Chapter 2: The Right to Frack
Oil and gas development often collides with landowners, farmers and ranchers throughout Weld County, where oil and gas companies operate more than 21,000 active wells—about 40 percent of all active wells in Colorado. The county’s high concentration of wells is primarily a relsult of its location on the Wattenberg field of the Denver-Julesburg (DJ) Basin, an oil and gas-rich area that covers 70,000 square miles from Denver to Julesburg and includes portions of western Kansas, western Nebraska and southeastern Wyoming. The Wattenberg field covers about 2,000 miles and 81 municipalities.
Oil and gas operators tap fossil fuel deposits in layers of Cretaceous rock that lie beneath the Wattenberg field via the process known as hydraulic fracturing, or “fracking.” After operators drill a hole into the oil and gas-rich rock layers—often a mile or deeper—using an approximately 110-foot drilling rig that remains on the well pad site for around 90 days, they line the hole with a steel and cement casing, which is then perforated. A solution of processed water is pumped into the well at extremely high pressures, pushing the solution through the perforated casing and cracking the surrounding rock. Oil and gas is released from these cracks and pumped back up to the surface with the processed water, which is then separated. The fracturing process—pumping the water in, cracking the rock and bringing it back to the surface—takes three to 10 days to complete. After fracturing is complete, wells can continue to produce oil and gas for years, or even decades.
Hydraulic fracturing in the Wattenberg field has prompted a multibillion-dollar oil boom. In 2013, Weld County oil and gas operations produced a total of 52.1 million barrels of oil—81 percent of state totals. The county’s oil and gas industry also produced 303.1 billion cubic feet of natural gas and natural gas liquids (NGLs), which accounts for 18 percent of state totals.
Of all the oil and gas wells in Weld County, 84 percent are operated by four companies: Noble Energy, Inc., Anadarko Petroleum Corporation (and Anadarko-owned Kerr-McGee Corporation), Encana Corporation and PDC (Petroleum Development Corporation) Energy. About 30 active wells are added to the COGCC’s database each week.
These four operators spent nearly $4 billion on Weld County operations in 2013. In late 2013, Noble, Anadarko, Encana and PDC identified 15,000 new potential drilling locations for 2014, most of which are in the Wattenberg field. Noble, by far the top operator in Weld County with more than 8,400 active wells—including the one beside Ed Graham’s home—plans to spend about $2 billion of its $4.8 billion total projected investments for 2014 on DJ Basin operations. Anadarko, which operates more than 5,500 wells in Weld, plans to spend $1.5 billion in 2014.
In 2013, the oil and gas industry accounted for $3.9 billion—about 55 percent—of Weld County’s total assessed value, according to the Weld County Assessor’s Office.
“In other counties, all of their taxpayers bear the entire brunt of their tax load, and here, the oil and gas companies pay more than half of our property taxes,” said Bill Jerke, who was one of five Weld County commissioners from 2001 to 2008.
Jerke and his family have lived on their 150-acre Weld County farm for 59 years, growing primarily corn and alfalfa for cattle and horse feed. There are currently 10 active oil and gas wells on Jerke’s farm, nine of which are operated by Noble. The “odd duckling,” as Jerke called the remaining well, is operated by PDC Energy.
Like many residents whose lands are peppered with wells, Jerke receives 2.5 percent of the royalties from the wells on his property. Those oil and gas royalties accounted for a quarter of the total income from his lands in 2013, with the remaining three-quarters from agriculture.
“That competing land use is at play here, but because most farmers will own some piece of the mineral estate… it ends up being beneficial to most farmers at some level… Nothing shows how much you really care as much as a check does.” – Bill Jerke, former Weld County commissioner and farmer
By contrast, landowners who do not have wells directly on their property receive nothing—or very little—when wells are drilled and fracked near their properties. For people like Graham and his family, surface rights agreements result in insignificant payments.
“Although I do get compensated for a well that is behind my house, it’s like a penny a day or so,” Graham said. “But we’re not cashing the checks anymore; we’re just saying we’re not interested.”
Graham said he doesn’t want to accept payment from an industry that is reducing his quality of life.
Even with the 2.5 percent royalty agreement, Jerke’s income from oil and gas is marginal compared to that of landowners who own the rights to the minerals beneath their property. Typically, mineral rights owners receive a minimum of 12.5 percent in royalties from the wells on their properties, but some receive as much as 20 percent.
“If I had owned the mineral rights, I would’ve received five times as much as I did, which means that oil and gas would have superseded our crop production,” Jerke said.
