The Powder River Basin in Wyoming is expected to become thehottest new gas supply point in the Rocky Mountain region over thenext few years, and multiple pipeline companies are fighting toothand nail to deliver the burgeoning supplies. The huge productiongrowth forecast has led some observers to compare the Powder Riverwith the San Juan Basin, where the benefit of tax credits oncoal-seam gas triggered rapid development. But Powder Riverproducers, such as Barrett Resources and Western Gas Resources, aretapping the coal without federal help because of higher gas pricesin the region and lower finding costs in the basin.

“Certainly there’s been a lot more interest in coal-bed methaneover the last six months than there has been over the last severalyears,” said KN Energy’s Buddy Farah. “I think a lot of folkshistorically had doubted the potential. And now even those that haddoubted it are saying maybe it’s real. From these early projectionsit should become a very significant supply source in Wyoming.”

Barrett Resources spokesman Frank Keller said his company andpartner Western Gas have interests in 418 Powder River wellscurrently, plan to drill another 420 wells before the end of theyear and at least 400 more in 1999.

“You can drill these wells in a day for $55,000-$60,000,” saidKeller. “And Rockies gas prices in the middle of the summer are$1.75-$1.80. Back in 1989, you were lucky to get $1/MMBtu,” henoted. “It’s just the straight economics of gas prices and drillingcosts that make this basin so producible,” he said.

In the Powder River, “you’re drilling wells that are maybe 300-to 400-feet deep in contrast to the San Juan Basin where the coalsare much deeper, it costs a lot more and you’ve got water disposalissues,” said Keller.

Currently, estimates show the Powder River Basin could hold upto 30 Tcf of gas reserves. Production from the basin is expected tomore than triple its current 210 MMcf/d level over the next fiveyears with the potential to reach 1.4 Bcf/d eventually if all theexisting leases are fully developed.

“If everyone is successful in drilling in this Powder RiverBasin, pipeline expansions will be needed,” said Keller. “Ourpartner, Western Gas Resources, has a pipeline in the area with acapacity of about 90 MMcf/d, which is probably going to be full bythe end of the year. They have an expansion planned that will raisethat capacity to about 120 MMcf/d. If these wells of ours aresuccessful, we’ll probably fill that by next spring.”

Such rapid growth in the capacity-constrained basin has not goneunnoticed by the interstate pipeline community. Competition is redhot, with Questar, Wyoming Interstate and KN Energy vying toestablish a position that eventually will pay off in substantialthroughput. All three have expansion projects in the works.

“We’ve got a lot of exciting areas but [the Powder River]certainly is where the competition has heated up the most andoffers the most growth potential in terms of production,” saidWIC’s Thomas Price. WIC has an existing line entering the basinthat currently is being expanded by 49 MDth/d for service thisfall, but the company also is advertising a variety of otherexpansion projects, including a pipeline loop that is slated to add120 MDth/d by October 1999 or a much larger loop of its existingline that would add 300 MMcf/d. A third possibility would involvebuilding 145 miles of new 24-inch diameter pipeline directly fromthe basin to Cheyenne, WY, adding 600 MMcf/d of gas transportationcapability. That project could be in service in December 1999 ifproducer response is significant, Price said.

Questar has proposed a major 24-inch diameter line that couldextend 380 miles to the Montana border from a connection withQuestar’s existing system near Kanda, WY. “Potential in the PowderRiver basin is just unbelievable as far as total volume that is outthere,” said Questar’s Gary A. Schmitt. It promises to be thefastest growing producing area in the Rocky Mountain region overthe next decade, he said.

In contrast with other proposed projects, the Questar line wouldbe designed to deliver more than 300 MMcf/d of Powder Riverproduction primarily to western markets through interconnectionswith Kern River, TransColorado and other southbound and westboundpipelines. “WIC is already there. KN is already there. There’s alot of access to the east. There’s very little access to markets inthe West for Powder River Basin producers right now,” noted BradBurton, senior business development representative at Questar.

