculating royalty payments under the lease was a net calculation of the original liquid production at the wellhead, offset by the cost of transmission of the liquid to a processing facility. The lease was renegotiated to make clear that royalties would be paid solely on the amount of liquid produced at the wellhead. The city was successful in renegotiating the lease to its benefit, but the success was wholly attributable to favorable market conditions in 2009âa luxury that does not exist in the current economic climate. ⢠An issue that came up specifically with respect to the airport was the question of how the city would approach the FAAâs revenue diversion rules. The decision was made that Denton Airport would collect all revenue from the airport surface lease and would pay the city for the indirect costs of providing services to ensure the least amount of disruption to airport activities. These services include fire and police protection, property remediation, and outsourced operating costs related to oil and gas drilling activities. While this approach complied with the FAAâs revenue diversion rules, it created a problem for the airport when the price of natural gas dropped significantly and with it airport revenues. The airport can no longer afford to pay the indirect costs to the city. Fortunately, the city and the airport have come up with a business plan to develop the undeveloped eastern and western portions of Denton Airport property and add a second runway, which will increase the airportâs financial sustainability. ⢠An ongoing question is the extent to which cities in Texas have the authority to exert some control over drilling opera- tions and, if so, the limitations on such control. While this question was never directly raised with respect to Dentonâs creative approach to drilling operations, the issue of local government authority and jurisdiction is ongoing. For example, at the end of 2014 the city voted to ban hydraulic fracturing on city property, causing all ongoing drilling operations to cease. In response, less than 7 months later, Governor Greg Abbott signed a law prohibiting cities from banning hydrau- lic fracking on city property, citing the stateâs exclusive authority over the banning or regulating of drilling activities.30 Timeline of Events ⢠2001 â City enters into negotiations for drilling operations on non-airport city property. City passes ordinance that establishes platting process and ordinance allowing drilling operations at Denton Airport. ⢠2002 â Lease executed to commence drilling operations at Denton Airport.
47 ⢠2004 â First directional well built in the interior of Denton Airport property; capped within 1 year; three additional well pads built. ⢠2009â2010 â Well production begins; lease renegotiated to change royalty calculation. ⢠2012 â Lease amended to transfer rights to new drill operator. ⢠2014 â City passes ban on hydraulic fracking. ⢠2015 â Texas prohibits cities from banning oil and gas drilling activities. DENVER INTERNATIONAL AIRPORT (DEN) Based on interviews with the City and County of Denver, Department of Aviation: ⢠Francisco Alonzo, director of commercial property and rental cars ⢠Irina Tenenbaum, acting commercial property manager, contract administrator ⢠Julie M. Branting, manager, PetroPro Engineering, Inc. ⢠Debra Overn, senior assistant city attorney ⢠Tom Reed, supervisor, landside planning ⢠Brandon Howes, AICP, senior landside planner ⢠Mark Kunugi, acting director of environmental programs, environmental public health manager ⢠Jerry Williams, public health analyst II Background Denver International Airport (DEN) is owned and operated by the City and County of Denver. At 33,531 acres, it is the largest airport in the United States in total land areaâan area larger than the City of Boston. The airport has six runways and in 2015 had 547,648 operations (including 424,930 air carrier operations). The history of oil and gas development at DEN is interesting and reflects an early and active engagement by the City and County of Denver in oil and gas activity and a notable turnover of upstream oil and gas companies involved in exploration, drill- ing, and production. This case study highlights how DEN has transitioned from a mixed management model of airport-owned wells and third-party leases to a 100% airport-owned oil and gas operation using a contract manager, PetroPro Engineering, to manage wells, oversee production, and perform regulatory compliance. DEN currently does not explore or drill new wells. Extent and Ownership of Mineral Estates The airport is located 25 miles northeast of downtown Denver and is situated on the northern reaches of the Niobrara Denver- Julesburg Basinâan area in northeastern Colorado and parts of adjacent Wyoming, Nebraska, and Kansas that is rich in oil and gas deposits (see Figure 14). In recent years, advances in the hydraulic fracturing process have renewed interest in the extraction of the minerals in the formation, particularly in Colorado. FIGURE 14 Niobrara Denver-Julesburg Basin Shale Formation. Source: http://www. energycondor.com/the-niobrara-formation.html. Denver International Airport ⢠Existing oil wells on property ⢠Multiple operators over time ⢠DEN exercised right of first refusal to acquire wells. ⢠Third-party manager oversees oil and gas operations.
48 In the 1970s, before land was acquired for the new Denver International Airport, 71 oil and gas wells operated on what would become airport property.31 Because surface access rights in Colorado are granted to any party that owns mineral rights, the City and County of Denver acquired the mineral rights so it also would control surface use of airport land. Prior to the acquisition of land for the new airport, the City and County of Denver retained certified reservoir engineers to perform an evaluation of the existing wells. Other consultants estimated the costs of operating and maintaining these wells. The evaluations formed the basis for calculating a purchase price for the mineral rights, the active oil and gas leases, and the wells. Once the city and county acquired the mineral rights and active leases, 20 of the original wells were plugged and abandoned in order to build the airport (groundbreaking in 1989). The remaining 51 wells continued to operate until 2009.32 Denver leased mineral rights to certain airport property to Prima Oil and Gas in the 1990s. Under this lease, Prima drilled and completed 10 wells. In 2004, a subsidiary of Petro-Canada acquired Prima and obtained a second lease in 2005 to drill 20 additional wells. In 2009, Petro-Canada merged with Suncor. Of the 30 wells drilled, three were dry holes and 27 were transferred to DEN. One of the transferred wells was a shut-in well,33 four were awaiting completion,34 and 22 were producing. Shortly after the merger in 2010, Suncor announced its intention to sell the Petro-Canada leasehold and wells to Noble Energy. However, the City and County of Denver exercised its right of first refusal in the lease and acquired a working interest35 in the wells for $5.5 million. Subsequent revenue from the acquired wells paid for this investment within 20 months. Denverâs buyout of the lease and acquisition of the wells extinguished all privately held oil and gas leaseholds on airport property; the City and County of Denver now controls 100% of the mineral estates and all oil and gas activity on airport property. As of September 2016, DEN operated 73 wells on 29 of its 53 mi2 of airport property.36 Sixty-three of the wells are pro- ducing, four are shut in, five are awaiting completion or conversion, and there is one injection well for secondary recovery.37 Figure 15 illustrates the oil and gas transactions since the airport opened, and Figure 16 shows the location of oil and gas activity around Denver International Airport. FIGURE 15 Oil and Gas Well Ownership at Denver International Airport. Source: Prepared by KRAMER aerotek, 2016.
