Energy industry outlook improving

Kelly Sloan,  The Business Times

Steve Soychak

Representatives from two energy companies operating in Western Colorado offer a more upbeat outlook for industry activity in the region.

Even as WPX expands production in the Piceance Basin to take an advantage of an uptick in natural gas prices, Shell Oil continues its research into developing what’s potentially an even bigger energy resource in oil shale.

Steve Soychak,

a district manager for WPX, and Carolyn Tucker,  the communications representative with the  Shell Oil Mahogany Research Project, offered an overview of two components of the area energy industry as well as a note of cautious optimism during a briefing hosted by the Grand Junction Area Chamber of Commerce.

Soychak said WPX is well-positioned in Western Colorado to take advantage of higher natural gas prices. The company is particularly encouraged by the performance of its first horizontal well drilled in the Niobrara Formation in the Piceance.

Carolyn Tucker

WPX announced earlier it plans to increase the number of drilling rigs in the basin from five to seven this year.

“Now’s the right time for us to accelerate our natural gas production, and the Piceance is the right place to start,” Ralph Hill, president and chief executive officer of WPX, said a news statement. “Natural gas prices are stronger, and this helps lay the groundwork for our 2014 development.”

Soychak said at the chamber briefing the company’s existing infrastructure and ability to keep costs down were the main factors that encouraged WPX to keep drilling in Western Colorado, albeit at a reduced rate, following the 2009 downturn that saw other operators relocate to other parts of the country.

“WPX has been able to contain our costs to an extent that set us apart from other operators and enabled us to offset some of the effects of the marketplace,” Soychak said, adding WPX experienced about 38 percent lower drilling and completion costs relative to other operators.

“That was largely due to our water management,” he said referring to a recycling program that allows WPX to reuse water used in the hydraulic fracturing process and keep water handling costs down.

Efficiencies also resulted in 53 percent lower operational lifting costs associated with production of natural gas from completed wells, he said.

The additional drilling rigs this year will add $60 million to capital expenditures and bring the annual WPX budget for the Piceance up to $400 million, Soychak said. That’s still shy of the roughly $1 billion spent each year during the energy boom that preceded the bust.

Soychak attributed increasing natural gas prices to natural gas storage levels dipping below the 5-year average following a period of a “tremendous amount of storage” that kept prices low.

Soychak also discussed a horizontal well WPX drilled into the Niobrara formation in the Piceance basin earlier this year. The well provided an initial production rate of 16 million cubic feet of dry gas per day. The well went on to produce 1 billion cubic feet in its first 107 days of production, making it the top well for the formation in having delivered the equivalent of more than 6.6 million barrels of oil.

The Niobrara is a vast geologic formation that stretches from the Denver-Julesburg  Basin in Eastern Colorado, where its an oil play fueling an energy boom in places like Weld County. On the Western Slope, the Niobrara is located considerably deeper than the Williams Fork Formation, which has been the chief target zone for natural gas production in the area and produces dry gas. The Niobrara also holds oil reserves farther north in Moffat and Routt counties.

Soychak said horizontal wells drilled into the deeper Niobrara are “probably the future for development in this area” and a major part of the WPX strategy. The company plans on drilling four horizontal Niobrara wells in the Piceance this year.

The company is “ready to ramp up further” should natural gas prices move even higher. But improved technology makes two additional rigs a major development, Soychak said. “This seven-rig program is almost like a 14-rig program was a few years ago due to increased efficiencies.”

Meanwhile the “size of the prize” in the vast oil shale formations located in Western Colorado continue to drive research at the Mahogany Project in Rio Blanco County, Tucker said.

“U.S. oil shale in the Piceance Basin approximately equals the world’s known proven crude oil reserves,” Tucker said. “This is a tremendous resource and we will be relying on oil well into the future.”

Potential oil shale production has been the target of lawsuits by environmental interests, the latest of which led to a settlement that required the U.S. Bureau of Land Management to redo an environmental impact analysis and led to a decision to remove hundreds of thousands of acres of federal land, where most oil shale resources are located, from availability for applications for leasing. The analysis placed additional stipulations on oil shale leasing and required that leasing regulations be rewritten.

Tucker said Shell is taking a “cautious and deliberate” approach to oil shale. “Our plan is to establish a commercial oil shale industry that is economically viable and environmentally and socially responsible.”

Tucker described the various stages of research conducted at the Mahogany Project. The first stage included the use of electric heaters lowered into drilled boreholes that over time heated the shale to 650 to 700 degrees — the temperature required to free oil from shale to pump it to the surface.

The next phase was the testing of a “freeze wall” of liquid ammonia injected into peripheral wells to isolate the heated areas, increasing production and protecting groundwater.

The latest phase of research centers on removing nahcolite, which is found in quantity in oil shale formations, followed by installation of the heaters and recovery of the oil.

Tucker said future research will focus on other aspects of oil shale development, including refining, surface facilities and transportation.

Shell has been pleased with test results so far and intends on achieving its research and development goals by 2016, when the 10-year leases expire, she said.

Tucker said oil shale production isn’t new or inconceivable. Estonia has used oil shale as an energy source since the 1940s. Moreover, the Mahogany project has produced 1,500 barrels of oil.

Many of the challenges Shell faces in developing oil shale aren’t technical, Tucker said. “Public acceptance, skepticism and legacy concerns, and political acceptance, skepticism and policy challenges are just as big of obstacles.”

Skepticism is best countered by communicating facts, Tucker said.

“Our efforts have proven that oil shale is energy positive” Tucker said, alluding to statements oil shale development requires more energy than it creates. Another common misconception that Tucker said Shell research work has countered concerns water use. “Our processes use only 3 barrels of water per barrel of oil produced, and we are working on reducing that even further.”

In describing the regional goals of oil shale development, Tucker said, “We don’t want to be the economy of the region, we want to be part of the economy.”

Nonetheless, continued demand for oil and natural gas make energy an important part of the economy, she added.