Niobrara ‘burning cash’ without gas infrastructure

GREELEY — Dozens of oil and gas companies are drilling in the Niobrara shale formation in northeastern Weld County, but so far few are profiting from the natural gas extracted from the new play.

A lack of infrastructure to pipe the gas to existing pumps and processing facilities in more established areas of the Denver-Julesburg Basin has led most companies to simply flare off the gas onsite.

That’s lost revenue to oil and gas drillers — and local governments — but unavoidable until a more complete system of pipelines and other equipment can be built to gather and transport the gas from the hot new drilling zone.

“It’s definitely a tough pill to swallow, but at $4 (per thousand cubic feet for natural gas), it’s not that big a deal,” said Trent Korby of Greeley-based Cimarron Energy. “When oil’s selling at $85 to $90 a barrel, they tend to forget about it.”

Bill Ward, president and CEO of Oklahoma-based Ward Petroleum, said the still-developing Niobrara shale play needs infrastructure to fully realize its potential.

“There is an existing infrastructure just to the south in the Wattenberg (basin) area, and it would make a lot of sense to connect from Weld County to there,” Ward said. “As close as Greeley there’s quite a few pipelines, but the gathering system needs to be built.”

The Niobrara Shale play has been experiencing a mini oil rush since the fall of 2009, when Houston-based EOG Resources announced the discovery of “Jake,” a monster-producing oil well that poured out almost 700 barrels a day in November 2009.

Infrastructure on the way

Oil has been the focus in the Niobrara, but vast quantities of natural gas are also being produced — and mostly wasted — there.

Two of the bigger companies beginning to establish gas gathering infrastructure in the region are Anadarko Petroleum and DCP Midstream.

Houston-based Anadarko Petroleum, the biggest player in the Wattenberg Field, recently acquired the Wattenberg Plant in Adams County from BP America Production for $575 million.

The plant has the capacity to process about 195 million cubic feet per day of natural gas and 15,000 barrels per day of natural gas liquids and condensate.

“We expect the acquisition to improve field recoveries, allow for future expansions and capture efficiencies that enable us to reduce operating expenses,” said Brian Cain, Anadarko spokesman.

Cain said the acquisition “gives Anadarko and other area producers exceptional midstream options for development within existing plays and for future growth in the greater DJ Basin,” which includes Niobrara.

“Midstream” refers to the gathering part of bringing oil and gas to the marketplace.

Another big player in gathering and transporting natural gas in the region is Denver-based DCP Midstream, which already has seven natural gas processing plants in Weld County and is building an eighth in LaSalle.

DCP growing fast

DCP Midstream’s $270 million natural gas processing plant is scheduled to be in service by mid-2013. It will be able to gather 110 million cubic feet of natural gas per day and will include four compressor stations and about 45 miles of gathering pipeline.

“DCP Midstream is committed to the continuing economic success of the energy industry in Weld County,” according to the company’s Web site. “The Denver-Julesburg Basin continues to reinvent itself, and new technology is uncovering natural gas discoveries in the Niobrara Shale. There is a need for more natural gas gathering and processing facilities to bring producers’ products to market. We are expanding to accommodate that growth.”

Tim Christensen, DCP Midstream’s commercial managing director for the Rockies, said the company has a gathering system in Douglas, Wyo., that can gather 30 million cubic feet of natural gas per day. He said the Weld County system can currently gather 400 million cubic feet per day.

Christensen notes that the new drilling activity in the Niobrara play in northeast Colorado, southeast Wyoming and southwest Nebraska so far has “virtually no infrastructure for gathering and processing” gas brought up by horizontal drilling and hydraulic fracturing of oil shale formations deep underground.

“They need a lot more infrastructure and on all fronts — not just gathering but infrastructure to bring in equipment, pipe and sand and mud and water,” he said. “We’re lacking on all fronts.”
 
Someone to lead?

While acknowledging that Ward Petroleum is one of the smaller players in the Niobrara area, Bill Ward said he would expect one of the bigger players or perhaps a combination of players to step up to build the infrastructure needed to get the Niobrara gas to market.

“Usually, there’s a company that’ll come in and take a lead role because there’s a lot of gas that needs to get to market,” he said. “Somebody will take the risk to build that pipeline. This is kind of a normal process. You find a field, start to develop it and then fill in the infrastructure.”

DCP Midstream may be the company most inclined to take that on, but the company is not ready to make a major investment in infrastructure in the still-emerging Niobrara.

“We’ve laid some pipe but we’re taking a measured approach on how much to spend,” said Christensen. “The producers are still finding their way. They’re kind of doing some research right now, but they sure are hopeful that it will be a big play.”

Christensen said the challenge in the producing area centered in Weld County around Grover and the Pawnee National Grasslands is that the wells being drilled so far apart.

“The things they’re drilling are one per section, and there’s a lot of space between them,” he said. “We’re all in the expensive phase right now. If we were out there, we’d build something and hope all of the producers would come our way.”

But Christensen notes that it’s the high price of oil that’s been the driving force for the rapid growth of the Niobrara and will continue to be.

“High oil prices definitely help,” he said. “If it stays at $100 (per barrel) or above, it’ll keep going. But natural gas prices certainly are not what’s driving this.”

Natural gas prices have recently hovered around $4 per thousand cubic feet — far lower than the $10-plus seen a few years ago.

Cimarron’s Korby said uncertainty about the Niobrara’s long-term potential and ongoing low gas prices are slowing infrastructure development for now.

“I think they’re moving in that direction (of more infrastructure ) because it seems to be a formidable play. But it may take another two to five years.”