49 FIGURE 16 Oil and Gas Wells Surrounding Denver International Airport. Source: http:// blog.drillingmaps.com/2014/10/denver-airport-oil-gas wells.html (October 2014). Oil and Gas Revenues Oil and gas revenues are paid directly to the airport. Table 4 summarizes production and revenues for oil and gas activity from 2006 through 2015. TABLE 4 DENVER INTERNATIONAL AIRPORT OIL AND GAS PRODUCTION AND REVENUES, 2006â2015 Year Oil Production (BBL) Gas Production (MCF) Gross Revenue ($ Millions) Average Oil Price per BBL Average Gas Price per MCF 2015 19,263 446,622 $2.034 $36.80 $2.99 2014 19,908 482,111 $4.378 $80.00 $5.74 2013 20,714 515,472 $5.084 $92.23 $6.32 2012 25,112 596,037 $5.300 $91.50 $5.14 2011 25,527 649,756 $6.903 $92.32 $7.12 2010a 29,361 712,317 $7.283 $73.94 $7.18 2009a 16,716 360,888 $2.501 $56.80 $4.30 2008a 14,117 333,387 $3.907 $90.97 $7.87 2007a 12,390 274,107 $2.436 $64.68 $5.96 2006a 15,441 250,441 $2.425 $60.51 $5.95 Source: Denver International Airport. Note: BBL = barrels of oil. a Includes Petro-Canada mineral royalty. Midstream Transport and Wholesale Marketing of DEN Oil and Gas DEN markets its natural gas to Anadarko, the only natural gas purchaser with gathering lines and operating compression sites on or near the airport. Dry gas and gas liquids are sent to an Anadarko plant north of the airport, where settlement is calculated. This calculation determines revenues paid to the airport. Anadarko has entered into a long-term commitment with Xcel Energy to supply power plants on the Front Range. Because of legislative requirements for power plants to convert from coal to gas, gas produced on airport property is in high demand. Oil produced at DEN is sent to a Suncor refinery in Commerce City, approximately 10 mi from the airport.
50 Ongoing Management of Oil and Gas Activity at DEN DEN retains a single contractor (PetroPro Engineering, Inc.) to manage its mineral extraction program. The airportâs Revenue Management Division monitors, audits, and supervises contractors engaged in the extraction of minerals from its property. Division staff ensure that the contractors operate in a cost-efficient, safe, and environmentally conscious manner. Because DEN requires that its contractors have experience managing and operating wells of similar size in the Denver-Julesburg Basin as well as a proven record of experience dealing with multiple regulatory agencies (for example, the FAA, the EPA, and the state), DEN has had few issues with its contractors. Safety Management and Regulatory Oversight When DEN was first constructed, there were relatively few concerns regarding the conflict between airport operations and mineral development; wells that interfered with airport operations and conflicted with the airport layout plan were plugged and abandoned. After the airport was constructed and as it developed, airport staff had concerns about interference with cur- rent or future airport operations and development and the environmental effects of mineral extraction. Thus, while drilling operations outside the secured area are preferred, some operations within the aircraft operations area are necessary. Efforts are made to separate such activities from aircraft operations. The airport works closely with the FAA to monitor existing wellheads, and new wells are evaluated and sited so they do not conflict with existing uses or have potential adverse effects. Environmental issues have been addressed through the contracting process by requiring contractors who participate in drilling activities to follow DEN environmental policies as well as all applicable federal, state, and local laws.38 DEN has never experienced operations problems related to oil and gas wells, nor has the airport received complaints from its neighbors regarding its mineral extraction program. DEN planners work closely with the FAA to obtain Air Space Determinations related to its mineral extraction program. Regular notifications are provided to DEN Operations and the FAA whenever wellhead construction and maintenance occur. For example, FAA Forms 7460-1, Notice of Proposed Construction or Alteration is submitted for each oil or gas well on DEN property. Following FAA approval,39 DEN staff identify each oil or gas well on the FAA-approved airport layout plan. The same forms are filed every 18 months for each well to provide notice to the FAA that temporary construction equipment may be necessary to maintain or operate the well.40 DEN staff have established protocols for environmental compliance and have not found NEPA compliance particularly onerous. To date, the FAA ADO has required DEN to file environmental assessments on the NEPA short form rather than fil- ing full environmental assessments. The short form is based on guidance contained in FAA Orders 1050.1F (Environmental Impacts: Policies and Procedures, and the Environmental Desk Reference for Airport Actions) and 5050.4B (NEPA Imple- menting Instructions for Airport Actions).41 These orders incorporate regulations developed by the Council on Environmental Quality for implementing NEPA and other federal statutes and regulations designed to protect the environment and national historic, cultural, natural, and archeological resources. DENâs experience has been that FAA approval of a NEPA short form submission typically takes 180 days; the resolution of a long form submission may take several years. Lessons Learned One of the lessons learned at DEN pertains to the filing of FAA Forms 7460. While routine maintenance at wellheads can be anticipated, repairs are often unexpected and can be of uncertain duration. The requirement to refile Forms 7460 every 18 months for temporary construction equipment is time-consuming for both DEN and the FAA. For example, if a 100-ft well construction rig is needed to repair a well, it may take a significant amount of work by DEN planning staff and the FAA to keep the air space determinations active so that repair work can take place. DEN would prefer that the determinations extend for a longer period for existing wells that have not had any operational changes. The more quickly a well is brought back online, the less revenue is lost. The inclusion and exercise of the right of first refusal in the lease turned out to be profitable for DEN. Other airports that are willing to take on the risk of a working interest in oil and gas wells might consider including the right of first refusal in their oil and gas leases. The lease term regarding right of first refusal is quoted here. DEN staff noted that the 30-day period to make a decision proved to be short: PREFERENTIAL RIGHT TO MATCH THIRD-PARTY LEASE FOR AIRPORT LANDS. Through the fifth anniversary of the Effective Date of this agreement, Lessee shall have the right to match any bona fide offer or amendment thereto by a third party
