Natural gas price decline, tight credit, new energy rules could decrease Piceance development
Denver natural gas broker John Harpole recently conducted what he calls a “back of the envelope” survey of about eight energy companies’ northwest Colorado drilling plans.
From the perspective of Harpole and others in the industry, his findings might warrant marking that envelope as urgent.
Harpole, president of Mercator Energy, calculated that the number of drilling rigs operating in the gas-rich Piceance Basin could decrease by 35 to 40 percent, perhaps in the next few months.
A drop in prices for natural gas being produced in the region, problems in the nation’s lending markets and the anticipated impacts of new state oil and gas development rules all are causing companies to take a harder look at their investment plans in the Piceance Basin, Harpole said.
He worries about what that could mean for state severance tax revenue and for local communities that benefit economically from gas development.
“It’s not a good thing for the West Slope,” Harpole said.
But Parachute Mayor Roy McClung isn’t too worried.
“With the way things are, I don’t think we’d notice a whole lot. It might make it easier to get off the interstate,” he said.
Parachute has been struggling to relieve congestion at its Interstate 70 interchange, which has been clogged by traffic related to increasing gas development. McClung said a dip in activity could give communities a chance to catch up in trying to address effects related to drilling.
As of the start of November, 64 of the 132 rigs operating in the state were deployed in Garfield County alone. The county’s two biggest gas producers are Williams Production RMT and EnCana Oil & Gas (USA). Williams has been operating 26 rigs this year in the Piceance Basin, where its 2008 investment will total nearly $1.2 billion. But this week, it decided to cut that to an average of about 20 for 2009, said Williams spokeswoman Susan Alvillar.
Companies such as Williams and EnCana were happy to see this month’s defeat of Amendment 58, which would have resulted in oil and gas companies paying more severance tax on their production.
Still, Alvillar said Williams faces financial uncertainties as well as concerns surrounding the new state rules, scheduled for final adoption in December. The state is planning stricter regulations designed to protect public health, wildlife and the environment. Williams is worried that it might lead to delays in approvals of drilling permits, Alvillar said.
Because of increased drilling efficiency, Williams still expects to drill about 500 wells next year, the same as 2007. But this year’s total will exceed that, she said.
Doug Hock, of EnCana, said that company is running 10 rigs in the Piceance, down a couple from its recent average. He said its plans for next year probably won’t be finalized until mid-December.
“Given the current economic conditions, we’re approaching 2009 capital investment in a very conservative manner,” he said.
Earlier this year, EnCana shifted about $500 million in spending to the United States because of a change in the royalty rate in Alberta, Canada. However, it decided against investing any of that money in Colorado because of concerns over the state’s rulemaking.
Hock said the company is pleased that the Colorado Oil and Gas Conservation Commission has addressed EnCana’s biggest concern with the rules by eliminating a proposal under which the state could have required seasonal limitations on drilling to protect wildlife.
Still, EnCana anticipates some added costs with the new rules. As it is, he said, the Piceance is the most economically sensitive basin in which EnCana operates, because of its mountainous topography and the limited pipeline capacity to get gas to high-paying markets. That capacity problem has suppressed the value of gas produced in the Rockies compared to elsewhere, at a time when national prices have dropped significantly.
New pipelines have been coming on line to try to boost capacity, but Harpole said growth in local gas production over the last year has exceeded expectations.
PLANS OF OTHER PLAYERS
Bill Barrett Corp., which has drilled hundreds of wells south of Silt, was operating five rigs in that area in October but is down to four and expects to reduce that count to two. Jennifer Martin,
Barrett’s director of investor relations, said the company will match its capital plans with cash flow from operations.
That “generally means a cutback from what we would have done had the financial markets not taken the turn they did,” she said.
Barrett’s Piceance drilling reduction also reflects the anticipated added costs of new state rules, said company spokesman Jim Felton.
Berry Petroleum, which has operations near Parachute including about 100 producing wells, is cutting its capital spending next year because of energy prices. It is scaling back from four rigs to one in the Piceance for the winter, with plans to re-evaluate in the spring.
Delta Petroleum, with operations near Collbran in Mesa County, also trimmed 2009 capital spending plans, which regulatory compliance manager Brian Macke said means a reduction in that area from four rigs to two. Delta previously had planned on boosting its rig count there to eight.
Macke, the former oil and gas commission director, said the new state rules are a significant concern, especially at a time of low gas prices and lack of access to capital.
It’s important that the rules’ added costs are warranted by actual increases in environmental and health protections, he said.
“Any kind of new regulation needs to be founded in good scientific facts,” he said.
IN DEFENSE OF NEW RULES
A cutback in natural gas development would be a significant shift for the Piceance, where drilling activity has set records for years. The thriving industry also has helped provide some immunity from national economic problems.
Mercator Energy’s Harpole thinks Gov. Bill Ritter is more concerned about what Ritter calls Colorado’s new energy economy, with a focus on renewable resources, than about preserving the vitality of the state’s $23 billion oil and gas industry.
But Dave Neslin, the commission’s acting director, said the state recognizes the industry’s importance and the commission has worked hard to develop new rules that strike a balance between reducing impacts and responding to fears of overregulation.
“The commission was very sensitive to some of the concerns that have been raised by the industry and others that the process remain a timely and efficient and affordable one,” he said.
He cited as one success a new rule that would let companies submit comprehensive drilling plans in return for expedited regulatory reviews. As many as a dozen companies already have expressed interest in making use of such plans, he said.
Barrett’s Felton said the coming of a new administration in Washington adds further uncertainty as companies try to plan for next year. Meanwhile, Williams’ Alvillar shares the view of Parachute
Mayor McClung that a bit of a slowdown in local gas development might not be a bad thing.
She said the industry “has been operating at a breakneck speed” in the Piceance Basin to help meet consumer demand for natural gas.
“Everybody has been really giving it 110 percent, and it might be time to take a breather for everybody,” she said.
McClung said less drilling would mean the departure of some rig workers, but companies are still needed to service the numerous existing wells in the region, he said.
But Hock, of EnCana, thinks some small energy-related companies would suffer from a drop-off in drilling.
Jimmy Smith is the owner and president of Wagon Wheel Consulting, a Rifle company that does permitting and compliance inspection work for energy companies. He said he hasn’t seen any retreat in drilling activity yet and hopes that doesn’t change.
“Any slowdown in the drilling operations and the construction activities of the producing companies has a direct impact on our work as well, our volume of work,” he said.
He thinks any slowdown would have a direct or indirect economic effect on everyone in Garfield County.
Rifle-area resident Scott Brynildson, who has criticized the industry over its traffic, pollution and other impacts, would welcome a backing away from what he thinks has been a “ridiculous” pace of drilling.
He doubts any slowdown would be significant, however, given how heavily companies have invested in local gas development infrastructure.
Brynildson looks forward to the new state rules making the area more livable even as gas development occurs.
“This is a beautiful place to live in and we want to try to keep it that way,” he said.