What Determines the Location of a Well?

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Geology, leasing, permitting, technology, economics, and the environment

Introduction

Oil- and gas-rich rocks are only found in certain parts of the United States, so most of the country has no oil or gas wells. Where oil and gas production is commercially viable, many factors determine the exact location of each well, including leasing, permitting, competing land uses, environmental protection, economics, and drilling technology. These factors are strongly interlinked: the best well location for environmental protection may be on land that the owner will not lease for drilling, may be more expensive to drill on, or may be too close to a school for the state to issue a drilling permit. The most profitable location may endanger a local waterway or encroach on important agricultural land. The final location for most wells is usually chosen to balance the requirements of federal, state, and local regulators, landowners, oil and gas operators, and the local community.

Finding the Right Rocks

Oil and gas cannot form in all rocks; significant quantities can only form from organic matter (the remains of living organisms) trapped in thick layers of sediments. While peat and coal are formed from plant matter, oil and gas are mostly formed from large accumulations of tiny plankton that lived and died in ancient lakes, seas, and oceans. As the organic-rich sediments accumulate over time, the deeper portions become buried. Once the sediments reach depths of 5,000 to 30,000 feet, heat and pressure are high enough to convert the organic matter to oil and gas. The buoyant oil and gas may rise toward the surface and become trapped by overlying impermeable rocks or may remain trapped in the rocks where they formed (typically shales). These processes have produced the large oil and gas fields in California, within and east of the Rocky Mountains, and in the Gulf of Mexico and the Appalachian Basin.

Within oil-rich areas, finer-scale variations in the geology of the area will produce regions of greater or lesser productivity, as shown below for the Marcellus and Utica/Point Pleasant plays in the Appalachian Basin.3

Left: Areas of historical oil, gas, or mixed production in the contiguous United States as of 2005 (immediately prior to the shale boom). Right: Current and prospective shales for oil/gas production, overlain on major sedimentary basins, as of 2016.

Left: Areas of historical oil (red), gas (green), or mixed (yellow) production in the contiguous United States as of 2005 (immediately prior to the shale boom). Right: Current (solid orange, plus blue and black outlines) and prospective (solid red) shales for oil/gas production, overlain on major sedimentary basins (tan), as of 2016. Image credits: Laura R.H. Biewick, U.S. Geological Survey;1 U.S. Energy Information Administration.2

Leasing: Permission from the Landowner

Mineral rights – the ownership of rocks, minerals, oil, and gas beneath an area of land – may belong to private individuals or local, state, or federal government. Before exploring for and producing oil and gas, operators must obtain a lease from the mineral rights owner. The mineral rights owner may be different from the surface landowner, and in some cases the owner of one mineral, such as coal, differs from the owner of oil and gas. These cases of “split estate,” where there are different owners of surface and underground resources, result from the fact that mineral ownership can be sold or transferred like other property.

Obtaining a lease does not mean that a well will be drilled. Typically, an operator acquires a large number of leases in an area to give them the flexibility to drill wells in a range of locations based on the results of exploration and early drilling.

Private mineral owners can choose to lease or not to lease their land for drilling, and can negotiate the terms of the lease, including an up-front “bonus” payment of less than one hundred to as much several thousands of dollars per acre. The lease also sets the royalty payments (the proportion of the value of resources produced that will be paid to the mineral owner, often 12.5%). Lease terms may also include requirements to protect crops, livestock, or buildings, all of which may affect the location of the well.

The federal government restricts oil and gas activities in national parks, monuments, and areas where Congress or the President has suspended such activities. In other areas, the federal government leases public land for oil and gas development when it is deemed to be compatible with other public uses and the protection of wildlife, scenery, water, and land.5 Federal leases are offered in regularly scheduled competitive lease sales. State lands may also be leased, usually in a competitive process. For example, the Marcellus and Utica shales underlie 1.5 million acres of Pennsylvania state forest land; in 2017, over 130,000 of these acres were under lease for shale gas production.6 In addition, Native American tribes, individual Native American mineral owners, and Alaska Native Corporations may lease their lands for oil and gas development.7