51 that is acceptable to the Lessor to lease for oil and gas exploration and production [on] any Airport lands not then subject to this Amendment, other than the Existing Lands or Additional Lands, to which this provision shall not apply. Lessee shall have thirty (30) days from the receipt of notice of such offer in which to exercise its right to match such offer. Notwithstanding the foregoing, Lessee shall have no right to match if, at the time the offer is received, Lessee has not fulfilled the Annual Budget obligation. (Denver/ Petro-Canada Resources Lease 2005) The process that DEN has developed for operating its mineral extraction program suggests another lesson. DEN staff do not actively manage mineral extraction; instead, they retain the services of a contractor to manage the various subcontrac- tors who perform actual operation, maintenance, marketing, sale, and the transportation of the minerals. DEN has found this process of administration to be efficient and financially rewarding. Timeline of Events ⢠1970â1971 â Oil and gas wellheads drilled and operated on footprint that would eventually become Denver International Airport. ⢠1986 â Land site acquired for DEN; before acquisition, DEN retains reservoir engineer to evaluate existing wells to determine purchase price for mineral rights. ⢠1989 â Groundbreaking for DEN construction ⢠1990 â DEN leases oil and gas wells to Pima Energy; Pima drills 10 new wells at DEN. ⢠2004 â Petro-Canada acquires Pima Energy. ⢠2005 â Petro-Canada drills 20 new wells. ⢠2009 â Petro-Canada merges with Suncor and drills 30 new wells at DEN (three dry holes). ⢠2010 â Suncor announces its intent to sell the Petro-Canada leasehold to Noble Energy; City and County of Denver exercises its right of first refusal and acquires the working interest. ⢠2015 â Three uneconomic wells plugged. ⢠2016 â DEN operates 73 wells on 29 of its 53 mi2 of property. ELMIRA-CORNING REGIONAL AIRPORT (ELM) Based on research and interviews with Steven Hoover, man- ager, Chemung County Budget Office, and Ann Crook, for- mer director of aviation, Elmira-Corning Regional Airport, 2007â2016. Background Elmira-Corning Regional Airport is a small commercial avia- tion airport owned and operated by Chemung County, New York. ELM consists of two runways on 1,000 acres. In 2015, the airport enplaned 155,866 passengers.42 During the same year, there were 3,580 air carrier operations and 21,544 total opera- tions.43 Chemung County straddles the south central New York border and is located in the northern reaches of the Marcellus Shale deposit (see Figure 17).44 Gas Development in Chemung County near ELM In 2005, a number of firms began exploring natural gas deposits in Chemung County; in 2007, one of those firms proposed to drill six natural gas wells on ELM property. Each well was to consist of a 1-acre pad from which directional drilling would be performed. Chemung County and the FAA entered into discussions to identify the federal regulatory issues related to obtain- ing approval for the development. While the FAA was considering the issue of mineral estate development on airport property, the developer withdrew its offer and moved on to other, less restrictive sites. One of those off-airport sites lay adjacent to the northwest corner of ELM, outside the flight path and runway approach. In 2009, the developer proposed to use directional drilling to tap natural gas deposits lying under airport-owned land. As in most jurisdictions, New York law grants to the landowner the rights to the mineral estate of a property; however, the min- eral estate can be alienated by a written document. New York law also provides that the resources of a number of owners of mineral estates may be pooled by a single developer from a single site.45 The pooled owners whose deposits are tapped from a wellhead located on another property may negotiate the terms of payment, including bonuses and royalty payments. As a Elmira-Corning Regional Airport ⢠Off-airport drilling site ⢠Pooling agreement with adjacent landowners ⢠Gas extraction terminated owing to state ban on high- volume fracturing at shallow depths.
52 practical matter, however, pooled rates are often tied to the financial terms negotiated by the owner of the host site from which the pooled reserves are tapped.46 If a landowner fails or refuses to enter into a voluntary pooling agreement, the developer may seek compulsory participation at statutory rates (NY ENV CON LAW 23-0901). FIGURE 17 Marcellus Shale Deposit. Source: Geology.com. Chemung County Approach to Gas Development and Revenues Received Initially ELM issued an RFP for on-airport well development; in 2009, the airport negotiated an off-site pooling arrangement for extraction of on-airport minerals. The airport received a signing bonus of approximately $200,000 and royalty payments as listed in Table 5. TABLE 5 CHEMUNG COUNTY ROYALTY PAYMENTS Year Royalty 2011 $28,093 2012 $98,072 2013 $86,905 2014 $10,187 2015a $13,232 Total $236,489 Source: Chemung County a Production ceased at the well in May 2015. These payments were based on an 18.75% royalty rate that was higher than the prevailing average industry rate of 12.5%. ELM was able to negotiate a higher than average royalty rate because its initial use of the RFP process encouraged competition among developers active in Chemung County.47 Airport Regulatory and Oversight Responsibilities when Pooling from Off-Airport Location Few administrative or regulatory burdens were associated with the pooling arrangement used by ELM. ELM did not moni- tor, audit, or supervise the extraction of natural gas from its property. And, because the developer tapped its reserves from an off-airport location, ELM was not responsible for satisfying regulatory and environmental regulations that would apply if the wellhead development were located on airport property. All state regulatory issues were the responsibility of the off-airport well
53 owner. No approvals were necessary from the FAA ADO because no drilling activity occurred on the surface of airport property. Except for monitoring the height and location of the drilling equipment, ELM had no responsibility for the operation of the well. One activity unique to natural gas well operation is worth noting. The process of monitoring well pressure requires the well operator, from time to time, to ignite a plume of natural gas escaping from the well capâa practice called flaring. The height and brightness of the ignited plume can vary, and it may cause a distraction to aircraft if it occurs near a runway or an approach. Flaring did not cause difficulties at ELM because the wellhead is located in an off-airport location away from active runways. ELM did not receive complaints about the developerâs activities and never felt it necessary to provide regular updates to its tenants, although the airport and the developer provided notice the first few times the developer ignited the wellhead plume and filed a Notice to Airmen whenever flaring occurred. There were no considerations related to the ALP, because the drill pad and wellhead were located off airport property. Lessons Learned ELMâs experience with the development of its mineral estate was unique. It attempted unsuccessfully to develop several on- airport sites and then, through the pooling process provided for in New York law, was allowed to participate in the develop- ment of an off-airport natural gas well. Thus, ELM gained an understanding of the regulatory burdens of on-airport mineral estate development and the significantly lighter regulatory burden of participating in an off-airport development. ELM staff recommend that airports explore participation in off-airport development wherever it is allowed. Such an arrangement enabled ELM to avoid performing an environmental study, obtaining FAA approvals, entering into leases with developers, and monitoring developer compliance. Instead, the developer monitors and reports quarterly natural gas produc- tion from the off-airport directional well and sends a royalty check directly to Chemung County. The county deposits the royalty checks into the airport enterprise fund. If pooling is allowed by state law, airports should compare and evaluate the royalty payments from on- and off-airport development and the lighter regulatory burdens related to the latter. The ELM experience suggests that requiring potential developers to participate in an RFP may result in higher royalty payments. Timeline of Events ⢠2005 â Oil and gas exploration begins in and around ELM. ⢠2007 â Oil and gas development proposal made to ELM; ELM begins discussions regarding