Wyoming has voted to require pre- and post-drill testing of water sources within a half mile of oil and gas drilling sites. The rule requires producers to use a "radial approach" which means testing all drinking water sources within a half-mile radius of all new oil and gas wells. While the burden is unlikely to be very expensive, it does set a national precedent for continuing to establish the right equilibrium between environmental safety and energy production.
Wyoming's Republican Governor Matt Mead called the new rule, "another example of Wyoming leading the nation in striking the right balance between producing needed energy and protecting our natural resources." It's a rule that has been applauded by various environmental groups including the Environment Defense Fund and the Wyoming Outdoor Council. Both groups agree that collecting baseline samples and comparing them to post drilling samples is the best approach.
The industry, which submitted comments when the rule was being proposed, is taking a wait-and-see approach. The biggest concern is where to assign blame if a problem does arise. Wyoming drillers like Ultra Petroleum (NASDAQ:UPL) and BreitBurn Energy Partners (OTC:BBEPQ) use a variety of service contractors to drill wells in the state.
What this means is that drillers will need to document what contractors are doing. If something is found in the water during the post-drill test, it could have been caused by something a pumping or service company did.
Moreover, the new law won't have the same impact for all drillers. Ultra Petroleum, for example, is highly concentrated in Wyoming. The company has nearly 3,000 future drilling sites in the state between the Pinedale and Jonah Fields. This year it's spending more than 70% of its drilling capital in the state. If the testing does become a burden it could force Ultra to spend more of its capital in Pennsylvania's Marcellus Shale or at its newly acquired properties in Utah's Uinta Basin.
Other drillers like BreitBurn Energy Partners and LINN Energy (OTC:LINEQ) are much less concentrated in Wyoming. For example, only about 20% of BreitBurn's reserves are in Wyoming, and it drills just a handful of wells in the state each year. This past quarter it only spent $7.9 million to complete 10 wells along with six workovers. On the other hand, BreitBurn spent over $60 million to drill in its more active areas of California and Texas.
Meanwhile, LINN Energy is spending about $135 million of its $1.1 billion 2013 capital program in Wyoming's Jonah Field. That said, a bulk of that capital is being spent to drill wells in partnership with Encana (NYSE:ECA). Because of this, we could see LINN drill less wells in Wyoming in the future as Encana is looking to spend less capital to drill for natural gas in conjuction with its shift to invest in higher return oil and natural gas liquids projects. Increased costs in Wyoming due to water testing could mean that both LINN Energy and Encana spend less in Wyoming in the years ahead.
This new rule will effect Wyoming's oil and gas producers in different ways. Ultra Petroleum is highly levered to the state so its could slow down its ability to grow. Others like BreitBurn Energy Partners, LINN Energy and Encana all have options to drill elsewhere if the rule becomes burdensome. That said, if the rule becomes the new national standard it won't matter where a producer is located, so this is something investors should monitor in the future.
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