Bill Grant Column November 26, 2008

Realities of a slowing natural gas boom in western Colorado

The gas drillers in Colorado are almost unanimous in complaining about the threat of new oil and gas regulations, both at the state and federal levels, but few of them are willing to put primary blame on the Colorado Oil and Gas Conservation Commission or the new Democratic presence in Washington for the slowdown in drilling that is increasingly evident in these parts. Truth is, we are suffering not from an abundance of regulation but from an abundance of gas.

Chevron, announcing that it will not expand operations in the De Beque area next year, makes clear that its decision is based on low Rocky Mountain gas prices and a lack of pipeline capacity to move the gas to market.

The boom in drilling has overproduced Piceance Basin gas, making it worth significantly less at the wellhead, which in turn makes it less profitable to extract the gas.

These are the same factors that are causing both major and small operators in the Piceance Basin either to slow growth or cut back drilling operations for next year. According to a recent Daily Sentinel story, Williams Energy, EnCana, Bill Barrett Corp., Berry Petroleum and Delta Petroleum are all reconsidering plans to expand drilling next year. Most of the companies are reducing the number of rigs operating in the area. Statements from representatives of these companies give a higher priority to the new state rules in their search for causes than does Chevron, but it is easier to demonstrate the actual effect of a glut of Rocky Mountain gas on Western Slope drilling plans than not-yet-instituted state regulations.

The problem with either explanation is that it lacks context, making it seem as though the industry in Colorado has little connection with what is going on elsewhere in the region and country. Though we may seem isolated, the West Slope does not exist in isolation. Conditions here are being repeated elsewhere in the Rocky Mountain West as new natural gas resources are being developed closer to markets in the East, Midwest and South. While the Western Slope will continue to produce gas for many years, the frenetic pace of the recent boom may be slowing for good.

Keith O. Rattie, president, chairman and CEO of Questar Corp, which does business in Wyoming and Utah as well as Colorado, has announced that the company will move most of its operations from the Rocky Mountains to Louisiana and other U.S. areas. Like many operators, he complains of new regulations in Colorado, but blames the overproduction of gas outpacing pipeline export capacity for the decision to move east. “If all the gas comes on that we anticipate,” one of the company’s vice presidents says, “there’s just not enough (pipeline) capacity to get it out of the Rockies.”

What gets short shrift in comments on the changes in Colorado and other Rocky Mountain gas plays is the rapid development of shale gas in numerous new fields in the East, Midwest and South. Vast and largely undeveloped shale gas reservoirs exist in 27 states, most east of the Rocky Mountains. Inaccessible until the development of horizontal drilling and fracing, these fields are now being tapped.

The Barnett shale in Texas is but the first of many such fields poised to enter the gas markets. Rapidly emerging gas plays include the Fayetteville shale of Arkansas, the Haynesville of Louisiana and the Marcellus underlying 54,000 square miles of the Appalachian Mountains of Pennsylvania, New York, West Virginia and Ohio. Estimated to hold enough gas to meet the entire needs of the U.S. for 14 years, this field dwarfs the Piceance Basin.

The end of the Bush “drill, baby, drill” policy is coming, and with it may end the frenetic pace of the Western Slope gas boom. We are not yet hearing a giant sucking sound, but even a slow drip can lower the pool.

The best result for the West Slope might be a smaller, but more sustainable, gas industry. Spreading development over a longer period of time could help mitigate some of the negative effects of the boom, while supporting a strong local economy well into the future.

Bill Grant can be reached at .(JavaScript must be enabled to view this email address).


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