regulatory requirements for oil and gas development on airport with FAA; FAA defers consideration of ELM request; developer withdraws ELM mineral development proposal. ⢠2009 â Oil and gas developer proposes to tap ELM minerals by drilling diagonally from an off-airport wellhead; ELM issues RFP, negotiates, and enters into contract with developer for off-airport wellhead mineral extraction. ⢠2015 â State of New York bans high-volume fracturing at shallow depths. GREELEY-WELD COUNTY AIRPORT (GXY) Based on research and an interview with Gary Cyr, director of aviation Background Greeley-Weld County Airport is a general aviation airport oper- ated by the Greeley-Weld Airport Authority in Greeley, Colo- rado. The airport has two runways that are long by general aviation standards: Runway 17/35 is 10,000 ft long and Runway 10/28 is 5,801 ft long. There are also two helipads. In 2016, 204 aircraft and six helicopters were based at the airport; according to the 5010 Airport Master Record, GXY had 122,500 GA and military operations. Airport property extends across 1,100 acres. The airportâs experience with oil and gas development includes on-airport property wells and off-site directional drilling that extracts oil from under the airport property. Greeley-Weld County Airport ⢠On- and off-airport oil and gas extraction ⢠Sponsor careful to separate oil and gas activity from AOA. ⢠Example of a successor lease
54 Extent and Ownership of the Mineral Estate Greeley is located east of the Front Range of the Rocky Mountains, 45 mi south of the Wyoming border and 63 mi directly north of Denver. The airport is located in the northern reaches of the Niobrara Shale Formation.48 FIGURE 18 Drilling Rig in Weld County, Colorado. Source: Photo by R. J. Sangosti/ Denver Post, 2013. In 2005, a number of firms began exploring for oil and natural gas deposits in the Niobrara Shale Formation in and around Greeley, and several firms proposed to drill wells on airport property. The airport authority issued an RFP; in 2007, it negoti- ated and awarded a contract to Petro-Canada. The contract allowed Petro-Canada to drill 14 straight wells on airport property but outside the aircraft operations area. In 2009, Noble Energy purchased the Petro-Canada mineral interests at the airport; 4 years later, Noble proposed to drill four diagonal wells located off airport property in order to reach on-airport oil and gas deposits. In 2014 the authority entered into a royalty agreement with Noble Energy for four off-airport diagonal wells. Neither the on-airport nor off-airport wells are close enough to the aircraft operations area to interfere with airport operations. Recruitment of Upstream Oil and Gas Company The authority retained an attorney experienced in oil and gas transactions in the Greeley-Weld County area who was familiar with the market rates for lease bonuses and royalty rates in the region. The airport director believes that using the RFP process and hiring experienced counsel helped GXY negotiate bonus payments and royalties that were higher than the average rates in the region. Bonus Payments and Royalty The authority received a signing bonus of $527 per acre49 and royalty payments of 18.74% of revenue (see Table 6). GXY estimates that the 18.75% royalty rate was 4.75% higher than the prevailing average industry rate in the region. TABLE 6 GREELEY-WELD COUNTY BONUS AND ROYALTY PAYMENTS Year Bonus/Royalties 2008 $91,664 2009 $1,007,119 2010 $1,124,792 2011 $717,404 2012 $381,495 2013 $401,303 2014 $325,033 2015 $224,627 Source: Greeley-Weld County Airport.
55 Regulatory Responsibilities In GXYâs mineral lease agreement, the well operator is responsible for compliance with all state, federal, and local regula- tions.50 Accordingly, GXY has assumed no administrative or regulatory burdens associated with the oil and gas operations at the airport. Nor do airport staff regularly monitor, audit, or supervise the extraction of natural gas from the well located on GXY property. The only significant issues that have arisen on the airport land leased by the well operator are related to site maintenance, such as cutting grass and weeds. Because the on-airport wells are located far from the aircraft operations area, airport staff have not yet had to file a Form 7460 with the FAA. However, when the on-airport wells require maintenance with cranes more than 70 feet high, GXY issues Notices to Airmen. The off-airport wells have similarly required little supervision by airport staff. Because the well operator taps airport- owned oil and gas deposits from an off-airport location, GXY is not responsible for satisfying regulatory and environmental regulations. All state regulatory issues are the responsibility of the well owner. No approvals were necessary from the FAA ADO because no drilling activity occurred on the surface of airport property. Except for monitoring the height and location of the drilling equipment, GXY has no responsibility for the operation of the well. GXY has not received any complaints about the on- or off-airport oil and gas activities, and has never felt it necessary to provide regular updates to its tenants or neighbors. The activities do not affect the ALP because the drill pad and wells are located outside the fence line and off airport property. Lessons Learned GXYâs experience with the development of its mineral estate is unusual because it has developed several on-airport sites and participated in the development of off-airport oil and gas wells too. As a result, GXY has gained an understanding of the pro- cess for leasing on-airport property for the development of its mineral estate as well as off-airport development. GXY recommends that airports attempt to locate wellheads outside the fence line and as far away from the aircraft opera- tions area as practicable to avoid the burden of filing Forms 7460, granting security clearance, and monitoring contractor activities. If an airport is unable to control the location of wells, it should explore participation in off-airport development wherever it is allowed. Airports should also shift to the developer the responsibility for compliance with all federal and state environmental and regulatory matters and should require monthly reports of oil and gas production. Because it discovered through an audit that the well operator was improperly withholding certain state taxes, GXY recommends regular audits to ensure compliance with lease and contract terms.51 The GXY experience suggests that airports should examine their state laws to determine whether a pooling arrangement for the development of minerals is allowed and should carefully weigh the difference in royalty payments from on- and off- airport development and the lighter regulatory burdens for off-airport development. The GXY experience also suggests that requiring potential developers to participate in an RFP process may result in higher royalty payments. Timeline of Events ⢠2005 â Exploration for oil and gas begins in and around GXY. ⢠2007 â GXY issues oil and gas development RFP, negotiates with Petro-Canada, and awards development contract for 14 straight-line wells on airport property. ⢠2009 â Noble Energy purchases Petro-Canada oil and gas interests at GXY. ⢠2014 â GXY enters into contract with Noble Energy for four off-airport wellheads. PITTSBURGH INTERNATIONAL AIRPORT (PIT) Based on research and an interview with counsel for the Air- port Authority Jeffrey Letwin, Esq., Saul Ewing LLP, who was part of the negotiating team for leasing drilling rights to the mineral estate of Pittsburgh International Airport Pittsburgh International Airport ⢠Extraction of gas from coal ⢠Price/Mcf critical for economic feasibility and develop- ment timing
