The city of Loveland has been approached by two oil and gas operators regarding the subsurface mineral rights on a city-owned property at the southwest corner of the Interstate 25 and Colo. 402 interchange, southeast of the city.
The Loveland City Council voted unanimously Tuesday evening in favor of leasing the roughly 25-acre property per the terms of an offer from Delaware-based Incline Niobrara Partners LP for a no-surface occupancy lease lasting three years.
The lease would prohibit any oil and extraction activities upon the city-owned property and would require that access to the mineral deposits via a horizontal drilling operation be located upon another property, according to a council memo. Horizontal wells will be used to harvest minerals beneath the surface.
There are however, currently active wells and permitted wells to the south and east of the city property, according to the Inline Niobrara Partners website.
According to the Incline website, the company owns interests in several states, including Oklahoma, Kansas, Texas, Wyoming, Michigan and Louisiana. They state that the company’s “opportunistic prospect identification method” has led to their involvement in more than 1,500 horizontal well bores in Weld County alone.
“To date, (Incline) has sourced a significant amount of capital from the private equity market and is investing this newly acquired capital in development drilling and additional acreage on a daily basis,” the Incline website states.
In exchange, Incline has offered to pay the city $82,033.25 within five days of the lease execution and an additional 20 percent cost-free royalty for any hydrocarbon sales during the term of the lease. The second approval of the lease is scheduled to go before council Dec. 19.
The city also received an offer from Extraction Oil & Gas, also based in Delaware, which would pay the city just over $63,000 and a 20 percent cost-free royalty on hydrocarbon sales for a three-year lease with option for a two-year extension. City staff identified the Incline offer as more favorable.
Though the council has voted in favor of the Incline offer, city staff believe that Extraction will either lease or partner with Incline regarding the mineral rights. An extraction location east of the parcel has been identified in unincorporated Johnstown.
Because the city received the Extraction offer first, the city had been attempting to negotiate a lease with Extraction rather than be force pooled with adjacent land owners, “as this would generally provide a better financial return,” a council memo states.
To be “force pooled” refers to a last-resort legal technique used by oil and gas companies to joining together small parcels of land to create sufficient acreage to receive a drilling permit. Pooled parcel sizes vary between states, but in many states, oil and gas companies are automatically allowed to drill in the entirety of areas amounting to at least 640 acres.
While forced pooling can be used as a tool by oil and gas companies to force small landowners into low-ball leases, the practice can also be used to the advantage of small landowners who band together and bargain as a group.
Oil and gas development has been returning to Northern Colorado as oil prices rise from their recent slump. Anadarko Petroleum announced this summer the company would reactivate 3,000 vertical wells it shut down following the April home explosion in Firestone, according to reporting by the Denver Post.
Though the council approved the item on first reading, members asked for additional information to be provided by city staff upon the item’s second reading Dec. 19.
Julia Rentsch: 970-699-5404, jrentsch@reporter-herald.com
