Rockies/Other / Shale Daily / Piceance Basin

Information on the Piceance Basin

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Background Information

Located in Northwest Colorado, the Piceance (pronounced pee-aunts) Basin is a tight sands formation that lies at depths between 6,000’-10,000’, and features liquids rich natural gas. Although Encana Corporation is by far and away the largest acreage holder in the Piceance, with 799,000 net acres, WPX Energy (formally Williams) is the company most closely associated with the basin, since the Piceance forms the majority of WPX’s proved reserves and current production.

Other major natural gas producers in the Piceance include Occidental Petroleum, and ExxonMobil/XTO, although Oxy CEO Steven Chazen noted in late October 2014 that at some point the company will likely put its Piceance Basin assets up for sale. Oxy has owned interests in the Piceance since the 1970s and currently holds approximately 187,000 net acres. The company said in late 2015 that it was maximizing its production, reducing drilling times and working to minimize its environmental footprint in the Piceance through a variety of drilling, completion and other operational technologies.

Piceance

Much of the current production in the Piceance comes from the Williams Fork Formation within the Mesaverde Group in general, and from four major fields in particular: Grand Valley, Mamm Creek, Parachute, and Rulison. The Piceance can also be split into two different subcategories: the Piceance Highlands and the Piceance Valley. Highlands wells tend to be more expensive to drill, everything else being equal, because by definition, operators have to drill more just to get to the same starting point as wells within the lower level Piceance Valley.

As an older, more developed play, the Piceance certainly has seen its share of experience related to efficiency gains. For example, WPX drilled an average of 42.2 wells per rig in 2012, nearly double the 22.2 wells per rig it was able to drill in 2006. But as an older, more developed play, the Piceance is also no longer the fast grower it was in the early 2000s. At the start of 2015, WPX delayed completions on at least 20 drilled wells waiting for "economics to improve." At the time the Tulsa-based operator indicated that more wells could be impacted. WPX had been running eight rigs, but cut that in 2015 to an average three rigs for the year on a capital budget of $200-$225 million. WPX operates more than 4,400 gas wells in the Piceance, including some of the biggest gushers to date in the Niobrara formation (see Shale Daily, Jan. 26, 2015). WPX had 481 MMcfe/d of production in 3Q15, vs. 542 MMcf/d in 3Q14.

Natural gas production and permitting in the counties that contain the Piceance continued downward in 2015, leading to what could be a seventh consecutive year of lower annual production growth. Garfield County was by far the most productive in the Piceance with 295.9 Bcf through August, 2015. The next largest was Rio Blanco with 31 Bcf during the same eight-month period. Similarly, drilling activity has declined in the play as well, falling from a recent peak of 35 rigs in early 2011 down to 5 rigs in early October 2015. Those rigs were spread among Garfield (2), Gunnison (1), Mesa (1), and Moffat (1) counties. Much of the reason for this lower production growth and drilling activity has been generally weaker energy commodity prices throughout 2015.

In mid-2015 the two major E&P companies in the Piceance, Encana Corp. and WPX Energy, faced off in a court battle in western Colorado in which Encana sought an injunction to block WPX from completing a horizontal well. Encana alleged that WPX invaded its mineral holdings in part of the Niobrara Shale, drilling through adjoining properties and then out laterally through Encana holdings. WPX still needed to hydraulically fracture the well to extract the natural gas supplies, and Encana sought court action to block that from happening (see Shale Daily, June 17, 2015).

Piceance

Piceance

Former WPX CEO Ralph Hill noted in November 2013 that the Piceance essentially has become a mix between a growth and a more mature play. Across the Piceance Basin, “we have another, ultimately, 10,000 wells to drill, and that’s without the Niobrara opportunity. So we know what we’re doing there. We have a lot of wells that are on the very mature decline state of their life, so we feel we have a unique set of assets that we would be able to put into an MLP.” Master Limited Partnerships are more suited to assets that feature a steady and relatively predictable cash flow stream. Many unconventional oil and gas wells exhibit hyperbolic decline curves in their first few years, which leads to huge year-over-year negative production declines. Eventually, these wells assume a more normal and steady decline curve, thus making them more appropriate to be placed in an MLP.

In late 2015, saddled with more impairment charges for its exploration and production (E&P) business, Rapid City, SD-based Black Hills Corp. senior executives decided to narrow their focus to the Piceance Basin where the company's E&P unit has been testing the Mancos Shale. In conjunction with this new approach, the company also moved forward on its plan to use natural gas reserves programs for its utilities in eight states (see Shale Daily, Oct. 5, 2015). In November 2015, CEO David Emery said Black Hills was transitioning its E&P operations toward "primarily serving our utilities through a cost-of-service gas reserves program while preserving the upside value potential of our oil/gas properties [see Shale Daily, Nov. 5, 2015]."

In the first half of 2015, Black Hills added two rigs in the Mancos Shale of the southern Piceance Basin, taking advantage of lower rig and service costs to accelerate its developmental drilling (see Shale Daily, May 6, 2015). Black Hills had three wells producing in the Mancos and expected to have as many as 10 online by the end of 2015, with long-range reserve projections of about 10 Bcf/well, Emery told financial analysts.

The Piceance is also prospective for the gassier Niobrara Shale, but like activity in the Mancos, assessment of the Niobrara (in nearby Jackson County, CO) within the Piceance Basin is still very much in the early innings. WPX continues to target the Niobrara Shale and CEO Richard Muncrief told investors in the past that the area is “something that could be a game changer for us.” Separately, financially struggling SandRidge Energy Inc. in late 2015 diversified its operations by acquiring proved reserves and producing wells in the Niobrara in a $190 million cash agreement with privately held EE2 LLC. The Oklahoma City-based independent expected the deal to close by the end of 2015 (see Shale Daily, Nov. 5, 2015).

Counties

Colorado: Delta, Garfield, Gunnison, Mesa, Moffat, Pitkin, Rio Blanco

Piceance

Local Major Pipelines

Natural Gas: CIG, Northwest Pipeline, Questar, Rockies Express, TransColorado, White River Hub, WIC

Crude Oil: Rocky Mountains (Plains)

NGLs: Overland Pass, Rocky Mountains (Enterprise)