56 Background Pittsburgh International Airport is located in Allegheny County, Pennsylvania, and is operated and managed by the Allegh- eny County Airport Authority, which was formed in 1999 as a successor to the Allegheny County Aviation Department. The authority is a municipal authority, a form of special-purpose government unit under Pennsylvania law. It oversees acquisition, financing, construction, operation, and maintenance in the Allegheny County airport system, which includes PIT and the Allegheny County Airport. It is the airport sponsor for the purposes of this case study. The authority controls the 8,800 acres of land on which PIT sits, of which 3,800 acres are available for commercial development.52 Extent and Ownership of the Mineral Estate Pennsylvaniaâs key natural resources are coal and the Marcellus Shale, the largest natural gas field in the United States (Figure 19). Southwestern Pennsylvania is one of the areas in the state that have been very active in the extraction of natural gas from the Marcellus Shale and have been working to build a booming industry around the resource. The land that PIT occupies and the land around it sit atop a sizable mineral estate that includes hydrocarbon (natural gas and byproducts) and coal. FIGURE 19 Marcellus Shale. Source: Energy Information Administration. The authority was alerted to the value of its mineral estate in early 2011 when a national energy company approached it; at the time, the regionâs interest in extracting natural gas from the Marcellus Shale was beginning to gain traction, and the price of natural gas was high. The authority issued an RFP to the drilling community,53 but the solicitation process was frustrated by unexpected economic circumstances. By the time the authority had completed and issued the RFP, the price of natural gas had plummeted from $13.65/Mcf to $8.00/Mcf. As a result, only two drilling companies responded to the RFP, one with a formal bid and one with an expression of interest. The authority negotiated a deal with the successful proponent, and the lease was finalized on February 28, 2013. The lease is exclusive for a 5-year term with renewal rights conditioned on continued extraction of natural gas. Drilling operations began shortly thereafter and are ongoing. Mineral Estate and Subsurface Rights in Pennsylvania Under Pennsylvania law, ownership of subsurface mineral estates transfers with the transfer of surface ownership unless a property deed contains an express reservation of rights to the minerals, oil, or natural gas.54 Without such express reservation of rights in the deed, subsurface mineral rights transfer to the owner of the surface rights. In this case, Allegheny County owns the land that the authority controls. When the authority decided to lease the PIT mineral estate, it faced the question of subsurface rights and the proceeds from them. The county, under its lease with the authority, would have expected to share in any revenue from the drilling, but the authority was covered by federal revenue diversion rules, promulgated by the FAA pursuant to the Airport and Airways Improvement Act of 1982, that require that any revenue from drilling activities at an airport must be used solely for airport purposes.55 The title to the mineral estate was never confirmed.
57 Factors Considered by the Authority in Making a Development Decision Valuation of the PIT Mineral Estate After the authority decided to pursue exploitation of its natural gas resources, it hired an independent appraiser to value the assets related to the mineral estate and evaluate their market value. An individual or a team of business, finance, and techni- cal experts can conduct this type of appraisal. Independent appraisers typically have technical background; in this case, the appraiser had a petroleum geology and engineering background. Other Concerns In making its decision to allow natural gas extraction, the authority considered factors such as safety, fire hazards, noise, fumes, light emissions, environmental effects and cleanup, impact on wildlife (PIT is home to a large population of whitetail deer and other wildlife), and impact on real estate development. The Authorityâs Approach The authority took time to address these factors, and many of them are specifically covered in the final lease. The authority also engaged in a lengthy and detailed planning process to ensure that drilling would not disrupt the normal operations of PIT. The authority engaged its construction and environmental engineering staff, business leaders, safety and emergency manage- ment, and other staff members to participate in the planning process. As part of the process, a team from the drilling company worked with the authority and its team to develop a drilling plan and safety procedures. The authority conferred with DFW as well as experts in the drilling industry, anticipated bidders, and the persons responsible for developing gas leases for the Pennsylvania state parks to ensure that drilling activities met the highest industry standards. Finally, the authority initiated a public input process that consisted of monthly meetings to describe the emerging plan and to solicit input from the public. Regulatory Approval Part of the planning process included obtaining the necessary approvals from the FAA, including a lease and airspace, safety, and NEPA review and approval. The process ultimately required a redesign of PITâs airport layout plan. The entire regulatory approval process took approximately 1.5 years (May 2013 to January 2015), with the environmental assessment and FAA approval taking 10 months and a subsequent environmental reevaluation taking approximately 5 months. The process for FAA approval began in May 2013 when the winning bidder hired a consultant to complete the environmen- tal assessment for oil and gas drilling at PIT. The FAA (ADO, regional, legal, and national) participated in scoping, agency coordination, public involvement, and document review as part of the EA process. The FAA issued a Finding of No Significant Impact and a Record of Division in March 2014. Owing to the care with which the project plan was developed, there were no significant issues. An environmental reevaluation was undertaken in August 2014 to address a change in the location of the compressor station and pipeline and other small project changes, such as a change in the location of lay-down areas on airport property. Approval for the environmental reevaluation was issued in January 2015. The Lease Once the RFP process was concluded and the authority had selected the winning bidder, the authority and the drilling com- pany negotiated a lease. DFW provided the authority with its lease to use as a model. The DFW lease was adapted to include specific business terms, and terms needed for the lease to comply with applicable federal and Pennsylvania legal and regula- tory requirements. A lengthy collaborative negotiation process ensued. From the authorityâs perspective, the key issues were the safety and maintenance of well pads and drilling activities, safety of airport personnel and the public, assurance that the drilling activities would have no impact on airport operations, and the economic terms of the lease. Once the lease was finalized, the drilling plan was put in motion. The lease is currently in the third year of an initial 5-year term. The revenue section of the lease calls for a bonus payment and royalties. Upfront bonus payments of $46 million were received after execution of the lease. Drilling operations began on September 8, 2014. The basis for royalty payments is 18% of the gross amount of gas extracted multiplied by the selling price. To date, no royalties have been collected.
