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OCTOBER 2016 ENERGY PIPELINE 3
Features ROCKY MOUNTAIN ENERGY SUMMIT
10 INNOVATIONS
14 TWO BASINS
A tale of two prolific Colorado basins. By Sharon Dunn
Oil and gas industry must do better to educate the public. By Bridgett Weaver
8
ON THE COVER
COMPETITION
Design by Joshua Aho
Companies are still putting their money and faith into the DJ Basin. By Bridgett Weaver
9 EDUCATION
Industry leaders discuss need to continue public education efforts to combat “anti” challenges. By Bridgett Weaver
12
18
Making Hole
20
News Briefs
22
Tech Talk
PUBLIC POLICY
Officials overzealous worn regulation could lead to longterm industry changes. By Sharon Dunn
13
In Every Issue
WHAT THEY SAID
Overhead at the Rocky Mountain Energy Summit. By Sharon Dunn
4 ENERGY PIPELINE OCTOBER 2016
The Rock Eater. By Bruce Wells
Micro-filtration of producted water with sound waves. By Gary Beers
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ENERGY PIPELINE MAGAZINE 501 8th Ave. P.O. Box 1690 Greeley, CO 80632 For all editorial, advertising, subscription and circulation inquiries, call (970) 352-0211. Send editorial-related comments and story ideas to: editor@energypipeline.com For advertising inquiries, contact: bjacobson@energypipeline.com
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OCTOBER 2016 ENERGY PIPELINE 7
ROCKY MOUNTAIN ENERGY SUMMIT
COMPETITIVE Companies still putting their money, faith into DJ Basin
BY BRIDGETT WEAVER • FOR ENERGY PIPELINE
Denver — The oil and gas industry in Weld County is still competitive with others in the nation. Local officials with Noble Energy and Whiting Petroleum said Aug. 25 that they are still putting capital into the Denver-Julesburg Basin, which spans Weld County into Wyoming, Nebraska and Kansas, and they have no intention of stopping. Jim Volker, chairman, president and CEO of Whiting Petroleum Corporation, said even though drilling in the basin began in the early 1900s in Boulder County, it has continued to reinvent itself with improved efficiencies. It’s a continuous process, he said. Volker was joined by Dave Stover, chairman, president and CEO of Noble, on a panel during the Rocky Mountain Energy Summit, hosted by the Colorado Oil and Gas Association. The morning panel, held at the Colorado Convention Center in downtown Denver, was moderated by Peter Mueller, CEO and co-founder of EcoVaper Recovery Systems. Stover said through the downturn of the past few years, they’ve made a lot of changes. Some of the improvements specifically happening in the DJ basin include centralized processing facilities for each company, pipelines to transport product without using trucks and larger lateral reaches in horizontal wells — facilitated largely by land and lease trades between companies. With the industry embracing horizontal drilling, companies can do more with a 8 ENERGY PIPELINE OCTOBER 2016
smaller footprint on the surface. Vertical drilling required a pad, or surface development, for each well. But with horizontal drilling, many wells can be drilling from a single surface pad. “When you think about it, we’re maybe at 10 percent of the surface footprint that it would have taken in the old world of vertical drilling,” Stover said. “The longer laterals are a big thing from that standpoint.” A lot of trades and swaps have been happening in recent years all to allow companies to consolidate their operations. “We’ve made trades in order to increase the working interests in the units we have,” Volker said. Trades that consolidate operations also allow companies a better ability to fully embrace horizontal drilling, because a company cannot drill through another company’s territory. Stover said horizontal drilling has come a long way since 2009, when companies began to focus on it coupled with hydraulic fracturing. He said when they first began drilling, the well laterals, or how far they drill out from the initial vertical section, was only about 2,000 feet. Now they’re drilling wells that stretch to 9,000 to 10,000 feet from the initial well bore. Those larger laterals wouldn’t always be possible without the trading and consolidation that has happened. In an effort to optimize and save money in a tough economic climate, sales and trades have become more common.
