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Powder River Potential Draws Strong Pipeline Interest

Powder River Potential Draws Strong Pipeline Interest

The Powder River Basin in Wyoming is expected to become the hottest new gas supply point in the Rocky Mountain region over the next few years, and multiple pipeline companies are fighting tooth and nail to deliver the burgeoning supplies. The huge production growth forecast has led some observers to compare the Powder River with the San Juan Basin, where the benefit of tax credits on coal-seam gas triggered rapid development. But Powder River producers, such as Barrett Resources and Western Gas Resources, are tapping the coal without federal help because of higher gas prices in the region and lower finding costs in the basin.

"Certainly there's been a lot more interest in coal-bed methane over the last six months than there has been over the last several years," said KN Energy's Buddy Farah. "I think a lot of folks historically had doubted the potential. And now even those that had doubted it are saying maybe it's real. From these early projections it should become a very significant supply source in Wyoming."

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

"You can drill these wells in a day for $55,000-$60,000," said Keller. "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," he noted. "It's just the straight economics of gas prices and drilling costs 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 coals are much deeper, it costs a lot more and you've got water disposal issues," said Keller.

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

"If everyone is successful in drilling in this Powder River Basin, pipeline expansions will be needed," said Keller. "Our partner, Western Gas Resources, has a pipeline in the area with a capacity of about 90 MMcf/d, which is probably going to be full by the end of the year. They have an expansion planned that will raise that capacity to about 120 MMcf/d. If these wells of ours are successful, we'll probably fill that by next spring."

Such rapid growth in the capacity-constrained basin has not gone unnoticed by the interstate pipeline community. Competition is red hot, with Questar, Wyoming Interstate and KN Energy vying to establish a position that eventually will pay off in substantial throughput. 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 and offers the most growth potential in terms of production," said WIC's Thomas Price. WIC has an existing line entering the basin that currently is being expanded by 49 MDth/d for service this fall, but the company also is advertising a variety of other expansion projects, including a pipeline loop that is slated to add 120 MDth/d by October 1999 or a much larger loop of its existing line that would add 300 MMcf/d. A third possibility would involve building 145 miles of new 24-inch diameter pipeline directly from the basin to Cheyenne, WY, adding 600 MMcf/d of gas transportation capability. That project could be in service in December 1999 if producer response is significant, Price said.

Questar has proposed a major 24-inch diameter line that could extend 380 miles to the Montana border from a connection with Questar's existing system near Kanda, WY. "Potential in the Powder River basin is just unbelievable as far as total volume that is out there," said Questar's Gary A. Schmitt. It promises to be the fastest growing producing area in the Rocky Mountain region over the next decade, he said.

In contrast with other proposed projects, the Questar line would be designed to deliver more than 300 MMcf/d of Powder River production primarily to western markets through interconnections with Kern River, TransColorado and other southbound and westbound pipelines. "WIC is already there. KN is already there. There's a lot of access to the east. There's very little access to markets in the West for Powder River Basin producers right now," noted Brad Burton, senior business development representative at Questar.

"Our pipeline only makes sense if you believe the western markets are going to be the choice in the future," Burton conceded. "We see demand in the west increasing and gas prices increasing to compete as Canadian gas starts going to the Midwest. We think the price differentials will swing so that you'll want to move gas to California more so than Chicago. We just expect pricing [in Chicago] at best to stagnate where it is and maybe come down a little bit. But Chicago will take a lot of the gas that goes to California through PGT. That will just increase the California demand 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 this summer, which historically has been the time Southwestern heat and power generation load peaked, boosting San Juan prices higher than prices in the central Rockies and justifying the trip south. "I think the dynamics are changing so much as to who's got what generation capacity where," said Burton. "You've just seen everything in California that typically runs as peaking power being turned on all year. The power demand has been constant. Plus you've had a lot of hydro power this year. But we expect this year to be an anomaly."

Questar expects to file an application with FERC for its expansion project in early 1999 for service starting in October 2000. A June open season drew preliminary bids from producers, marketers and end users for the entire 300 MMcf/d of proposed firm capacity.

KN Interstate is selling a 450 MMcf/d project that would extend from Glenrock, WY, to its Rockport Hub near Cheyenne, which is basically the same route proposed by WIC. KN hopes its project could be in service in January 2000. "Frankly we were very encouraged by the result of our open season," KN Energy's Buddy Farah said recently at the Colorado Oil and Gas Association's annual conference in Denver. "We had terrific response from the producer community, which in my opinion on pipeline projects is pretty exciting to see. We've seen estimates and had our own studies on that which show deliverability could be as high as 700-800 MMcf/d once that play is developed. We're currently negotiating with shippers who have expressed interest in the project."

Farah said the company received expressions of interest from about 12 shippers for volumes in excess of 700 MMcf/d. "We would like to get something filed yet this year," he said. "Frankly what it depends on is how fast the producers' plans come together and at what level are they willing to commit to expansions. I think they realize that here there's essentially no unused pipeline capacity out of the area. In order for them to monatize gas and make this play a success, they know they have to support a pipeline expansion."

Southern Ute Decision

One recent development, however, that may stall development in western producing basins is the July decision by the 10th Circuit U.S. Court of Appeals giving the San Juan Basin property rights owner, i.e., the Southern Ute Indian tribe, ownership of the natural gas produced on their land. The appellate court's 6-3 decision (Docket No. 94-1579) reversed a 1994 decision by a lower court that was in favor of key defendant Amoco, 3,000 other mineral interest owners and a number of other gas companies that have produced coal-seam gas from the area for years. The decision gives the Southern Utes rights to royalties on gas produced from coal on about 200,000 acres in Colorado, but the decision potentially could be used as a precedent impacting 2.4 million acres of coal-seam gas producing properties in six Western states.

"There's no additional royalties to pay; the question is just who do you pay it to," said Barrett's Frank Keller. "The second issue is if you have a lease you got six months ago from Joe Rancher and you were intending to drill into coals and extract natural gas but he really didn't have the ownership of that gas the lease might not be valid. That's the worst case scenario and may be something that can be solved through legislation that would grandfather existing leases." Keller said the decision probably won't hold Barrett up this year because it has plenty of government-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 these issues, Keller said.

"There are royalty disputes going on up there but I don't worry too much about those because the gas is going to be produced," said Burton. "If the gas is there and producible, people are going to produce it and flow it."

Rocco Canonica

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