10,000 wells: Garfield drillers reach major landmark
About a decade ago, energy insiders talked about the possibility of 5,000 to 10,000 wells being drilled over the next 10 years in Garfield County.
It turns out they guessed the future of drilling in northwestern Colorado’s Piceance Basin quite accurately in some respects. But in other respects, many of them will readily concede they were quite wrong.
In October, the county topped the 10,000 mark for active oil and gas wells. As of Jan. 7, the number was at 10,102, a fifth of the 50,055 statewide total, and trailing only behind Weld County’s 19,799. Active wells have been drilled and not plugged, and about 98 percent are producing, said Thom Kerr, who oversees drilling permits for the Colorado Oil and Gas Conservation Commission.
Garfield County had just 1,669 active wells as of early 2004. It turned out that’s fewer wells than companies began drilling on in the county in 2008 alone (1,688).
In 2011, the county produced about 667 billion cubic feet of gas, and the 2012 production total should be similar, said Kerr. That’s a figure that impresses him even more than the growth of the county’s well count over the years. It amounted to about 40 percent of the state’s total gas production in 2011.
“I hadn’t anticipated that it would end up being such a huge portion of the state’s production,” he said, noting that the county was producing just 12 percent of the state total a decade earlier.
Put another way, the county produces gas equaling nearly 3 percent of the nation’s annual consumption.
But other figures speak to the part many experts didn’t see coming when it pertains to drilling in the county and surrounding region. In December, according to commission data obtained from Anderson Reports, seven drilling rigs were operating in the county. That compares to 64 in the fall of 2008. Drilling started on only 496 wells last year, well under a third of the activity in 2008.
Garfield County’s tale of oil and gas development over the last decade has actually involved two stories, one a boom that reached its crescendo in 2007-08, and the second the sharp slowdown beginning around the start of 2009. Blame it partly on the recession, but blame it largely on an explosion of successful natural gas drilling in shale formations in other parts of the country, and more recently in domestic drilling for oil.
“It all changed overnight and really, to be honest, no one saw it coming,” said Randy Udall, an energy analyst living in Carbondale.
In the early- and mid-2000s, Udall was one of those predicting drilling in Garfield County was still in its very early stages, with lots of activity to come. After all, domestic gas production had reached its plateau long ago, but demand was continuing to increase. There was even talk of importing liquid natural gas to the country in tankers.
While his expectation of big local drilling activity came true, he didn’t foresee what would follow.
“I myself was convinced that this boom we saw in 2007 was not vulnerable to a bust. I thought it would go on, for decades,” he said.
But when companies successfully applied techniques such as hydraulic fracturing to shale formations, suddenly the country was awash in natural gas and gas prices nosedived. Since then, companies have been focusing on promising new oil plays in places like North Dakota and northeastern Colorado, given the big price discrepancy between gas and oil prices. But even oil development produces some gas — about 15 percent of total current U.S. gas production, said Udall — which is further adding to the supply and depressing the price.
In North Dakota, producers are reportedly even flaring off about a third of the gas byproduct due to its low price and the cost of building pipelines to ship it to market.
It’s in this kind of price environment that Piceance Basin energy developers are trying to compete, which raises big questions about what the future holds for drilling in Garfield County and the region.
Vince Matthews, who just retired as state geologist and director of the Colorado Geological Survey, said there are plenty of places still left to drill in Garfield County and the Piceance, but it will be hard to make money doing it before the price goes up.
“Until that happens, you’re not going to see a lot of drilling out there,” he said.
Udall points to a July 2012 report by energy market analytics firm BENTEK Energy that includes comparisons of estimated internal rates of return for companies investing in various oil and gas fields across the United States.
BENTEK estimated that under the pricing environment at the time of the study, the Piceance offered a -1 percent return on investment for a typical well, one of the lowest in the country and similar to other dry gas areas producing little associated oil or natural gas liquids such as ethane and butane.
Prices have risen somewhat since then but remain low compared to the boom times. Two companies, WPX Energy and Encana USA, continue to operate about five rigs apiece in Garfield and the greater Piceance.
“I think we’ve adjusted to make our wells more efficient and less costly,” in order to adjust to current prices, said Steve Soychak, district manager in WPX’s Parachute office.