Jerke discovered that he only owned the surface rights to his property when he was approached by Union Pacific about 30 years ago. The company informed him that it owned the mineral rights to his property and that it intended to drill oil and gas wells there, offering a surface agreement that would provide him with that 2.5 percent interest in the wealth of those wells.
“I was nasty, I was belligerent, and I was uninterested in having wells foisted upon me,” Jerke said.
But Union Pacific made it clear that Jerke did not have a choice in the matter. The company had acquired the mineral rights to the property in the 1860s during Westward Expansion, when the U.S. government incentivized railroad companies to head west by giving them vast land holdings along the rail line. Over time, Union Pacific sold the lands to settlers but retained the mineral rights. Thus, if the company wanted to drill wells on Jerke’s farm, it could do so with or without his permission.
“They very bluntly told me that if I didn’t like them coming in with oil wells on our place, that I may wind up losing that gratis—that offer of getting 2.5 percent,” Jerke said. “It didn’t take long for me to figure out that 2.5 percent was better than nothing, and if they had the mineral rights—which they did—then I’d better be happy to take it.”
The mineral rights are now owned by Anadarko, which acquired them when it merged with Union Pacific in 2000. As a result of that merger, Anadarko owns about 7.5 million mineral acres across Colorado, Wyoming and Utah.
Jerke said he’s only had one problem with the wells on his property. In the summer of 2012, a center-pivot sprinkler caught on the top of an oil tank as it moved across Jerke’s fields. It kept moving, bending the metal and causing about $10,000 worth of damage to the sprinkler. Fortunately, Jerke’s insurance covered most of the cost to repair the sprinkler, and representatives from PDC Energy, the company operating the well site, arrived quickly and determined that the oil tank had not been damaged.
“Everything worked out really nicely, and that is really a testament to how well the farmers and the oil companies work together now,” Jerke said.
Despite his initial resistance to oil and gas development on his property, Jerke has become an active proponent of the industry’s growth. He is the executive director of Fuel Colorado, a 501(c)(4) formed by county leaders and Noble Energy in 2012 to promote the advancement of oil and gas, agriculture, gravel and water projects.
Fuel’s efforts are largely geared toward persuading the public of the necessity of various natural resource development projects and reducing any potential damages from those projects. Through the organization, Jerke leads presentations pushing legislation that advances industry interests. For example, Jerke said, he might speak to county residents who raise concerns about the odor and flies from a dairy, the appearance of a gravel pit, or the presence of oil wells near their homes.
“Those things are necessary for our way of life, so we need to find ways of doing them that mitigate the damages,” Jerke said. “We feel that with a better educated public, people understand that there’s a good reason for these things, that they produce the roads we drive on, the buildings we live and work in; they produce the food we eat; they keep us warm in the winter and cool in the summer. It’s all really important essentials that Fuel is actively promoting.”
Any damages or problems farmers face when oil and gas companies develop on their lands, Jerke said, are mitigated by the money the landowners receive from mineral rights and surface development agreements.
“That competing land use is at play here, but because most farmers will own some piece of the mineral estate, even if it’s the 2.5 percent that Anadarko gives, it ends up being beneficial to most farmers at some level,” he said, “and it either becomes our number one or number two source of income—number two typically only to livestock production. Nothing shows how much you really care as much as a check does.”
The oil and gas royalties provide landowners with a stable source of income as long as the wells are producing. Agriculture, on the other hand, is an unpredictable business. In August 2013, a 10-minute hailstorm cost Jerke $50,000 worth of crops.
Of the $4 billion in oil and gas sales from Weld County in 2013, about $500 million—or 20 percent—went to mineral royalties, and that amount is expected to grow in 2014.
However, much of this money went, not to landowners, but to the county itself.
In the early 20th century, homesteaders settled across Weld County, establishing large dryland farms. Unable to pay property taxes after the onset of the Great Depression and the Dust Bowl, many of those settlers lost their farms—tens of thousands of acres that were then acquired by the county. When the climate and the economy stabilized, the county sold off the farmland, but retained the mineral rights. The county currently owns the rights to about 40,000 mineral acres, and each mineral acre in the county can produce between $500 and $3,500 of oil and gas on the open market.
Encouraging the oil and gas industry to tap those resources has resulted in vast development on farms across Weld County, as well as an additional, non-tax income source for the county.
“Agriculture and oil and gas are largely in this thing together,” Jerke said. “We make our livings from the land and what’s beneath the land. We need what they produce to keep our homes warm and keep our tractors moving, and they need us to feed them. It’s a good partnership.”