58 Management of Drilling Operations and Environmental Cleanup The management of drilling operations at PIT is the responsibility of the winning bidder. The winning bidder is also respon- sible for any environmental cleanup, which would be undertaken only in the event that an issue arises. Under the lease terms, the winning bidder is required to meet any ongoing, newly adopted, or required FAA clearances; NEPA requirements; and state and local requirements. Lessons Learned The authority is hopeful that the revenues generated by this project will be substantial, to support existing PIT operations and create new opportunities. The ongoing costs to the authority are limited and include the costs of ensuring safety and continued nondisruptive operations and the allocation of personnel for such purposes, as well as other administrative and operational costs. So far, the process has been a smooth one. The authority attributes this success to the well-considered RFP and the bid- selection process, the collaborative spirit with which the parties negotiated the lease, meticulous planning to ensure that the drilling activities would be safe and nondisruptive, and the detailed, thoughtful execution of the entire process by a qualified, reputable, top-notch team of executives, managers, attorneys, consultants, and staff. The authority offers the following advice to other airports considering pursuit of oil and gas drilling operations: ⢠Contract with an oil and gas drilling company committed to industry best practices and a strong partnership with the airport. ⢠Have the selected oil and gas drilling company contract with a consultant to prepare the environmental assessment. This will save time in procurement and project completion. ⢠Hire a firm with airport EA experience to complete the FAA and NEPA clearances. ⢠Be prepared for community opposition to fracking and possible opposition from national groups. ⢠The FAA will likely ask for more detail on the EA. The ability to quickly provide details will facilitate the process. ⢠FAA commitment and close coordination can facilitate timely completion of the EA. ⢠Be prepared for schedule fluctuations for construction, drilling, and production as a result of market conditions. Summary of Laws and Regulations Applicable to Airport Oil and Gas Drilling Operations in Pennsylvania All Pennsylvania oil and gas activities are subject to multiple laws and regulations, including the 2012 Oil and Gas Law,56 the Oil and Gas Conservation Law,57 the Clean Streams Law,58 the Waterway Resources Planning Act,59 the Solid Waste Manage- ment Act,60 and the Air Pollution Control Act.61 These laws and regulations apply whether the oil and gas operations are con- ducted on private or public land. A complete list of laws and regulations, along with hyperlinks, can be found on the website of the Pennsylvania Department of Environmental Protection Office of Oil and Gas Management.62 Oil and gas operations are additionally subject to federal laws such as the AAIA63 and NEPA,64 as well as various airspace and environmental laws. The PADEP Office of Oil and Gas Management is the state regulatory agency for oil and gas matters, including the extrac- tion of natural gas. PADEP issues permits, conducts inspections, and ensures regulatory compliance of wells drilled by oil and gas companies. The Pennsylvania Bureau of Aviation governs aviation activities in the state and has authority to regulate certain airport operations. Other regulatory bodies may be involved as well, such as the EPA,65 the Federal Energy Regula- tory Commission (pipeline regulation), and the Pennsylvania Department of Conservation and Natural Resources (wildlife conservation). Multi-state compact commissions must approve any oil and gas operations on airports located in the Delaware River Basin or the Susquehanna River Basin, but this does not apply to PIT. Timeline of Events ⢠October 2012 â Bids solicited. ⢠December 2012 â Bids received and the winning bidder selected. ⢠February 2013 â Winning bidder and authority execute lease agreement. ⢠May 2013 â EA initiated. ⢠March 2014 â FONSI and ROD issued. ⢠August 2014 â Environmental reevaluation initiated. ⢠September 2014 â Drilling initiated.
59 ⢠January 2015 â FONSI and ROD issued for environmental reevaluation. ⢠June 2016 â Gas flows to compressor station. SLOULIN FIELD INTERNATIONAL AIRPORT (ISN) Based on research and interviews with Steven Kjergaard, airport director, and John Kautzman, city auditor, Williston, North Dakota Background Sloulin Field International Airport is a non-hub commercial aviation airport owned and operated by the City of Williston, North Dakota. The airport is located in the northwest corner of the state, 60 mi south of the Canadian border and 18 mi east of Montana. Airport property spans 803 acres. The airfield consists of two runways. In 2015, there were 3,285 air carrier opera- tions and 102,341 enplanements.66 Including general aviation, total operations for the year were 43,000.67 In 2011, the City of Williston began discussions with the FAA and the State of North Dakota to explore redevelopment or relocation of the existing airport. After extensive site review and feasibility analysis, environmental studies, and public discussion, the city approved a decision to relocate the airport 8 mi to the northwest. In 2015, a master plan and airport layout plan for the new airport were completed and approved by the FAA. The city acquired the land in 2016; groundbreaking was in October 2016, with an anticipated opening between 2018 and 2019 (see Figure 20). FIGURE 20 â New Williston Basin International Airport. Source: http://www.xwaproject.com. The city plans to maintain ownership of Sloulin Field and of the oil and gas activity on the airport property. Extent and Ownership of the Mineral Estate Sloulin Field is located in the Bakken Shale Formation, which is one of the largest continuous oil formations in the continental United States.68 The formation was originally discovered in the early 1950s, when Henry Bakken, a farmer in North Dakota, was surprised to learn that his property was sitting atop an oil reserve estimated to contain upward of 18 billion barrels of oil.69 The Bakken Shale Formation occupies approximately 200,000 mi2 beneath Montana, North Dakota, and Saskatchewan, Canada, and produces about 700,000 barrels of oil a day. The area around the current Williston Airport has been the site of significant oil and gas exploration and development for some time. Mineral rights in North Dakota may be owned by the same person who owns the surface of the land (the surface owner), or they may be owned by another person, in which case they are considered to be severed from the surface rights. In the case of Sloulin Field, the city owns both surface and subsurface rights. North Dakota law also divides oil and gas deposits into units and provides for voluntary and mandatory pooling when two or more owners share mineral deposits located in a single designated unit. Pooling allows all the mineral rights owners in a single unit to share the costs and benefits of mineral development within that unit (N.D.C.C. § 38-08-08). Sloulin Field International Airport ⢠Off-airport directional drilling for oil and gas ⢠Airport is relocating but keeping revenue-producing property.
60 Oil and Gas Development on Airport Property In 2009, the city published an RFP for oil and gas exploration and development on 650 acres of airport property. The city did not retain a consultant to estimate the mineral reserves located on ISN property; instead, it relied on the sophistication of the oil and gas firms operating in the region that submitted development proposals. The city did retain counsel experienced in oil and gas transactions in the region to review the matter and draft the necessary transactional documents. The city accepted the proposal of Brigham Oil and Gas and, in 2009, entered into a contract for directional drilling to tap oil and gas deposits lying under airport-owned land from a wellhead located a mile from airport property. Because the well- head is not on airport property, ISN and Brigham Oil and Gas did not enter into an airport lease, nor was FAA consultation or approval necessary for the transaction. Oil and Gas Revenue The agreement required a one-time bonus payment of $750 per acre ($487,500) in addition to monthly royalty payments. The cityâs royalty payments for the years 2012 through 2015 are shown in Table 7. TABLE 7 CITY OF WILLISTON ROYALTY PAYMENTS FROM OIL AND GAS DEVELOPMENT AT ISN Year Royalty Payments 2012 $648,348 2013 $528,085 2014 $370,909 2015 $100,214 Source: City of Williston, North Dakota. To avoid revenue diversion issues, the city established an enterprise fund for ISN mineral extraction royalty payments; all related revenues are deposited in that fund. Mineral payments to the airport are based on a 20% royalty rate that ISN believes is slightly lower than the prevailing rate in the region. The lower royalty rate may be the result of two factors: 1. The wellhead is not located on airport property. 2. North Dakota law places certain pressures on landowners to participate in mineral extraction. The North Dakota Industrial Commission, for example, may require a landowner to participate in pooling (compulsory pooling) and may impose penalties on landowners who do not participate in the cost and risk of drilling operations within a specific unit (N.D.C.C. § 38-08-08). ISN Administrative and Regulatory Responsibilities Few administrative or regulatory burdens are associated with the extraction of minerals at ISN. The airport does not monitor, audit, or supervise the extraction of minerals from its property. Moreover, because the developer taps reserves from an off- airport location, ISN is not responsible for satisfying environmental and other regulations that would apply if the wellhead development were located on airport property. All state regulatory issues are likewise the responsibility of the off-airport well developer. No FAA approvals were necessary because no drilling activity occurs on the surface of airport property. Except for monitoring the height and location of the off-airport drilling equipment, the airport has no responsibility for the operation of the well. However, ISN did file Form 7460-170 with the FAA when the wellhead was first constructed and later when it was repaired, but because the wellhead is located 6 mi from the aircraft operations area, the airport has not been required to take any additional compliance or precautionary action. Airport management has not experienced any FAA or tenant issues related to drilling activity.71 Nevertheless, because the developer had not previously conducted operations near an airport, ISN staff conducted an educational program to make certain that the well operator understood the relevant federal regulations and that its activities would be consistent with its proximity to an airport.
