An "enormous amount of gas" in the Rocky Mountains awaits discovery from emerging basins and recovery from legacy assets, which means a lot more money and new pipe will be needed to be poured into the region within the next few years, Questar Corp. CEO Keith Rattie said.
Rattie, speaking at the UBS Natural Gas and Electric Utilities Conference in New York City Thursday, told attendees to "pay attention to what happens to Rockies' basis differentials. They are very wide right now, and there's a lot of sensitivity to commodity prices in the basin. The Rockies basis is averaging $2.15 right now, and the market is saying, 'we need more pipe.'" He said the Rockies Express Pipeline (REX), now under construction, will help, but it won't solve the coming bottlenecks.
The first leg of the REX went into service in mid-February (see Daily GPI, Feb. 15). The 327-mile pipeline segment stretches from the Meeker Hub in Rio Blanco County, CO, northward to the Wamsutter Hub in Sweetwater County, WY, and southeastward to the Cheyenne Hub. The REX-West leg, which is targeted for in-service on Jan. 1, 2008, includes 713 miles of pipeline extending from the Cheyenne Hub in Weld County, CO, to an interconnection with Panhandle Eastern Pipe Line in Audrain County, MO.
"One of the fundamentals with the Rockies region is that there is the risk for investors, with the boom and bust cycles," said Rattie. But he noted that "only about 20% of the gas consumed in the Rockies stays in the Rockies, and Rockies producers grew production 10% last year. The Rockies Express will help for a few years, but we need more pipes to prevent the basis problems we currently have."
Rattie said "an enormous amount of capital needs to be put into infrastructure" to accommodate growing output from the Greater Green River, Piceance and Uinta basins, where Questar focuses its exploration. Questar hasn't made any major acquisitions since 2001, and Rattie said doesn't expect to buy anything in the near term. Subsidiary Questar Exploration & Production (E&P) holds about one million net acres on Rockies leaseholds in Wyoming, Colorado and Utah. The company also holds a substantial leasehold in the Midcontinent, where production grew 21% in 2006.
The "crown jewel" is the Pinedale field in Wyoming. Questar holds 18,923 gross acres in the play, with up to 932 well locations on 10-acre density in its core acreage. At the end of 2006, Questar had 195 producing wells, with net proved reserves of 932 Bcfe and additional net probable and possible reserves of 1.5 Tcfe.
But the company has not forgotten about its legacy properties in the Rockies, said the CEO.
"We're finding that we are able to find new opportunities with new technology," he said. "The play that's getting the attention right now is the attempt to validate a new play in the Vermillion Basin, in the northern part of Colorado on the Wyoming border."
Last month, Questar E&P announced early production results for its Trail 13C-15J well, which reached a total depth of 13,700 feet in January. After fracture stimulation in the Frontier and Baxter formations and subsequent cleanout, the well turned to sales at an initial rate of 4 MMcf/d on a 12/64-inch choke with flowing wellhead pressure of 6,850 psig. The well now is producing at a rate of 9 MMcf/d; it produced more than 65 MMcf/d in its first 11 days of operation.
Questar had seen indications of naturally occurring fractures from cores and well logs, but the Vermillion well was the first to show evidence of the influence of natural fractures on well production performance, Rattie said. Once the natural fracture network depletes, Questar expects gas rates to fall in line with other wells in the play. However, the well's early performance demonstrates the potential significance of natural fractures on initial production rates.
"This well has been a head-scratcher," Rattie said. "We've drilled 18 wells, and the essence is, based on costs, the current estimates of reserves is that this play doesn't hunt unless Nymex [New York Mercantile Exchange] cost is close to $6. But how to go forward...it's pretty significant. New delineation wells will help further define the areal extent of our Vermillion play." Devon Energy Corp., which also focuses almost exclusively on unconventional gas, is Questar's nonoperating partner, with a 30% stake.
"The bottom line is there's a enormous amount of gas...but the key is the rate of recovery not the gas in place," he said. "Watch out for news about the Vermillion basin. The most significant impact for us is the Pinedale...but watch the progress with the next well in Vermillion, which is a horizontal well...Horizontal drilling is part of the magic that turned the Barnett Shale and others into the moneymakers they are today."
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