Drilling Permits

Regardless of leasing agreements, operators must obtain permission from the state to drill a well on any land within that state, whether it is private or owned by the local, state, or federal government.8 If the land is federally owned, federal approval is also required (see below). In some cases, the well will also require county or local government permission to drill. Although state drilling regulations vary widely, common regulations include:

  • Restrictions on drilling in or near parks or historic sites
  • Rules on how closely wells can be spaced, to prevent operators from extracting resources that belong to adjacent leases and mineral rights owners
  • Minimum distances or setbacks between wells and homes, businesses, schools, roads or public areas – some local and county governments also set minimum distances within their jurisdictions

In some states, the application to drill a well may be open for public comments before being approved.

If the operator plans to hydraulically fracture a well, they may be subject to additional regulations such as taking groundwater measurements before drilling. This provides information about the pre-drilling composition of local groundwater, which allows potential groundwater contamination from hydraulic fracturing fluids to be identified.9 As of 2018, hydraulic fracturing has been banned in two states with resources that could be produced using the technology (New York10 and Maryland11) and one state with no known oil or gas resources (Vermont12).

Drilling Restrictions on Federal Land

Drilling on public land is controlled by the federal government, which aims to balance a wide variety of land uses, including oil and gas exploration and production, livestock grazing, hunting and fishing, coal and mineral development, recreation, and natural or cultural conservation.13 Laws passed by Congress and signed by the President – or executive orders signed by the President – can restrict or ban leasing and/or drilling in federally controlled areas. Recent and historical restrictions and bans of this nature have been implemented in national parks and monuments, wilderness areas, the Great Lakes, and offshore (see “Offshore Oil and Gas” in this series for more information on offshore drilling).

Oil and gas development of onshore federal land is largely overseen by the Bureau of Land Management (BLM). There are roughly 100,000 active wells in areas managed by BLM; between 2000 and 2016, on average 3,000 new wells were drilled each year.13,14 The Forest Service, the National Park Service, the Army Corps of Engineers, the military, or the Bureau of Reclamation may impose additional restrictions on lands under their management. Regardless of land ownership, if operators intend to drill beneath a navigable waterway or add new material (e.g., for roads or well pads) that might affect a waterway or wetland, they must first obtain permission from the U.S. Army Corps of Engineers.15

The National Environmental Policy Act of 1970 (NEPA) requires federal agencies to assess the environmental effects of their proposed actions, including oil and gas leasing or drilling on federal land.16 For NEPA compliance and other requirements, BLM develops regional, long-term land-use plans, called Resource Management Plans, with input from other government agencies, individuals, organizations, and local governments (see “The Pinedale Gas Field, Wyoming” in this series for example elements of a Resource Management Plan).17

Drilling Technology

Early oil and gas wells were drilled straight downward, meaning that oil and gas resources could only be extracted if a well site could be installed directly above them. Over time, drilling technology continuously advanced, and by the first half of the 20th century, wells could be drilled at an angle, allowing the location of the wellhead to be placed away from sensitive areas or competing land uses. More recently, advances in horizontal drilling have allowed operators to drill horizontally underground for up to several miles.20 This has the potential to provide increased flexibility in choosing the surface location of drill sites based on other factors, such as environmental protection (see sidebar).

Enhanced Recovery Wells and Pooling

Many advanced techniques for oil and gas production require operations to span more than one lease:

  • Enhanced oil recovery techniques such as steamflooding, waterflooding, and carbon dioxide injection require an operator to drill injection wells some distance from producing wells.22
  • Since the early 2000s, the proliferation of horizontal wells extending a mile or more away from the vertical portion of the well has required operators to work with mineral rights owners in leases adjacent to those where the producing well sites are located.

“Pooling” refers to the combining of leases and sharing of operational costs and production revenues within those leases by all parties involved. Mineral owners adjacent to an area leased for oil and gas development may be legally forced to lease their subsurface minerals if theirs are necessary for development of the first lease – this is referred to as “forced pooling”. All mineral rights owners in the pool share in the costs and revenues, even if there are no producing wells on their land.23

Map of wells in the Marcellus and Utica/Point Pleasant formations (Pennsylvania, Ohio, and West Virginia) through April 2017.