61 Lessons Learned On-Airport Versus Off-Airport The airport director recommends that airports explore participation in an off-airport wellhead development wherever it is allowed. Such an arrangement has freed the airport from performing several administrative tasks and satisfying regulatory requirements, including undertaking an environmental study, obtaining FAA approvals, entering into leases with develop- ers, and monitoring developer compliance. Instead, the developer monitors and reports monthly mineral production from the off-airport directional well and sends a royalty check directly to the city for deposit in the airportâs enterprise fund. The ISN experience suggests that airports should examine their state laws to determine whether participation in off-airport well devel- opment is permitted and should carefully consider the difference in royalty payments from on- and off-airport development and the lighter regulatory burdens for off-airport mineral development. Provisions in Tenant Leases The airport director also found it helpful to insert in tenant leases a provision that authorizes the airport to develop its min- eral rights at its discretion. Although no tenants have objected to the airportâs development of its mineral estate, the director believes that this lease provision would prove helpful if there were an objection. Approval of Successors The director also recommends that, if possible, airports require written airport approval of any successor to a well operator. Already at ISN, other companies have purchased the original operatorâs assets. Local Emergency Contacts ISN has found this right of approval helpful in enforcing its insistence that the well operator maintain a local point of contact in case of emergencies or conflicts with airport operations. Safety Training Finally, to avoid compromising airport operations, the director recommends that airports provide oil and gas developers who lack experience with operations near airports with sufficient guidance and training regarding airport regulatory and safety issues. Timeline of Events ⢠2009 â ISN issues RFP for oil and gas exploration and development at airport and accepts proposal of Brigham Oil and Gas for off-airport development of oil and gas wellhead. ⢠2011 â City of Williston begins state and federal discussions for relocation of ISN. ⢠2015 â ISN publishes ALP for new airport. ⢠2016 â City acquires land and breaks ground for new airport ⢠2019 â Anticipated opening of new ISN airport and retention of former airport property. ENDNOTES 1 Dallas/Fort Worth International Airport helped members of the authority staff and counsel, including Jeff Letwin, develop the drill- ing process for PIT based on DFWâs experience. 2 http://www.arlington-tx.gov/airport/ 3 FAA Air Traffic Activity System data for CY 2015. 4 http://www.rrc.state.tx.us/about-us/resource-center/faqs/oil-gas-exploration-and-surface-ownership/ 5 http://www.arlington-tx.gov/cdp-gaswells/wp-content/uploads/sites/44/2014/12/GasDrilling-Chapter.pdf
62 6 http://www.cob.unt.edu/firel/baen/Baen-%20Standard%2088%20Oil%20and%20GasFinal.pdf 7 https://www.dfwairport.com/fastfacts/; $37 billion in total economic output across North Texas is attributable to DFW. 8 https://www.reference.com/business-finance/natural-resources-texas-548641046809980; Texas also has abundant mineral resources. 9 In 2011, DFW helped members of the Allegheny County Airport Authority staff and counsel develop the drilling process for PIT. 10 http://www.rrc.state.tx.us/about-us/resource-center/faqs/oil-gas-exploration-and-surface-ownership/ 11 See http://www.demac.com/index.php/about-us/overview2/ for more details. 12 Unconventional reservoirs are essentially any reservoir that requires special recovery operations outside the conventional operating practices. Unconventional reservoirs include reservoirs such as tight-gas sands, gas and oil shales, coalbed methane, heavy oil and tar sands, and gas-hydrate deposits. 13 The official rules of the RRC are found in the Texas Administrative Code, Title 16, Part 1, Chapters 1 through 20. 14 Arco v. Railroad Commission, 346 S.W.2d 801 (Tex. 1961). 15 Lesley v. Veterans Land Bd., 352 S.W.3d 479 (Tex. 2010). 16 Day & Co. v. Texland Petroleum, Inc., 786 S.W.2d 667 (Tex. 1990) 17 Natural Gas Pipeline Co. Of America v. Pool, 124 S.W.3d 188 (Tex. 2003). 18 Ridge Oil Co. v. Guinn Ins., 148 S.W.3d 143 (Tex. 2003). 19 Clifton v. Koontz, 325 S.W.2d 684 (Tex. 1959). 20 Id. 21 Sun Oil v. Whitaker, 483 S.W.2d 808 (Tex. 1972). 22 Ball v. Dillard, 602 S.W.2d 521 (Tex. 1980) (emphasis added). 23 Humble Oil & Refining v. Williams, 420 S.W.2d 133 (Tex. 1967). 24 Warren Petroleum v. Monzingo, 304 S.W.2d 362 (Tex. 1957). 25 49 USC § 47101, et seq. 26 42 USC § 4321, et seq. 27 https://www.epa.gov/regulatory-information-sector/oil-and-gas-extraction-sector-naics-211 28 18 CFR §158.1, et seq. 29 http://www.rrc.state.tx.us/about-us/resource-center/faqs/oil-gas-exploration-and-surface-ownership 30 http://www.ibtimes.com/fracking-resumes-denton-texas-after-governor-outlaws-local-bans-oil-gas-drilling-1947031 31 Based on a report prepared by PetroPro Engineering Inc. (2016). 32 In 2009, two of these wells were plugged for economic reasons.