“Our pipeline only makes sense if you believe the westernmarkets are going to be the choice in the future,” Burton conceded.”We see demand in the west increasing and gas prices increasing tocompete as Canadian gas starts going to the Midwest. We think theprice differentials will swing so that you’ll want to move gas toCalifornia more so than Chicago. We just expect pricing [inChicago] at best to stagnate where it is and maybe come down alittle bit. But Chicago will take a lot of the gas that goes toCalifornia through PGT. That will just increase the Californiademand though Kern River, El Paso and Transwestern.”

Currently, price differentials don’t justify an expansion,however. San Juan and Opal prices have been neck and neck thissummer, which historically has been the time Southwestern heat andpower generation load peaked, boosting San Juan prices higher thanprices in the central Rockies and justifying the trip south. “Ithink the dynamics are changing so much as to who’s got whatgeneration capacity where,” said Burton. “You’ve just seeneverything in California that typically runs as peaking power beingturned on all year. The power demand has been constant. Plus you’vehad a lot of hydro power this year. But we expect this year to bean anomaly.”

Questar expects to file an application with FERC for itsexpansion project in early 1999 for service starting in October2000. A June open season drew preliminary bids from producers,marketers and end users for the entire 300 MMcf/d of proposed firmcapacity.

KN Interstate is selling a 450 MMcf/d project that would extendfrom Glenrock, WY, to its Rockport Hub near Cheyenne, which isbasically the same route proposed by WIC. KN hopes its projectcould be in service in January 2000. “Frankly we were veryencouraged by the result of our open season,” KN Energy’s BuddyFarah said recently at the Colorado Oil and Gas Association’sannual conference in Denver. “We had terrific response from theproducer community, which in my opinion on pipeline projects ispretty exciting to see. We’ve seen estimates and had our ownstudies on that which show deliverability could be as high as700-800 MMcf/d once that play is developed. We’re currentlynegotiating with shippers who have expressed interest in theproject.”

Farah said the company received expressions of interest fromabout 12 shippers for volumes in excess of 700 MMcf/d. “We wouldlike to get something filed yet this year,” he said. “Frankly whatit depends on is how fast the producers’ plans come together and atwhat level are they willing to commit to expansions. I think theyrealize that here there’s essentially no unused pipeline capacityout of the area. In order for them to monatize gas and make thisplay a success, they know they have to support a pipelineexpansion.”

Southern Ute Decision

One recent development, however, that may stall development inwestern producing basins is the July decision by the 10th CircuitU.S. Court of Appeals giving the San Juan Basin property rightsowner, i.e., the Southern Ute Indian tribe, ownership of thenatural gas produced on their land. The appellate court’s 6-3decision (Docket No. 94-1579) reversed a 1994 decision by a lowercourt that was in favor of key defendant Amoco, 3,000 other mineralinterest owners and a number of other gas companies that haveproduced coal-seam gas from the area for years. The decision givesthe Southern Utes rights to royalties on gas produced from coal onabout 200,000 acres in Colorado, but the decision potentially couldbe used as a precedent impacting 2.4 million acres of coal-seam gasproducing properties in six Western states.

“There’s no additional royalties to pay; the question is justwho do you pay it to,” said Barrett’s Frank Keller. “The secondissue is if you have a lease you got six months ago from JoeRancher and you were intending to drill into coals and extractnatural gas but he really didn’t have the ownership of that gas thelease might not be valid. That’s the worst case scenario and may besomething that can be solved through legislation that wouldgrandfather existing leases.” Keller said the decision probablywon’t hold Barrett up this year because it has plenty ofgovernment-owned leases on which to drill. A Wyoming Senator(either Craig Thomas or Alan Simpson, both Republicans) is”contemplating” introducing a bill which would resolve theseissues, Keller said.

“There are royalty disputes going on up there but I don’t worrytoo much about those because the gas is going to be produced,” saidBurton. “If the gas is there and producible, people are going toproduce it and flow it.”

Rocco Canonica

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