Global energy consumption is sure to increase, especially with emerging markets in China and India. And a bevy of discoveries of natural gas deposits portends well for that particular segment of the energy business.
However, with natural gas prices at lower levels than during the boom days of 2005 to 2007, companies face a bit of a conundrum: Do they invest in new exploration and drilling or wait until prices move higher and produce more profits for the companies and their shareholders?
“What dictates this is how much we use,” said Chad Odegard, asset director for Williams Production in the Piceance Basin of Western Colorado. Odegard addressed an energy briefing hosted by the Grand Junction Area Chamber of Commerce.
During the “shoulder months” of the fall season, natural gas companies typically store gas for use in high-demand winter months. Residential and industrial demand typically spikes in both winter and summer, when both types of users tend to use energy for heating or air conditioning. In addition, though, manufacturing demand also depends on economic conditions and how much demand there is for new products.
There’s also a huge wildcard in the potential increased use of natural gas to power vehicles. For a local example, Grand Valley Transit plans to add two natural gas-powered vehicles to its fleet, while the City of Grand Junction plans to use trash trucks powered by natural gas in the near future. The city is constructing a natural gas filing station near the city shops along the Riverside Parkway, a facility scheduled for completion by the end of the year. It’s a station billed as the missing link that will enable natural gas vehicles to motor from Denver to Los Angeles.
Texas oilman T. Boone Pickens made a splash by promoting the use of natural gas in vehicles as a way to reduce dependence on foreign oil while using an abundant domestic energy source.
Recent discoveries of gas deposits in the Marcellus shale formation near the Eastern Seaboard as well as in the Haynesville shale formation in Northwest Louisiana and East Texas have raised expectations for how long the supply might last. Energy analysts now predict there’s enough natural gas on hand to fuel the U.S. for another century.
“The supply of natural gas has changed dramatically,” said Doug Hock, director of public and community relations for Encana Oil and Gas. Hock said Encana is already using 40 trucks that use a combination of natural gas and gasoline.
The discoveries to the south and east have led Williams and Encana to pour more resources into those regions, while holding steady in the Piceance Basin.
Encana operates about 30 drill rigs in the Haynesville formation, Hock said.
In the Piceance, Williams plans to operate the current average of 11 rigs a month through next year, producing 850 million to 880 million cubic feet of gas a day. Directional drilling techniques have been refined to the point that as many as 52 wells can be drilled from a single drilling rig.
Odegard said Williams will spend about $620 million in capital investment for 2010 and produce about 860 million cubic feet of gas per day. About 350 wells will be drilled next year in the Piceance.
Williams also plans more than $600 million in capital construction costs, including equipment for drilling and extracting. An uptick in production could happen in about 13 months. “We’re looking to pick up additional rigs in 2012,” Odegard said.
Meanwhile, Encana was operating six natural gas rigs in the Piceance Basin in early November and tentatively planned to add another rig by the end of this year, Hock said. Encana produces about 440 million cubic feet of gas per day and will have drilled about 120 wells when this year’s final count is tallied. “We’re drilling and completing wells from a pad at the same time,” he said.
Encana and Williams are the largest natural gas producers in the Piceance Basin.
Once again, price will be play a big role in making decisions about production. As recently as January 2009, natural gas was selling on the open market for $6 for 1,000 cubic feet and analysts predicted prices would rise to more than $6.60 by 2011. Now, analysts forecast prices as low as $4.27 per 1,000 cubic feet next year, Odegard said.
One factor that’s improved the ability to transport natural gas out of Western Colorado is construction of pipelines to carry the gas to the Midwest, East Coast and West Coast.
And what about oil shale? It appears experiments underway by ExxonMobil, Royal Dutch Shell and others will continue in Western Colorado.
“The volume of oil shale here is world scale,” said Tom Yelverton, a mechanical engineer who works for the research branch of ExxonMobil. Yelverton said the company continues to conduct tests at the Colony Mine site about 12 miles northwest of Parachute in Garfield County.
The company continues to test the in situ method of extracting oil from shale. The method entails heating the rock underground instead of earlier tests in which shale was extracted and then heated to produce oil.
Exxon Mobil uses a patented electrofrac system in which workers hydraulically fracture the rock, then fill the fractures with electrically conductive material to form a heating element within the rock. “It’s essentially a giant toaster,” Yelverton said of the underground heating method.
The company also continues to work with the U.S. Bureau of Land Management to complete an environmental impact statement for another experimental site proposed for northwest of the Colony Mine. “That could take up to a year or more,” Yelverton said.
Still, commercial oil shale production is probably at least a decade away.
As always, the price of a barrel of oil influences whether shale oil is economically viable. When oil prices rise, as they have in recent weeks, shale oil becomes more feasible.
Should natural gas be used more as a fuel for vehicles, the price of that commodity could be a factor as well. But Yelverton said he’s not aware of concern about natural gas prices so far. “That’s not a factor in our near-term plans.”
The energy briefing came just a week after midterm elections in which Republicans gained control of the U.S. House of Representatives and made gains in the Senate. Such changes also can affect the ability of companies to extract natural resources, Odegard said, adding that local elected officials have a lot to say as well. But companies continue to plan for the future as they watch both economic and political changes over time.
“Some are more pro- and some are less pro-industry,” Odegard said.
While the exact extent of production is difficult to predict, one thing remains certain: Natural gas production will continue for years in the Piceance.
“We have thousands of locations yet to drill,” Odegard said. “We’ll be here for awhile.”