Priming the new energy pump
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Sun, wind meet fossil fuel
With all this attention to the new energy economy, one might expect resentment from an oil and gas business in contraction. Not so.
John Swartout, government affairs and policy director for the Colorado Oil and Gas Association, calls renewables and traditional sources "complementary." "I think the nation needs additional energy resources, and they should get them from where they can," he said.
Doug Hock, spokesman for EnCana Oil & Gas (USA), one of the state's largest gas producers, echoed the sentiment, saying "We're going to need all the energy we can get, in addition to conservation." Natural gas plays a big role in balancing out renewable power anyway, he added, which unless interconnected to a grid much larger and smarter than today's, is inherently intermittent as winds die off and the sun dips behind the mountains.
"What people don't appreciate is how much new natural gas infrastructure in pipeline and gas storage is needed to back up intermittent wind with natural-gas turbines," said John Harpole, president of Mercator Energy in Denver. He pointed to Colorado Interstate Gas' Totem Natural Gas Storage Project north of Bennett and the company's and Xcel Energy's High Plains Expansion pipeline project as examples. Although the 164-mile pipeline and 10.7 billion cubic foot reservoir will serve many purposes, the combined $370 million projects explicitly stated electricity generation as a motivator, he said.
Indeed, the oil and gas business, following explosive growth in recent years, is slowing down. Prices are a big driver, Harpole said. "You can't see a $100 drop in the price of crude in three months and not see it impact natural gas," he said.
Natural gas prices have plunged, with late-January Henry Hub spot prices of less than $5 per million Btu compared to more than $13 per million Btu at their July 2008 peak. With this drop, the number of natural-gas drilling rigs has also fallen. According to data from oilfield service firm Baker Hughes, there were an average of 116 rigs drilling in Colorado last August.
As of late January, just 77 were active. EnCana averaged about 15 rigs last year, Hock said. Now they are averaging about five, he said. That some of Colorado¹s richest natural gas fields happen to be in the Western Slope's Piceance Basin is also a factor. Hock called the basin "the most price-sensitive basin in which we operate." The Colorado Energy Research Institute's 2007 report put the price of an average Piceance Basin well at $1.6 million, nearly triple the $550,000 cost in the Northern Denver Basin and $611,000 in southern Colorado.
Harpole said "devastating" credit market conditions and a lack of pipeline capacity were additional short-term business problems facing the Colorado gas industry. El Paso Corp.¹s forthcoming Ruby pipeline, 680 miles of tube scheduled for opening in early 2011, will send Rocky Mountain gas to California markets and help on that front, he said.
Oil and gas face new rule
Then there is the regulatory landscape. Harpole, Swartout and Hock all said new regulations put forth by the Colorado Oil and Gas Conservation Commission should be reconsidered.
The state Legislature in 2007 instructed the commission to develop the rules to take better account of environmental health amid exploding gas development. Created in concert with industry, the rules were the product of more than a year of effort, including 24 days of hearings and thousands of pages of comments. They came out in December and, barring legislative action, will go into effect this spring.
Legislators might just act, though. Senate Minority Leader Josh Penry, R-Fruita, has been the rules' most outspoken opponent. But despite broad Democratic support, frustration bleeds across the aisle. Wes McKinley, D-Walsh, called the rules "too far-reaching" and giving "way too much authority to the Colorado Division of Wildlife." He and others have proposed bills that would alter the rules, and the Colorado Legislative Council is considering whether they follow the 2007 law's intent.
McKinley's bill (HB 09-1167) failed in committee on Feb. 10 in a 7-6 vote, with McKinley joining the House Committee on Agriculture, Livestock, & Natural Resources' five Republicans in defeat. Swartout contends the rules, "which industry did support, went beyond legislative intent" in several areas. First, he said, new rules surrounding landowner consent leave too much discretion to the commission. Second, the rules with respect to wildlife lack clarity. Third, new potential for administrative appeals could delay the permitting process. Finally, Swartout said, the commission is jumping the gun in its desire to open a new round of rulemaking in 2009 before the dust settles. The net effect, he said, is to introduce uncertainty and make the state less attractive to oil and gas developers.
David Neslin, the commission¹s director, countered that many of the new rules come straight from language industry submitted and that the current downturn's impact should be muted by grandfathering all permits issued before April 1 on private land and May 1 on federal land. The state issued a record 8,027 drilling permits in 2008, 27 percent more than 2007, the previous record. Neslin says the industry is coming into 2009 with 4,500 unused drilling permits, all to which the old rules apply. That's more than enough to cover a year's worth of drilling, he said.
Whether it involves drilling for fossilized sunshine or soaking in modern-day rays, Colorado's energy business is poised for success, says Dag Nummedal, director of the Colorado Energy Research Institute at the Colorado School of Mines.
"I think Colorado is exceptionally well-positioned -- probably better than any state in the country -- to really benefit economically from the changes going on in the energy industry," Nummedal said. "We are the only place with expertise and business savvy both in fossil energy and renewable energy."
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