Staying Power: Why They're Still Drilling for Natural Gas

The energy resource remains so cheap

Clouds of steam once billowed from the 928-megawatt Cherokee Station, which sits along the South Platte River north of downtown Denver. Invisible were the mercury, nitrogen oxide and sulfur dioxide, the latter two contributing to smog, a major motivation for replacing the aging coal-burning units. Colorado was failing federal air quality standards for ozone. The oldest of the units predated arrival of the Denver Broncos in 1960 by three years.

In August, the plant burned the last of its coal and became fueled entirely by natural gas, which produces much less of these pollutants and only about half as much carbon dioxide, another greenhouse gas.

Colorado’s Clean Air-Clean Jobs Act of 2010 gave Xcel Energy the framework for the transition. Even then, it was understood that Colorado had lots of natural gas in the Wattenberg Field between Denver and Greeley, the San Juan Basin south of Durango, and in the Piceance Basin of northwest Colorado.

Coal companies angrily resisted the switch. The Colorado Mining Association predicted “dramatically higher electricity rates.” No, not really, responded the Colorado Oil and Gas Association. It said this was the cheapest way to improve Colorado’s air quality.

Even then, innovation had dramatically reduced natural gas prices. “We were pretty confident that the supply chain was long, and not just because of Colorado but because of what was happening around the country,” says former Gov. Bill Ritter Jr., now director of the Center of the New Energy Economy, a department of Colorado State University.

What surprises Ritter has been just how low prices have been for natural gas: In 2008, natural gas was getting $13.50 per thousand Btu (also called mcf), a measure of heat. Those high prices had trucks pounding county roads around Rifle and Meeker as up to 100 rigs poked the subterranean of the Piceance Basin. Modeling studies conducted by Ritter’s administration in 2010 predicted gas prices of $5 or $6 going forward. In fact, prices have been almost entirely $3 or below. The average impact to Xcel customers of burning the cleaner fuel, Ritter says, has been about 5 cents a month.

How has this happened? Drilling has become radically more efficient, deeply slashing costs of extraction. In the Denver-Julesburg Basin, in which the Wattenberg Field is located, oil and gas production working in the all-important Niobrara formation increased 12-fold per rig per well from 2011 to 2017, according to RBN Energy, a consultancy in Houston.

“The basic story is, it’s not a scarce resource any more,” says John Harpole, founder and owner of Littleton-based Mercator Energy. He’s been in the business since 1980, and he thinks this is the energy story of his generation — and perhaps several more.

Speed of drilling is one of many major advances. The Piceance Basin, located west of Glenwood Springs and both north and south, is what operators call a “dry play,” which consists almost exclusively of natural gas with very little oil.

What once took up to three weeks now takes four days, says David Ludlam, executive director of the West Slope Colorado Oil and Gas Association. That quicker work means less cost, fewer rigs and continued drilling at even historically low prices.

The Wattenberg field of Northern Colorado is what operators call a “wet play.” The field’s Niobrara shale yields mostly oil but also natural gas, propane and butane. For Anadarko, the largest operator in the basin, that mix has made the basin “an attractive ongoing investment,” Anadarko spokesperson Jennifer Brice says. Growing production from the basin “directly benefits Front Range consumers because of proximity and lower cost to transport it,” she says. Anadarko supplies the natural gas to Cherokee.

During the past five years, Anadarko has invested more than $10 billion in the Denver-Julesburg Basin, of which the Wattenberg is the most noteworthy part. Anadarko has 1,100 employees, mostly along the northern Front Range, according to the company’s website. It owns or has leased 950,000 acres of mineral rights.

Anadarko expects to ramp up production from the Denver-Julesburg Basin. In 2015, the company calculates it could deliver 250,000 barrels of oil equivalent per day, or BOE, a measure of total energy for both gas and oil. By 2021, the company expects to produce 400,000 BOE a day. That’s enough energy to meet the daily needs of more than 3 million average American households. The company estimates it has reserves of 2 billion BOE in the field. A third-quarter 2017 filing by Anadarko says the company plans $900 million investment in development.

“Continue Building on Wattenberg Success” was a third-quarter takeaway by PDC Energy, another major player in the basin, with 95,500 net acres. PDC reported about 47 percent growth in oil production in the third quarter of 2017 relative to 2016.

Dr. William W. Fleckenstein, an adjunct professor at Colorado School of Mines, describes a convergence of technology and opportunity. “People can make money at $3,” he says, referring to the current natural gas price.

The Wattenberg Field has been poked repeatedly since the first well for natural gas was drilled near Brighton in 1970. But the returns from those vertical wells were marginal. Then came realization of the hydrocarbons in the overlooked Niobrara shale, one of seven geologic layers in the Wattenberg. It’s 6,000 to 7,000 feet underground. It provided the opportunity. The field, as defined by the Colorado Oil and Gas Conservation Commission, had 27,000 wells as of November.

The technology has arrived in horizontal drilling.  From the vertical well, horizontal laterals up to two miles long are bored in the Niobrara. Next are the repeated hydraulic fractures of the subterranean rock. “Fracks are like college students, they want to take the path of least resistance,” says Fleckenstein, in describing how experience has taught drillers to produce even greater quantities of oil and gas.

“The technology is still really evolving,” he says. “As the cost of drilling wells drops, the economics will continue to improve.”

This cheap natural gas generates electricity at the Cherokee power plant and heats homes. It might also help explain the robust economy along the Front Range. “Right now the Colorado economy is probably one of the best in the country,” Fleckenstein says. “There are a number of reasons for that. But when natural gas is so cheap, it’s like a gigantic tax cut, because it’s just something you don’t have to pay for.”

Using 2013 data, the U.S. Energy Information Administration in 2015 ranked Wattenberg fourth in the nation for estimated oil reserves and ninth in natural gas reserves.

In the short term, Colorado will continue to argue about where, when and how Wattenberg’s hydrocarbons can be extracted. In October, at Ritter’s energy conference in Fort Collins, a fractivist wearing a Mardis Gras mask made of green and yellow feathers stood up every time Gov. John Hickenlooper spoke. The individual’s sign protested drilling planned on the outskirts of Greeley, near a school. But it’s not just people in costume who want distance from drilling. It’s also turf-protecting city councils and those with growing anxiety about carbon emissions.

Long term, carbon emissions will be a problem for even low-priced natural gas. Ritter foresees a low-carbon future, particularly if the United States puts a price on emissions. “Then natural gas becomes more expensive to burn,” he says. For natural gas to survive, it will need cost-effective technology to prevent carbon dioxide from adding to the greenhouse effect. Billions have been spent on carbon capture and storage, but the technology remains marginal at best.

Other technologies such as cost-effective battery storage could arrive, however, making renewables capable of delivering 24/7 power supplies, undercutting natural gas. “I don’t think anybody can say with exact certainty what the future looks like,” Ritter says.

What can be said is that Colorado’s air quality has improved as a result of the fuel switching at Cherokee. Xcel, in a recent posting on its website, reported emissions of sulfur dioxide, nitrogen oxides and mercury have all gone down 90 percent. What the website doesn’t say, but Ritter did, is that the cost to consumers is about a nickel a month.

Categories: Economy/Politics