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Piceance Basin Producers Pull Back -- Who's Next?

The surge in natural gas drilling that has transformed Colorado's landscape and plumped its coffers appears headed for a plateau as producers cut back spending and reduce rig counts for a variety of reasons: lower gas prices, credit market turmoil, limited pipeline capacity and the possibility of more stringent state regulations.

In just the past few weeks several operators have quietly begun to lay down rigs in the prolific Piceance Basin in Garfield County, CO, which has led the state in gas production since 2004. Several producers have announced reductions to capital spending plans, and more are expected to follow. The turnaround in less than a year is evident at the Colorado Oil and Gas Conservation Commission, which early this month was only 23 permits short of setting an all-time well permitting record; it had issued around 2,537 permits since January. Officials now wonder how long it will take to reach those levels again.

"The Rockies, in the Green River...Overthrust, Powder River Basin, Piceance, Uinta...we're up 1.2 Bcf/d in the Rockies and nobody thought that would happen last year. It's completely overwhelmed the gas system," Bentek Energy LLC CEO Porter Bennett said two months ago (see Daily GPI, Oct. 24).

Colorado has been a big beneficiary since oil and gas explorers began to strike it rich in basins across the state, where abundant deposits of oil and gas have been found not only in Garfield, but also in Weld and La Plata counties, to name but a few. Among the 35 states that receive royalties from the Department of Interior for wells drilled on federal lands, Colorado retained its No. 3 ranking for fiscal 2008, which ended Sept. 30. The state pocketed $178.4 million, which was 45% more than it received in 2007. However, without a big turnaround in gas prices, the credit markets or in takeaway capacity, the state is readying for a leaner 2009.

The big news last week was Chevron Corp.'s decision to scale back its emerging Piceance Basin program. Chevron is not the biggest operator in the Piceance, Williams RMT is, but the producer's decision to pull back, despite its deep pockets, may be a threatening sign for the independents, which aren't as cash-rich.

Chevron will delay its plans to double its De Beque drilling program, which would have upped the rig count to four from two, and which would have added 50% more to the budget. Instead, the producer plans to keep its spending flat at 2007 levels for the next three years.

Chevron's Kristi Pollard explained that lower gas prices and the economic slowdown forced the major to scale back. Colorado's proposed drilling rules also were taken into consideration, but "there were a lot of other factors at play as well."

Since July 2007 Chevron has drilled about 120 wells in the Piceance basin, and its initial long-term plan called for a six-rig program, which may still happen.

"We are still here. We still have a commitment to develop the resource, but it is going to take place at a slower pace," Pollard explained. All of Chevron's 63-person local workforce is expected to be retained. On hold are plans to expand to around 80 Chevron employees and the addition of 200 contractors to the current staff of 300.

Long term, Chevron plans to drill 2,000 wells on its 40,000 acre leasehold over the next 15-20 years. The San Ramon, CA-based producer also expects to invest about $7.3 billion over the life of the Piceance project.

Changes are afoot as well for Garfield County's largest producer, Williams Production RMT. The Tulsa-based operator, which reported its Piceance output jumped 15% in 3Q2008 from a year ago (see NGI, Nov. 10), now plans to reduce its rig program there to about 20 from this year's 26 rigs, said spokeswoman Susan Alvillar. Even with fewer rigs, Williams still expects to drill 450-500 wells, which is close to what it expects to drill this year.

For Williams, 2008 "was just an unbelievable banner year," Alvillar explained. Williams already has drilled close to 550 wells in the basin this year, "and we still have a month and a half left to go." Because of the credit market turmoil, Williams, like other operators, wants to finance its drilling operations through cash flow.

Using only cash flow to finance projects, "you have to be prudent," Alvillar said. Williams is taking a "very, very disciplined approach."

Williams officials also are keeping a wary eye on possible new Colorado oil and gas rules, which may impact its drilling operations. However, since none of the rules have been approved yet, Williams has no plans that would specifically cut into its operations other than downsizing its rig program.

At EnCana Oil & Gas (USA), the Calgary-based operator is using scenario planning for its 2009 budget in the state. That isn't expected to be completed before mid-December, but as far as activity levels, next year is a question mark. EnCana was operating 12 rigs in the Piceance last summer but it has since reduced the number to 10.

"Given the current economic conditions we are approaching our 2009 capital investment in a very prudent and conservative manner," EnCana's Doug Hock told the Glenwood Springs, CO, Post Independent. "The Piceance is the most economically sensitive basin in which we operate, primarily due to the topography."

Pipeline constraints also are hindering EnCana's and other producers' plans in the basin, and without enough pipes to take gas to market, obtaining adequate returns on investments is challenging, Hock said. If Colorado were to impose more stringent drilling regulations, that also "will put uncertainty into the mix."

EnCana has many North American exploration targets outside Colorado, Hock noted. "We have a lot of choices. We operate in a lot of different basins."

Bill Barrett Corp., which operates almost exclusively in the Rockies, has four rigs running in the Piceance, which is down from five in October. And in the coming year, only two rigs now are scheduled to be running. At Berry Petroleum Inc. there were four rigs in operation in the Piceance earlier this year, but by next year, it only plans to have one rig operating. Of Berry's 12 rigs that were in operation across the Rockies early this year, only four rigs are expected to be running at the end of December.

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