Map of wells in the Marcellus and Utica/Point Pleasant formations (Pennsylvania, Ohio, and West Virginia) through April 2017. Although potentially oil- and/or gas-bearing shales (brown outline and blue field) underlie almost the entire region, a wide variety of factors (discussed throughout the text) determine exactly where and in what concentration wells are drilled. Image credit: U.S. Energy Information Administration.4

U.S. oil and natural gas drilling activity by number of drilling rigs in operation, 1988-2018.

U.S. oil and natural gas drilling activity by number of drilling rigs in operation, 1988-2018. Natural gas drilling boomed with the use of horizontal drilling and hydraulic fracturing in the early 2000s, then fell in response to the 2008 recession and continued to fall due to excess gas production. Drilling in oil-rich shale areas picked up after the 2008 recession but fell with low oil prices in 2014-2015. Image credit: U.S. Energy Information Administration.21

Economic Considerations

For oil and gas operations to be financially viable, the expected cost to explore for, drill, and extract the resource must be less than the value of oil and gas expected to be produced over the life of the well. National and global demand and price for oil and gas have major implications for the number and location of new wells that are drilled. For example, declining natural gas prices from 2008 to mid-2016 led operators to focus on more oil-rich areas. The drop in the price of oil in late 2014 reduced the total number of new wells being drilled and led the industry to focus operations in areas with highly productive wells and lower operating costs. Even with decreased drilling costs and improved drilling efficiency,24 the number of new wells plummeted. For example, in Texas, the number of new wells drilled per year dropped from over 27,000 in 2014 to less than 9,000 in 2016.25

More Resources

Biewick, L.R.H. (2008). Areas of Historical Oil and Gas Exploration and Production in the United States. U.S. Geological Survey Digital Data Series DDS-69-Q.
The Nature Conservancy – LEEP: The Nature Conservancy’s Appalachian Shale Siting Tool.
The Nature Conservancy and Carnegie Mellon University (2016). Advancing the Next Generation of Environmental Practices for Shale Development: Workshop Deliberations and Recommendations. May 27-29, 2015. Pittsburgh, PA.
Pennsylvania Department of Conservation and Natural Resources (2017). Natural Gas Development and State Forests: Shale Gas Leasing Statistical Summary, May 2017.

References

1 Biewick, L.R.H. (2008). Areas of Historical Oil and Gas Exploration and Production in the United States. U.S. Geological Survey Digital Data Series DDS-69-Q.
2 U.S. Energy Information Administration – Lower 48 states shale plays, June 2016.
3 U.S. Energy Information Administration (2017). Marcellus Shale Play: Geology Review.
4 U.S. Energy Information Administration – Marcellus and Utica/Point Pleasant wells through April 2017.
5 U.S. Bureau of Land Management – Oil and Gas: Leasing.
6 Pennsylvania Department of Conservation and Natural Resources (2017). Natural Gas Development and State Forests: Shale Gas Leasing Statistical Summary, May 2017.
7 U.S. Bureau of Indian Affairs – Working on Indian Lands.
8 Joy, M.P. and Dimitroff, S.D. (2016). Oil and gas regulation in the United States: overview. Westlaw, June 1, 2016.
9 Bosquez IV, T. et al. (2015). Fracking Debate: The Importance of Pre-Drill Water-Quality Testing. American Bar Association, Section of Litigation: Environmental Litigation.
10 New York Department of Environmental Conservation – High-Volume Hydraulic Fracturing in New York State.
11 General Assembly of Maryland – HB1325 (CH0013): Oil and Natural Gas – Hydraulic Fracturing – Prohibition. Approved by the Governor, April 4, 2017.
12 Vermont Department of Environmental Conservation (2015). A Report on the Regulation and Safety of Hydraulic Fracturing for Oil or Natural Gas Recovery.
13BLM Lands Leasing.” Statement of Neil Kornze, Director, Bureau of Land Management, U.S. Department of the Interior, before the House Committee on Oversight and Government Reform, March 23, 2016.
14 U.S. Bureau of Land Management – Oil and Gas Statistics: Table 8 – Wells Spud.
15 U.S. Army Corps of Engineers (2017). U.S. Army Corps of Engineers Regulatory Role in Activities Associated with Oil and Natural Gas Production and Distribution, June 2017.
16 U.S. Environmental Protection Agency – What is the National Environmental Policy Act?
17 U.S. Bureau of Land Management – How We Manage.
18 The Nature Conservancy – LEEP: The Nature Conservancy’s Appalachian Shale Siting Tool.
19 The Nature Conservancy and Carnegie Mellon University (2016). Advancing the Next Generation of Environmental Practices for Shale Development: Workshop Deliberations and Recommendations. May 27-29, 2015. Pittsburgh, PA.
20Halliburton, Eclipse Resources complete longest lateral well in U.S.” World Oil Magazine, May 31, 2016.
21 U.S. Energy Information Administration – Crude Oil and Natural Gas Drilling Activity.
22 U.S. Department of Energy – Enhanced Oil Recovery.
23What is “Forced” Pooling and Why is it Important?” J. Luellen, Husch Blackwell Emerging Energy Insights, April 25, 2017.
24 U.S. Energy Information Administration (2016). EIA report shows decline in cost of U.S. oil and gas wells since 2012. Today in Energy, March 30, 2016.
25 Railroad Commission of Texas (2017). Summary of Drilling, Completion and Plugging Reports Processed for 2016.

