The Powder River basin is a Laramide foreland basin that was filled by a combination of fluvial, deltaic, paludal, and lacustrine sediments. The depositional history of the Fort Union Formation was unraveled in a regional subsurface study using data from approximately 1,400 geophysical well logs. The depositional model developed from the subsurface study was tested by selective fieldwork.

The Powder River basin originated as a structural and depositional basin in earliest middle Paleocene. As a result of rapid subsidence, a lake (Lake Lebo) formed along the basin axis. Lake Lebo, documented in the mudstone of the Lebo Shale Member, spread rapidly to cover an area greater than 10,000 mi² (25,900 km²). During the middle through late Paleocene, Lake Lebo was filled peripherally by fluvial-deltaic systems that are recorded in the coarser clastics of the Tongue River Member. Primary basin fill was from: (1) the eastern margin by elongate deltas fed by suspended to mixed-load fluvial systems issuing from the ancestral Black Hills, and (2) the southwestern margin by mixed to bed-load streams emanating from the Wind River basin. Secondary fill was from th northwest by an elongate delta system fed by a suspended to mixed-load fluvial system flowing from the Bull Mountain basin.