Western Slope gas drilling rebounding

Rig activity, prices both on the rise

The Colorado River meanders by a Williams drilling rig near the Rulison exit of Interstate 70. Drilling activity is on the upswing again this year after a slump in 2008 amid a nationwide economic downturn. The state is on a pace for 5,600 approved permits by the end of the year, up from 5,129 last year.

Like a garden in springtime after a hard winter, northwest Colorado’s energy industry is showing increasing signs of revival and recovery.

Following a severe pruning beginning in late 2008, area natural gas development is showing more and more regrowth. Some companies are continuing to respond to improved natural gas prices and pick up activity even as they deal with new state oil and gas rules that critics said contributed to last year’s slowdown.

As of March 8, the Colorado Oil and Gas Conservation Commission had approved 1,026 permits. That puts the state on pace to top 5,600 by year’s end, up from 5,129 last year. However, that still would be below annual totals from 2006-08, including the record 8,027 in 2008.

The new rules particularly affect northwest Colorado, for reasons including the fact it is home to significant amounts of wildlife-sensitive habitat, but the region continues to lead the state in permitting activity. The state has issued 423 permits in Garfield County this year, followed by 305 in Weld County. Fifty-two were issued for Rio Blanco County.

Only seven permits have been approved for Mesa County. But oil and gas commission Director David Neslin said recently he expects northwest Colorado as a whole to account for 50 to 60 percent of total permits issued this year.

Garfield County is on pace to have about 2,300 permits issued this year, up from 1,981 last year but below the record 2,888 for 2008.

Citing Anderson Reports figures, the oil and gas commission says 49 rigs were operating statewide as of March 3. That compares to about twice as many at the start of 2009, but it is up from 38 at low points last year.

Twenty-one rigs are operating in Garfield County. Again, that is well below the 54 running at the start of 2009. But it’s well above the 13 operating late last year.

Another eight rigs are running in Rio Blanco County.

Last year’s slowdown was made evident by data from Williams, the leading natural gas producer in the Piceance Basin. Although its average daily production locally increased to 697 million cubic feet per day last year from 650 million the previous year, that was due to production that peaked during the first quarter. Average quarterly production declined the rest of 2009.

However, Williams is adding some local rigs this year, and it is projecting to increase its 2011 Piceance production by 12 percent compared to this year.

The company said its plan is to go to 22 rigs next year locally, after having operated as few as eight at some points last year.  The plan is conditional on factors such as natural-gas-price trends.

Companies have participated unevenly in the region’s drilling rebound. Some, such as Chevron and Laramie Energy II, are currently doing no drilling. EnCana Oil & Gas (USA) Inc. has upped its local rig count to six. Bill Barrett Corp. is operating three rigs.

Petroleum Development Corp. has resumed drilling with one rig after a one-year hiatus. Delta Petroleum, which has struggled with financial losses and liquidity problems after gas prices fell, indicated Wednesday it expects to announce a resumption of drilling in the Vega Reservoir area later this year.

Companies with large local operations, such as Williams, have been able to take advantage of accompanying economies of scale that have boosted their drilling efficiency. In a recent conference call with investment analysts, Williams President, Chairman and Chief Executive Officer Steve Malcolm said the company’s lower-elevation wells in the basin have after-tax returns around 53 percent.

“So, clearly this is a world-class resource that has drilling economics that match those that people are talking about in the various shale plays,” Malcolm said.

Williams spokesman Jeff Pounds said the company is trying to dispel concerns that those Piceance wells might not get as high a rate of return on investment as might be the case in other areas of U.S. gas production. Those areas include shale formations that have newly emerged as targets for development.

Still, Susan Alvillar, a Williams spokeswoman, said the new Colorado rules have added to the cost of drilling a well. They also initially increased the time it took for the company to get drilling permits, although processing times are decreasing, she said.

David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, said, “Neither price nor the rules alone are single-handedly responsible for the downturn. In Colorado, the most restrictive drilling regulations in America were put in place while at the same time natural gas prices were falling.

“The predictable result was a very tough overall business climate for operators and investors alike. And as to Colorado’s measurably slower recovery when compared to some other states, the cost of new compliance can’t reasonably be ruled out as a factor.”

According to rig counts by Baker Hughes, Colorado’s count is still 12 below a year ago, whereas states such as Louisiana, New Mexico, North Dakota, Texas and Pennsylvania showed sizable increases.  Wyoming’s count fell to 37 compared to 47 a year earlier.

Oil and gas commission staff say Colorado approved more permits last year than neighboring states.

Grand Junction resident Richard Alward, an oil and gas commission member, said the rules “were a convenient whipping post” for a drilling slowdown instead dictated primarily by gas prices.

“The activity fell when the price fell, and the activity’s going back up as the price goes up,” he said.

He said most of the drilling that occurred during the slowdown took place under the old rules, so it’s hard to argue the new rules contributed to the slowdown. The new rules didn’t take effect until April 1, and permits issued beforehand were grandfathered in under the old rules, and remain valid for a year.

Alward also noted today’s Colorado rig counts are virtually the same as when the new rules took effect last April.

“I think as far as the rules go, there’s a certain level of certainty now that the rules have been in place almost a year. Operators are getting comfortable with what they need to do, and COGCC staff are becoming more adept at working with the operators to make sure that they can meet the requirements of the rules,” Alward said.


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