Higher commodity price points to local rebound
Story courtesy of the Daily Sentinel.
A peek into the crystal ball when it comes to western Colorado’s energy outlook in the coming year offers to some degree a look back at the past, at least when it comes to natural gas drilling levels.
While the year promises a number of uncertainties — from what changes in federal energy policies will result from Donald Trump’s election to whether coal production levels in the state can halt their continued slide — a return of gas development activity in western Colorado’s Piceance Basin to past levels is looking fairly promising thanks to improved natural gas prices.
“I wouldn’t be surprised if we saw 15 to 25 rigs running by late fall next year,” said John Harpole, owner of Littleton-based gas brokerage firm Mercator Energy. “I know I’m sticking my neck out there. Only a fool tries to predict the future, but I’m really positive on it. I think we’re going to see some strength here.”
Such a rig count would be welcome news for everyone from local service companies and employees who do contract work for energy producers, to local governments that have suffered hits to tax revenues due to the local drilling slowdown. More than a dozen rigs were operating locally at the start of 2015, but by this year generally just three rigs have been operating — one apiece by Ursa Resources, Terra Energy Partners and Caerus Oil and Gas.
As of the start of this month drilling had begun on 131 wells in Garfield County in 2016, a number that hasn’t been lower since 1999.
No wells had been drilled in 2016 through Dec. 1 in Mesa or Rio Blanco counties, two other areas of past activity. In a sign that better times may be coming, Laramie Energy began operating a rig in the Plateau Valley of Mesa County late this year. And Terra added a second Piceance rig this month.
Spokesperson Susan Alvillar said Terra is likely looking at sticking to a two-rig program for the near term. She said a lot depends on market prices, but Terra also is continuing to work to gain more local operating experience after just acquiring its Piceance Basin holdings from WPX Energy earlier this year, so it’s too soon to say whether it might be adding more rigs later.
“Terra is still very new to operating this resource and out of an abundance of caution they’re watching their dollars very carefully,” she said.
But she called the growing rig count “very good news for western Colorado. The community really needs this boost right now. I’m happy to be part of the action.”
Don Simpson, a vice president for Ursa, said Ursa is looking to add a second rig next year to do some on-and-off drilling on acreage it has acquired in Rio Blanco County.
He said Ursa doesn’t predict gas prices, but others are saying next year should be a little better. He added that “2016 was rough, so we’ll see how that goes.”
David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, said natural gas was trading for $1.86 per million British thermal units a year ago, and has risen to $3.50 today.
“We’re optimistic for 2017 because we think there could be an extended period of gas that’s in that 3.75 or $4 range,” he said.
Gas storage will be drawn down during the winter heating season, and gas demand has been growing over the years due to factors ranging from new liquefied natural gas export facilities coming on line to more coal power plants being replaced by gas-fired plants, Ludlam said.
Meanwhile, Ludlam said, gas production has been down. He said while Canadian producers might want to export more gas into the United States, they’re limited in their ability to do so because their pipelines are already nearly fully used.
Harpole said new pipelines intended to ship more gas from the Marcellus and Utica shale formations in the eastern United States are being held up by local opposition and agencies dragging their feet. Meanwhile, the Piceance Basin continues to have ample spare pipeline capacity to export gas to other markets.
Local companies also can take advantage of improved prices by participating in price-hedge contracts with customers, which provide everyone involved long-term price certainty and help producers plan for and get financing for prolonged production programs.
Harpole said his rig predictions are based on the assumption that there won’t be a warm winter that would drive down heating needs. He’s also assuming it will be difficult as gas prices rise for power companies to switch from gas-powered to coal-fired plants because they’ve shuttered a number of coal plants.
If his market assumptions hold up, he’s expecting the rise in rig levels to occur by spring 2018 if not next fall.
What levels of coal mining might be seen next year is more of an open question. Production in 2015 was down 18 percent from the year before, falling to the lowest levels since the early 1990s. And the production decline this year looks like it will be far worse. The Colorado Division of Reclamation, Mining and Safety reports that 10.1 million tons of coal were produced through October, compared to 18.7 million tons for all of last year.
“I think maybe it can only get better from here,” said Stan Dempsey, president of the Colorado Mining Association.
He said the federal government has helped by creating some regulatory certainty due to its reinstatement of the North Fork Valley coal exemption to the Colorado national forest roadless rule, and in recent years having resolved environmental issues involving expansions of the Colowyo and Trapper mines in the Craig area.
“Because those issues have been disposed of perhaps there will continue to be coal mining on federal lands and maybe the bleeding will stop,” he said.
The roadless rule decision could benefit Arch Coal’s West Elk Mine, which is hoping to expand into roadless acreage.
Meanwhile, the emergence of Arch Coal from bankruptcy and Peabody Energy’s continuing work to complete a bankruptcy reorganization also could bode well for a coal revival, Dempsey believes. Peabody owns the Twentymile Mine in Routt County.
And Dempsey is encouraged by the support President-elect Trump has voiced in support of fossil-fuels development.
“With President-elect Trump’s views on coal and other natural resources, at least the boot is going to be lifted off of our throat,” he said.
Jeremy Nichols with the conservation group WildEarth Guardians said that while the political situation surrounding fossil fuels has changed, the market reality for local coal mining has not.
“The market for Colorado coal is just not what it used to be and I don’t foresee that changing,” he said.
Some Colorado mines can be expected to produce at stable rates because they supply nearby power plants. But Denver metro coal-fired plants are going away, Nichols said. West Elk — currently the only mine operating in the North Fork Valley — has been a supplier of Front Range plants, he said. In a more national market, it faces competition from huge mining operations owned by Arch Coal and other companies in the Powder River Basin in Wyoming.
While Nichols expects some regulatory changes under Trump in the case of coal, he’ll also be closely watching Bureau of Land Management oil and gas leasing, as will people like Ludlam.
“We’re really excited about the idea the BLM’s leasing program might get back on track over the next four years,” said Ludlam, who hopes to see the process speed up, with fewer lease deferrals.
Nichols believes the BLM already is leasing plenty of acreage — it’s planning to offer some 100,000 acres in just one Colorado lease sale next May — and he expects the pace to pick up even more under Trump.
For groups like his, “it’s going to be watchdogging like we’ve never watchdogged before,” he said.
Emily Hornback, with the Western Colorado Congress citizen group, said groups like hers will push for implementation by the Trump administration of newly adopted rules such as the ones the BLM just finalized for limiting methane emissions for oil and gas operations.
“They’ve come a very long way through the process (on the methane rule) and we think it would be very bad form to revise that process at this point,” she said.
She expects citizen groups to continue to push at the state level for more protections of neighborhoods from oil and gas development, and Nichols would like to see Gov. John Hickenlooper work hard to defend Colorado’s clean-energy economy from what measures Trump may take.
“We can’t afford to have oil and gas above everything else,” Nichols said.
Simpson said of Trump, “He’s for reliable, inexpensive energy and I think that bodes well for natural gas. It’s cleaner burning than some of the other fuels so I think that’s a positive for natural gas.”
One forum where both state and federal energy policy are likely to undergo scrutiny next year will be the newly formed state Senate Select Committee on Energy and Environment, to be chaired by Sen. Ray Scott, R-Grand Junction.
He would like to see more discussion about potential energy sources such as nuclear and hydroelectric, and he expressed discomfort with renewable-energy mandates.
“There’s questions out there, will those mandates go away and (will we) let the free market figure this out,” he said.
He also expects it to be a new world for fossil fuels after Trump’s inauguration, and sees a new attitude among those in the energy industry.
“The meetings I’ve had, instead of a frown on their face they’ve had a smile on their face,” he said.