In May, Noble sold 33,100 acres of disjointed land to Synergy. Noble then went through another swap, this time with PDC Energy, which landed Noble with an additional 11,700 leased acres in the Wells Ranch area, which is northeast of Greeley. Most companies, including Noble and Whiting, have also built centralized processing facilities rather than having several in different areas. This helps decrease the footprint of oil and gas development, while allowing companies to provide the best equipment possible in their facilities. It’s also largely cost-effective. “You can have four pads, each with eight wells coming to a central point,” Mueller said. Companies working in the DJ Basin have been focused on improving how they transport the oil and gas they extract to their processing facilities. Many work now with pipelines, so they don’t have to ship to their processing facilities with trucks. The longer horizontal drilling capabilities, paired with easier transportation and a better processing facility have all been very helpful in keeping the DJ basin profitable. “You’ve got a totally contained system now,” Stover said. “It’s probably twice as efficient as it was two years ago. You get twice as much for every dollar you put in.”
ROCKY MOUNTAIN ENERGY SUMMIT
EDUCATION
Oil and gas industry must do better to educate the public
BY BRIDGETT WEAVER • FOR ENERGY PIPELINE
Denver — A few months back, 45 high school students visited the Noble Energy training facility in Greeley. They did so to research a paper they were planning to write, which would have opposed fracking in the state. The group toured the facility, during which they learned about the safety precautions and other nuances of Noble’s operations. Chip Rimer, senior vice president of the onshore operations for Noble, said he got a call the day after their trip. The students had changed their minds. Rimer said educating people in this way is crucial to the continued success of his industry, and it’s good to start teaching people about oil and gas when they’re young. “It’s how you educate the public — we need it from elementary school all the way up to college,” he said. “I think we did a poor job on educating my generation. We’ll have to do better with the next generation.” Rimer was part of a panel discussion Aug. 24 at the Rocky Mountain Energy Summit, hosted by the Colorado Oil and Gas Association at the Colorado Convention Center in downtown Denver. Also on the panel was Steve Struna, president and CEO of Bayswater Exploration & Production, and it was moderated by Brad Holly, senior vice president of operations for the Rockies division of Anadarko Petroleum Corp. They discussed the two oil and gas
ballot initiatives that had been proposed for November, which insiders and analysts said would nearly destroy the industry in Colorado. Ballot initiative 75 would have allowed local governments to create laws and regulations limiting oil and gas development in their borders. Initiative 78 would have required all new oil and gas development that includes hydraulic fracturing to be located at least 2,500 feet from an occupied structure or area of special concern, such as a river. Shortly after the summit, the Secretary of State ruled that the groups circulating the petitions had not collected enough signatures to make it to the ballot, but backers said they wouldn’t be deterred, vowing to keep fighting. That puts the onus on operators, who will have to keep fighting off such measures if they don’t get their messages across. Struna said the Colorado oil and gas industry already operates under some of the most stringent regulations in the country, but still, residents want more. He said he thinks this is a breakdown in education of the public. Ballot initiatives similar to 75 and 78, Struna said, were a threat every time Colorado goes to vote, even though three of every four Coloradans are favorable toward oil and gas development. Such initiatives are frequently backed largely by national causes and a few state-run organizations. Struna explained Colorado is often at the
center of national debates like this because Colorado’s constitution is one of the easiest in the nation to change. He said he hopes to see that ease subside this year with the Raise the Bar initiative, which will make it harder to make constitutional changes. That initiative, No. 71, will be on the ballot in November. Meanwhile, Rimer and Struna both agreed they need to work on that social license to operate by consistently working toward safer methods and more environmentally friendly options in their drilling programs. Across the industry, companies run advertisements, hand out pamphlets, get involved in local communities and do public outreach to help get their message out. Rimer said at Noble they train every employee so they can answer questions about the industry. “When they’re sitting at the Thanksgiving table and the conversation comes up, they have the ability to talk about it,” Rimer said. “If they hear it there, they trust it. You have to build that relationship. You have to build that trust, and it takes time.”
