Energetic outlook: Natural gas activity gradually increasing on West Slope, but long-term prospects for industry still depend on price

Drilling Rig
The number of drilling rigs operating in the Piceance Basin in Western Colorado is expected to increase to between 30 and 36 this year. (Business Times photo by Mike Moran)

The natural gas industry constitutes a major player in the Mesa County economy. Unemployment figures and sales tax collections aside, what’s happening in the Piceance Basin provides a significant indicator in determining the economic outlook. While the number of people earning paychecks directly from Encana Oil and Gas, Williams Production and other companies might comprise less than 10 percent of the total local work force, 93 different occupational sectors are affected by natural gas exploration and development activity.

In early 2011, there are signs that activity is on the upswing.

“We’re seeing a gradual increase in Western Colorado,” says David Ludlam, executive director of the West Slope Chapter of the Colorado Oil and Gas Association.

Still, the number of active drilling rigs and production levels are nowhere near what they were in the summer of 2008, when 103 rigs operated in the Piceance. The rig count dropped significantly in early 2009 as the Great Recession took hold nationwide. Demand for natural gas declined as factories reduced hours and work forces. Fewer than 30 rigs were operating in the Piceance by the summer of 2009.

The local trend mirrored the national news as described in a report prepared by ICF International for the Natural Gas Supply Association: “U.S. drilling activity in recent years peaked in September 2008. This was followed by one of the steepest and largest drops in history, bottoming in June 2009. The large swing in activity corresponded to the sharp decline in the U.S. economy, reduced credit availability, shale gas deliverability additions and other factors.”

Those same factors were cited by energy company representatives in Western Colorado.

But production and employment increased locally and nationally following the summer of 2009, as cited in the ICF report: “U.S. total oil and gas rig activity in August 2010 averaged 1,632 rigs (Baker-Hughes report), which was 665 rigs higher (69 percent) than in August of 2009.”
The report states the increase was primarily driven by gas activity in shale formations discovered in Texas, Louisiana, Pennsylvania and other parts of the Eastern United States.

But if natural gas demand rises across the country and the globe, activity could improve in the Piceance Basin as well, partly because a major obstacle has been addressed — limited pipeline capacity to transport gas out of the Rocky Mountains.

“It doesn’t make sense to develop gas and not be able to transport it anywhere,” says Carter Mathies, spokesman for Clover Energy Services, which pursues oil and gas opportunities in the Western U.S.

In the past five years, the Rocky Mountain Express pipeline has opened shipping lines from the Rockies to Midwest and East Coast markets. The much-heralded Ruby Pipeline, which is set to be completed by the fall, will transport gas to the West Coast. With such improvements in transportation, energy companies don’t have to worry about drilling wells that produce more gas than they can transport to market.

Carter Mathies
Carter Mathies

“The Piceance should be well-served for years,” Mathies says of the Ruby Pipeline.

Ludlam likened the pipeline to the transcontinental railroad, which linked the east and west with a rail line in the 1800s.
Pipeline capacity could be a prelude to a healthy future for the Western Colorado natural gas industry even as that industry enjoys a comeback in 2011.

Mathies says between 30 and 36 rigs will be active in the Piceance Basin this year.

Natural gas drilling activity is likely to increase as the weather warms and daylight hours lengthen in the spring and summer. But that doesn’t portend a full-blown boom over the coming year, Mathies says.

“It’s not indicative of a high activity level,” he says.

Because natural gas and oil deposits go hand in hand in geological formations, companies can shift between the two energy sources in a single area of the country.

The rising price of oil — to about $90 a barrel early this year — no doubt contributed to the increased rig count last year. The ICF report cited an increase in oil-targeted activity since the first half of 2010.

Meanwhile, natural gas prices were hovering around $4.40 per million British thermal units (Btus) in early February, about $11 less than they were in 2005.

At the February price, it would take about $26 worth of natural gas to produce the same energy as the $90 barrel of oil.

If low natural gas prices are a hindrance to production, such prices could also lead to increased demand and, eventually, higher prices.
Increased demand is predicted in a Bloomberg News report that quotes information from the Energy Information Administration (EIA):

“The cheaper price will drive up the use of natural gas as a fuel for generating electricity at the expense of coal and renewable sources such as wind turbines.”

Meanwhile, there’s no apparent shortage of natural gas reserves in the United States. The recent discoveries in the South and East lead analysts to predict the country has enough gas to meet demand for another 100 years.

According to a recent report from the (EIA), production forecasts for gas locked in shale have doubled.

“Last year’s long-term outlook predicted annual shale-gas production would rise to 6 trillion cubic feet by 2035. “The updated forecast is 12 trillion cubic feet,” EIA Administrator Richard Newell was quoted as saying in the Bloomberg News report.

The prediction was largely predicated on recent discoveries. The scenario seems to indicate natural gas prices will not rise quickly. In fact, prices could remain stable for some time.

“The price of natural gas is more steady with the supply that’s there,” says Doug Hock, director of public and community relations for Encana Oil and Gas. “We don’t see prices going a lot higher anytime soon.”

David Ludlam
David Ludlam

Newly enacted drilling regulations in Colorado provide fodder for the debate between those who favor stricter environmental protections and those in the industry who point to the demand for natural gas as a source of energy as well as a means to help the United States reduce its dependence on foreign oil.

To further complicate the regulatory landscape, the industry faces oversight from federal and state governments as well as individual boards of county commissioners.

More than 80 percent of the gas deposits are located on private land and outside the purview of the U.S. Bureau of Land Management, so state and county governments can have a big say in how and when drilling occurs.

“On any given day, our business is facing a combination of those entities,” Ludlam says. “It’s not so much the regulations as the uncertainty.”

Now that revised regulations in Colorado have been in place for two years, the industry is better able to calculate the costs of regulation when it determines whether or not to extract natural gas, Ludlam says.

Adds Hock: “We’ve been able to adapt to the rules.”

Still, other factors constitute something of a wild card for the Colorado energy industry.

Colorado lawmakers last year enacted a law requiring Xcel Energy to reduce nitrogen oxide emissions from its power plants by 70 percent to 80 percent by 2017. Lawmakers cited the threat of action by the U.S. Environmental Protection Agency if power plant emissions aren’t reduced.

Late last year, the Colorado Public Utilities Commission approved Xcel plans to switch two units at power plants from coal to natural gas and to construct a new unit to burn gas. Still other coal-fired units will be fitted with additional emission controls or closed.

The ultimate outcome of fuel switching remains uncertain, though, because the PUC order likely will be appealed.

Lawmakers also approved a measure requiring Colorado’s largest utilities to produce 30 percent of their power from renewable energy sources by 2020.

Still another wild card is the potential effects of national health care legislation on the cost of doing business.

As is the case with all businesses these days, energy companies continue to monitor the health care debate in the wake of the sweeping reforms approved in Washington last year.

“A lot of that won’t be in effect until 2014,” says Hock, citing the year in which many of the new health insurance provisions will take effect.

The health care law requires companies that employ more than 50 people to provide health insurance options for employees or pay a fine.

Companies such as Encana and Williams Production, both major players in the Piceance Basin, fall into that category.
In the meantime, the biggest factor  affecting production and employment remains the price companies fetch for natural gas. With supplies increasing and demand also likely to increase, experts are reticent to predict what the outcome will be for the industry over the next couple of years.