The anatomy of an energy lease

by Jodi Peterson

Grand Junction, Colo., and neighboring Palisade — smack in the middle of the West’s energy country — are riding the economic high of the natural gas and oil boom. But now that boom threatens their water supply: The federal Bureau of Land Management has leased a big chunk of the towns’ watersheds to an oil and gas company. Community leaders aren’t pleased. In their failed attempts to prevent the leasing, they even tried to buy some of the leases themselves.

It’s a familiar story: The BLM offers a lease on sensitive land, and one or more groups protest. The agency considers the protest, but usually denies it, so another parcel joins the over 225 million Western acres offered for oil and gas development since 1982.

The Grand Junction/Palisade watershed story lays out the little-understood process of oil and gas leasing. It also underscores how such leasing represents a long-term and nearly irreversible commitment of the West’s natural resources.

Fall 2004/Winter 2005 — Energy companies in search of natural gas nominate nearly 12,000 acres of BLM and private land on Grand Mesa for leasing. These forested slopes provide drinking water for the roughly 45,000 residents of Grand Junction and Palisade.

The BLM oversees mineral leases on BLM and other federal lands as well as on thousands of privately owned acres. The agency checks that the public land lies within an area approved for energy development in its management plan. It also carries out an environmental assessment to determine the likely impacts of drilling.

Although the agency had planned to auction the watershed parcels in its May 2005 quarterly lease sale, it defers them to February 2006 so it can confirm the watershed boundaries and add stipulations, development restrictions meant to protect the watershed.

January 2006 — The two towns and local environmental groups, concerned that the stipulations are vague and could be easily waived or reduced, file protests on the watershed parcels before the 15-day pre-sale deadline.

February 9, 2006 — After a 45-day notice period, the parcels hit the block at the BLM’s quarterly lease auction in Denver. Greg Trainor, Grand Junction’s utility manager, tries to buy some of the highest-priority leases (HCN, 4/17/06: City makes desperate bid for watershed). The minimum bid in a lease auction is $2 per acre; Trainor expects to pay $20 to $40 per acre. When bidding hits $300 an acre, Trainor bows out and the parcels sell to a Denver landman. Before the BLM can issue leases, however, it must resolve the protests.

August 3, 2006 — The BLM denies the protests; the agency believes the added stipulations will sufficiently protect the watershed, says Duane Spencer, the BLM’s Colorado branch chief of fluid minerals. The agency issues leases to the new owner, Genesis Oil and Gas of Kansas City, Mo., then suspends them for up to a year so that the company and the cities can agree on a development plan.

August 17, 2006 — Genesis won’t apply for a drilling permit in the watershed until at least next year, says company vice-president Bob Behner. Once it does, the Energy Policy Act of 2005 gives the BLM 10 days to decide if the application is complete and schedule an on-site inspection. The agency must either approve or defer the permit within 30 days.

The lease, like all oil and gas leases, allows Genesis to operate for 10 years. If the parcels are still actively producing at the end of that time, the BLM will renew the lease for two more years, or as long as the well is producing paying quantities of gas.

What’s next? Palisade and Grand Junction hope to hammer out an agreement with Genesis to protect their drinking water. The Grand Junction city council plans a public hearing to consider an ordinance for watershed protection; Palisade already has such an ordinance.

Now that the land is leased, "the feds control what happens," says Greg Trainor, Grand Junction’s utility manager. "All we can do is try to control how it happens."

 

The author is HCN’s news editor.

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