63 33 A shut-in well is one that is capable of producing but is not presently producing for various reasons, including lack of a suitable market, lack of facilities to produce the product, regulatory issues, economic infeasibility, or other reasons defined in the shut-in provisions contained in the oil and gas lease. 34 One of the transferred wells was completed in 2012. 35 Working interest owners pay a portion of the capital expenses and operating costs for a well based on the percentage of the acreage they own that is assigned to that well. Royalty (mineral) owners receive a portion of the revenues but are not liable for costs if they leased their mineral estate. The working interest owners incur the costs and liabilities and receive their share of the revenue, less royalties paid to the mineral owners. Any company that owns a part of a lease or mineral interest in the acreage assigned to a well may drill for oil and gas. Some wells have multiple lease owners. The company with the largest interest usually drills and operates the well through a joint operating agreement. Each lease owner is responsible for paying its share of the costs according to this agreement. If the drilling is successful, the working interest owners receive a share of the revenues based on that production. If the drilling is unsuccessful, however, the working interest owners receive no revenue and are responsible for 100% of the costs of drilling, plug- ging, and abandoning the well. 36 Three uneconomic wells were plugged in 2015. 37 The most common secondary recovery techniques are gas injection and water flooding. Gas is injected into the gas cap or water is injected into the production zone to push oil from the injection well to the producing wells. 38 The Colorado Oil and Gas Conservation Commission regulates oil and gas activities in Colorado. The agency administers permit- ting, drilling, operating, final abandonments, and the reclamation of wells. The Colorado Department of Public Health and Environ- ment regulates air and water quality according to EPA requirements (CRS Sec. 34-60-101 et seq.). 39 Although approved, each FAA determination of a DEN Form 7460 contains the explicit condition that âThe well must be removed if it interferes with any future aeronautical development.â To date, no well at DEN has been removed for this reason. 40 Because of the uncertainty over when repairs will be needed and the duration of those repairs, DEN personnel said that longer- duration FAA 7460-1 determinations would be more efficient than refiling every 18 months. However, they consider the existing 18-month duration workable. 41 For a general discussion of these guidance policies, see https://www.faa.gov/airports/eastern/environmental/media/short-form-ea- final.docx. 42 FAA, Preliminary CY 2015 Commercial Service Enplanements. 43 FAA, Air Traffic Activity System (ATAD), 2015 ELM Operations 44 The New York Department of Environmental Conservation Division of Mineral Resources administers regulations and issues per- mits for oil and gas exploration and extraction (New York Oil, Gas and Solutions Mining Law, Section 23-0301 et seq.). 45 NY ENV CON Law 23-071 (Voluntary Integration and Unitization in oil and natural gas pools and fields) (2016). See generally: http://www.dec.ny.gov/energy/1553.html 46 In addition to royalty payments, the owner of the land on which the wellhead and drilling pad are located may negotiate lease fees for the use of the land on which the pad and ancillary drilling equipment are located, travel on the land, and storage space. 47 The State of New York conducted exhaustive investigation and in 2015 issued a report that supported the stateâs decision to ban high- volume fracturing at shallow depths. See New York Department of Environmental Conservation: Final Supplemental Generic Envi- ronmental Impact Statement on the Oil, Gas and Solution Mining Regulatory Program at 34-42. The ban did not affect low-volume wells and those located in the deeper Trenton Black River Shale deposit. The wells at ELM are of the deeper kind located in the Trenton Black River Shale, which were not banned. (http://www.dec.ny.gov/docs/materials_minerals_pdf/findingstatehvhf62015. pdf), High-Volume Hydraulic Fracturing in NYS (http://www.dec.ny.gov/energy/75370.html), and Syracuse.com: New York State Officially Bans Fracking (http://www.syracuse.com/news/index.ssf/2015/06/new_york_officially_bans_hydrofracking.html).
64 48 The Colorado Oil and Gas Conservation Commission regulates oil and gas activities in Colorado. The agency administers the permit- ting, drilling, operation, final abandonment, and reclamation of wells. The Colorado Department of Public Health and Environment regulates air and water quality according to EPA requirements (CRS Sec. 34-60-101 et seq.). 49 The lease specifies 400.19 acres âmore or less,â indicating an approximate signing bonus of $210,900. 50 The agreement requires that GXY cooperate with the operatorâs efforts to satisfy all FAA and Colorado state regulatory requirements related to mineral development. The agreement also contains a broad indemnification clause that indemnifies and holds harmless the Greeley-Weld County Airport Authority for the operatorâs âactivities on the leased premisesâ Para. 14, GXY and Petro-Canada Lease dated January 24, 2008. 51 As a public entity, GXY is exempt from Colorado state taxes applicable to mineral development. Nevertheless, GXY discovered dur- ing an audit that the operator had withheld state taxes for mineral development. GXY obtained a refund of the erroneously withheld taxes. 52 http://www.flypittsburgh.com/Data/Sites/1/media/pdf/PIT_Fast_Facts.pdf. The authority owns an additional 400 acres on and near Allegheny County Airport. 53 The Dallas/Fort Worth International Airport helped members of the authority staff and counsel, including Jeff Letwin, develop the drilling process for PIT based on DFWâs experience. 54 Butler v. Powers Estate, 29 A.3d 35, 43 (Pa. Super. 2011). 55 The AAIA states, âAll revenues generated by the airport, if it is a public airport, will be expended for the capital or operating costs of the airport, the local airport system, or other local facilities which are owned or operated by the owner or operator of the airport and directly related to the actual transportation of passengers or property.â 56 58 Pa.C.S. §§ 3201-3274. 57 58 P.S. §§ 401-419. 58 35 P.S. §§ 691.1-691.1001. 59 27 Pa.C.S. §§ 3101-3136. 60 35 P.S. §§ 6018.101-6108.1003. 61 35 P.S. §§ 4001-4015. 62 http://www.dep.state.pa.us/dep/subject/advcoun/oil_gas/oil_gas.htm 63 49 USC § 47101, et seq. 64 42 USC § 4321, et seq. 65 For example, the disposal of any âfracâ water is regulated by both PADEP and the EPA, and two permits may be required (for example, when the water is disposed through an injection well). 66 FAA, Preliminary CY 2015 Passenger Boarding. 67 5010 Airport Master Record. 68 The North Dakota Industrial Commission administers regulations and issues permits for oil and gas exploration and extraction. North Dakota Century Code N.D.C.C. § 38-08-01 et seq.; North Dakota Administrative Code N.D.A.C. chap. 43-20-03 et seq. 69 https://bakkenshale.com.
65 70 Notice of Proposed Construction or Alteration. 71 The FAA is aware of ISNâs mineral extraction program and, although it has cautioned ISN about revenue diversion issues, it has not voiced any operational concerns.