Soychak has been in on the Piceance Basin’s modern gas development efforts since its early days. In 1999 he joined what was then Barrett Resources, the company that was at the forefront of using hydraulic fracturing to unlock a resource tied up in underground sandstone formations.
At the time Barrett had about 400 wells in the Piceance and was producing about 90 million cubic feet of gas per day. WPX — a later spinoff of Williams, which had purchased Barrett — now has about 4,100 local wells producing on average about 10 times that amount of gas.
Among its increased efficiencies applied in the Piceance over the years has been the introduction of rigs that can be quickly skidded upright in four directions on pads where as many as 30 or 40 wells may be drilled directionally.
Through such innovations, wells that took 18 or 20 days to drill in 1999 now take about 7.5 days. What that means, Soychak said, is that WPX’s five-rig program is equivalent to a nine- or 10-rig program several years ago.
Encana topped 3,000 wells in the Piceance last year and as of Sept. 30, its average 2012 daily production was 478 million cubic feet.
And in fact, Encana plans to add two rigs this year because of a recent joint venture with steel-maker Nucor Corp. Under the deal, Encana hopes to drill more than 4,000 wells over 20 years on 50,000 acres of federal land straddling Garfield and Rio Blanco counties. For Nucor, the deal serves as a hedge so that if the price rises for the natural gas its plants rely on elsewhere in the country, it also will be gaining from that price increase by being involved in gas production.
“We see it as very innovative and kind of the wave of the future as we have these low gas prices,” Encana spokesman Doug Hock.
It’s the kind of innovation that Hock said will continue to make the Piceance an important asset for Encana, which holds mineral interests on about 900,000 to 1 million acres in the basin.
Udall estimates that between them, Encana, WPX and ExxonMobil own 2 million acres of mineral interests in western Colorado, “covering an area the size of Yellowstone National Park.”
Companies locally have relied on hedge contracts locking in future pricing as one means of supporting drilling, but such contracts have become harder to secure with many expecting gas prices to remain low for some time. Companies also have tried to focus on drilling in areas locally that are richer in natural gas liquids, but even NGL prices have softened due to the heavy national volume of gas development.
Even at low prices, energy companies in the Piceance can have certain incentives to drill that may range from keeping a lease from expiring, to maintaining cash flow even when there’s no profit to be made, to satisfying investors who would otherwise worry about a company’s declining production, observers say.
However, some companies have chosen to focus their drilling elsewhere, in more liquids-rich areas. Bill Barrett Corp. last year suspended its local drilling program and also agreed to sell a minority interest in its assets south of Silt to Vanguard Natural Resources, as BBC focuses its drilling in areas with oil prospects. Antero Resources sold its Piceance Basin holdings to Ursa Resources Group II LLC as it shifted its focus to drilling in the eastern United States.
For Ursa and Vanguard, however, the sales presented investment opportunities involving a resource that they indicated they believe will rise in price in the long term.
Matthews thinks gas prices could rebound even sooner than many expect. He bases that on estimates of annual production declines in wells. Shale wells can be hugely productive at first, but Matthews says decline rates for those wells are said to average 48 percent. That means production could drop off quickly as companies are reluctant to drill new wells with today’s low prices, even as demand for gas by industry and power utilities continues to grow, which could cause a price spike.
a fuel with a solid future
Said the oil and gas commission’s Kerr, “There isn’t anybody out there that doesn’t think the real future in this country is natural gas. It’s a great resource, we have a lot of it, but everybody’s looking for some price stability and increase in order for it to be an exploration target.”
Some companies also continue to eye the potential for development of the Mancos shale and Niobrara formations in the Piceance, hoping for a payoff in oil and other liquids as well as natural gas. Encana continues to do some exploratory drilling in these zones, and Soychak said WPX is still evaluating results from some test drilling.
David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, said that for those companies that continue to believe in the long-term promise of the Piceance, from traditional development of gas in sandstone to the search for oil and gas in the Mancos/Niobrara, it’s reminiscent of the early days when companies like Barrett Resources believed in the basin and reaped the eventual benefits.
“I think the history of the Piceance is repeating itself in a way,” he said.