Williams adding gas rigs amid market skepticism

The region’s largest natural gas producer, Williams, will add three more drilling rigs locally over the next year, and its top executive is heralding the increased pipeline capacity that has closed the gap in price between gas produced in the Rockies and elsewhere.

However, other local companies and industry officials say that with gas prices in general still being low, it will take more than the elimination of the price differential to trigger a significant rebound in the pace of drilling in western Colorado’s Piceance Basin.

“Unfortunately, we don’t see a large increase in price in the near future,” said Doug Hock, spokesman for EnCana Oil & Gas (USA), another local producer. “I think we’ll continue to see kind of lower levels of prices for a while until there’s more of a (national economic) recovery, maybe later next year.”

EnCana has not determined its 2010 drilling levels locally. It had been operating four rigs this year until recently moving one to Wyoming, Hock said.

Williams has been operating seven rigs in the Colorado River Valley and plans to maintain that level next year, but it will add three rigs to the one it is running in the mountains north of Parachute.

In a quarterly conference call with investment analysts, Steve Malcolm, Williams’ president, chairman and chief executive officer, said a combination of falling production levels in the Rockies and the completion of pipeline projects to ship local gas to other markets has ended the regional pipeline shortage that caused the price gap. Rockies prices even have exceeded those at the benchmark Henry Hub distribution point in Louisiana.

With the price differential gone, the Piceance Basin “moves to the very top of the list of U.S. gas plays, and we have thousands of low-risk locations left to develop,” Malcolm said.

However, he said Williams is continuing to look at cash flows and commodity prices before committing to further drilling expansion in the basin.

Williams spokeswoman Susan Alvillar said the company’s 2010 exploration and production budget for the basin will be $600 million, unchanged from this year. Some of this year’s budget went to major facility upgrades, such as for water treatment plants.

Although the large scale of Williams’ local operations helps reduce its costs, others say the expenses of drilling in the region continue to be a consideration for companies as lower-cost gas development opportunities in shale formations have emerged in several parts of the country.

Hock said that’s a factor in EnCana’s decision making, “but we certainly will continue to have activity in the Rockies and Colorado in particular.”

Porter Bennett, founder of the Denver-based Bentek Energy consulting and information firm, said Piceance Basin operators face everything from topographical and climate challenges to uncertainties resulting from new state regulations. They also are saddled with additional permitting processes when drilling on federal land.

“It all just combines to make for a difficult project,” Bennett said.

That didn’t matter so much a few years ago when gas prices were high and the new gas plays had yet to emerge. Jim Felton, spokesman for Bill Barrett Corp., said those new plays have been good news for consumers, by helping increase supply and competition and keep down prices.

“What that does, of course, is put a lot of pressure on the economics of drilling,” he said.

Barrett has been operating three rigs south of Silt and is expecting to continue at that level there next year.

Delta Petroleum, which has suspended drilling in the Vega area, is continuing to evaluate gas prices to determine when to bring in any rigs again.

Both Oxy and Antero Resources say they plan to resume local drilling again next year, but only on a limited basis, with each operating one rig.

Said Jon Black, Antero’s local operations manager, “2010 operations are going to be very critical on cost management. It’s still a very tight market at the moment.”

He said nationally, with gas production declining, companies are beginning to secure rigs. But they are not necessarily operating them yet. Some are waiting to see whether a tighter supply of gas increases prices.

Bennett thinks next year will look a lot like this year for local energy producers, and perhaps even a little worse. A lot depends on this winter’s temperatures, which affect heating demand and gas pricing.

“That’s the really bad news. You’ve got to depend on weather, and weather’s not a really dependable partner,” he said.


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