I would like to give you an update on the damage that is being done to small producers in the active horizontal plays in Oklahoma. I am a partner in Cimarron Production Co., Inc., and Brown & Borelli, Inc. The vast majority of our operated production is in Kingfisher County, Oklahoma. We have had, as of this date, 21 wells damaged or destroyed by the impact of horizontal frac jobs. Our wells producing from the Oswego formation are being damaged or destroyed by nearby horizontal frac jobs in the Big Lime/ Oswego formations, whether drilled in the same section, or nearby. The Mississippi formation horizontal frac jobs are hitting our vertical Mississippi production. Our core production area produces from the Hunton Dolomite. Those wells are being damaged or destroyed by nearby fracs in the Mississippi formation. We are not the only producers that are experiencing these damages. Most of the small producers in the Kingfisher area with whom I’ve spoken have been hit even harder than we have. I’ve been told by Legislators and people at the Oklahoma Corporation Commission that the OIPA is still taking the position that this damage is rare or non-existent. That statement is simply not true. Our engineer is of the opinion that, upon completion of infill drilling, we will no longer have any vertical wells producing from the Big Lime/Oswego, Mississippi, or Hunton Dolomite formations. Where we have contacted the horizontal operator concerning our damage, they have declined to even acknowledge it. Where I have spoken to vertical operators who have initiated litigation, the horizontal producers have indicated a willingness to spend whatever is necessary, taking as long as possible, to avoid any liability for the damages done by their fracs.
In addition to the damage done to our vertical production, our acreage is being taken in large blocks by the large horizontal operators, working through the Oklahoma Corporation Commission. Historically, the OCC allowed forced pooling only as to an amount of acreage which was expected to be drained by one well. Horizontal developers are now using the OCC to take mile wide swaths of acreage, capable, in the recent report of Devon Energy, of supporting the drilling of as many as 20 or 30 wells. The large drillers have reported acreage trades of $15,000, $30,000, to more than $40,000 per net mineral acre. Meanwhile, they routinely force royatly owners and small producers to sell their acreage at prices which are less than 5 and 10% of those amounts. We have a great number of interests which are burdened to slightly under 80% net revenue interest. The force pooling actions in which we are named routinely declare that those interests are “over-burdened”, and are of no value.
Tim Wigley, OIPA’s incoming President, was recently quoted in the press that horizontal drilling is Oklahoma’s future, implying that the thousands of vertical producers are merely a quaint vestage of the past, and are irrelevant to today’s oil and gas industry. This is an astounding dismissal of the fact that the wealth of thousands of vertical producers, and tens of thousands of Oklahoma royalty owners are being transferred to the pockets of large out of state investors in the large horizontal operating companies. This transfer of wealth amounts not to tens, or hundreds, of millons of dollars, it amounts to billons of dollars of hard earned wealth owned by hard working Oklahomans into the pockets of these large horizontal operators and their investors.
OIPA was formed in the 1950’s in order that the small independent producers of Oklahoma could have a collective voice and influence which could be used to protect them from the abuses of the major oil and gas companies and their organization, which was formerly known as Mid-Continent Oil & Gas Association. OIPA should be standing and raising its voice to the rafters in defense of the disaster that is starting to overtake the independent producers and royalty owners in the State of Oklahoma. Instead, it appears that it is interested only in preserving and extending the advantages held by the large companies which have overtaken its governance. The regulatory system in the State of Oklahoma needs to be reformed to make it one that is equitable to all, and that should include a return to a gross production tax at a level that is the same for all producers, and sufficient by historical standards to help support the core services of the state that has provided so generously to so many in our industry over past decades. I urge all of OIPA’s remaining small independent producers to go to www.okenergyproducers.org , and join the Oklahoma Energy Producers Alliance, which is the only Oklahoma industry association which is dedicated to protecting the interests of Oklahoma’s small independent producers.
After twenty plus years of service on the Board of Directors of Oklahoma Independent Petroleum Association, I submitted my resignation from the OIPA board on March 29th, and joined the many longtime OIPA Board Members and former Chairmen, who realized there was no point in continuing to fight for an association we had already lost. We welcome the support of those of you that remain.
Cimarron Production Co., Inc.
Brown & Borelli Inc.