Petroleum and the Environment

Download a full PDF of Petroleum and the Environment (free) or purchase a printed version ($19.99).

Other parts in this series:
1. Petroleum and the Environment: an Introduction
2. Water in the Oil and Gas Industry
3. Induced Seismicity from Oil and Gas Operations
4. Water Sources for Hydraulic Fracturing
5. Using Produced Water
6. Groundwater Protection in Oil and Gas Production
7. Abandoned Wells
8. What Determines the Location of a Well?
9. Land Use in the Oil and Gas Industry
10. The Pinedale Gas Field, Wyoming
11. Heavy Oil
12. Oil and Gas in the U.S. Arctic
13. Offshore Oil and Gas
14. Spills in Oil and Natural Gas Fields
15. Transportation of Oil, Gas, and Refined Products
16. Oil Refining and Gas Processing
17. Non-Fuel Products of Oil and Gas
18. Air Quality Impacts of Oil and Gas
19. Methane Emissions in the Oil and Gas Industry
20. Mitigating and Regulating Methane Emissions
21. Regulation of Oil and Gas Operations
22. Health and Safety in Oil and Gas Extraction
23. Subsurface Data in the Oil and Gas Industry
24. Geoscientists in Petroleum and the Environment
Glossary of Terms
References

Protecting Forests while Producing Energy in Appalachia

Forests and streams in Appalachia support diverse plant and animal populations that may be threatened by habitat fragmentation caused by oil and gas activity. Environmental organizations in partnership with industry and academia are working to reduce the surface impact of oil and gas operations in this region by optimizing the placement of drilling and production sites, roads, and pipelines. For example:

  • The Landscape Environmental Energy Planning tool (LEEP)18 was developed by The Nature Conservancy (TNC) in collaboration with the University of Tennessee at Knoxville, the Cadmus Group, and industry advisors. LEEP is an interactive, web-based GIS program that industry planners can use to assess the relative costs and environmental impacts of different configurations for wells, access roads, and gathering pipelines.
  • A 2015 workshop hosted by TNC and Carnegie Mellon University brought together a group of over 70 organizations to develop siting recommendations for energy infrastructure to protect Appalachian biodiversity. The publication, “Advancing the Next Generation of Environmental Practices for Shale Development,”19 was a collaborative effort between the energy industry, non-governmental organizations, academic institutions, and federal, state, and local government.
Date updated: 2018-06-01
Petroleum and the Environment, Part 8/24
Written by E. Allison and B. Mandler for AGI, 2018

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