OCTOBER 2016 ENERGY PIPELINE 9
ROCKY MOUNTAIN ENERGY SUMMIT
INNOVATIONS Oil and gas industry must do better to educate the public BY BRIDGETT WEAVER • FOR ENERGY PIPELINE
Denver — A few months back, 45 high school students visited the Noble Energy training facility in Greeley. They did so to research a paper they were planning to write, which would have opposed fracking in the state. The group toured the facility, during which they learned about the safety
precautions and other nuances of Noble’s operations. Chip Rimer, senior vice president of the onshore operations for Noble, said he got a call the day after their trip. The students had changed their minds. Rimer said educating people in this way is crucial to the continued success of his industry, and it’s good to start teaching people about oil and gas when
they’re young. “It’s how you educate the public — we need it from elementary school all the way up to college,” he said. “I think we did a poor job on educating my generation. We’ll have to do better with the next generation.” Rimer was part of a panel discussion Aug. 24 at the Rocky Mountain Energy Summit, hosted by the Colorado Oil and
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ROCKY MOUNTAIN ENERGY SUMMIT Gas Association at the Colorado Convention Center in downtown Denver. Also on the panel was Steve Struna, president and CEO of Bayswater Exploration & Production, and it was moderated by Brad Holly, senior vice president of operations for the Rockies division of Anadarko Petroleum Corp. They discussed the two oil and gas ballot initiatives that had been proposed for November, which insiders and analysts said would nearly destroy the industry in Colorado. Ballot initiative 75 would have allowed local governments to create laws and regulations limiting oil and gas development in their borders. Initiative 78 would have required all new oil and gas development that includes hydraulic fracturing to be located at least 2,500 feet from an occupied structure or area of special concern, such as a river. Shortly after the summit, the Secretary of State ruled that the groups circulating the petitions had not collected enough signatures to make it to the ballot, but backers said
they wouldn’t be deterred, vowing to keep fighting. That puts the onus on operators, who will have to keep fighting off such measures if they don’t get their messages across. Struna said the Colorado oil and gas industry already operates under some of the most stringent regulations in the country, but still, residents want more. He said he thinks this is a breakdown in education of the public. Ballot initiatives similar to 75 and 78, Struna said, were a threat every time Colorado goes to vote, even though three of every four Coloradans are favorable toward oil and gas development. Such initiatives are frequently backed largely by national causes and a few state-run organizations. Struna explained Colorado is often at the center of national debates like this because Colorado’s constitution is one of the easiest in the nation to change. He said he hopes to see that ease
subside this year with the Raise the Bar initiative, which will make it harder to make constitutional changes. That initiative, No. 71, will be on the ballot in November. Meanwhile, Rimer and Struna both agreed they need to work on that social license to operate by consistently working toward safer methods and more environmentally friendly options in their drilling programs. Across the industry, companies run advertisements, hand out pamphlets, get involved in local communities and do public outreach to help get their message out. Rimer said at Noble they train every employee so they can answer questions about the industry. “When they’re sitting at the Thanksgiving table and the conversation comes up, they have the ability to talk about it,” Rimer said. “If they hear it there, they trust it. You have to build that relationship. You have to build that trust, and it takes time.”
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OCTOBER 2016 ENERGY PIPELINE 11
ROCKY MOUNTAIN ENERGY SUMMIT
PUBLIC POLICY
Public involvement in fracking debate could lead to overzealous regulation BY SHARON DUNN • SDUNN@ENERGYPIPELINE.COM
Denver — Large-scale changes in population and oil and gas drilling in Colorado in the last several years have converged to push more industry regulations to the ballot box — and that’s a scary place, indeed, for those who already regulate the industry. After a 60-year evolution, Colorado’s oil and gas rules were poised again to change as officials contemplated the two proposed ballot initiatives were being validated at the Secretary of State’s office. Though the initiatives, Nos. 75 and 78, failed to meet the required number of signatures to get on the ballot, backers vowed to keep up the fight, which means the oil and gas industry will have to be vigilant in the continued fight. Initiative No. 75 would have allowed local governments to ban oil and gas drilling (which the Colorado Supreme Court recently ruled was unconstitutional), and Initiative No. 78 would have required future oil and gas drilling be a minimum of 2,500 feet away from protected or sensitive areas, such as homes, schools, or streams. Matt Lepore, director of the Colorado Oil and Gas Conservation Commission, speaking in a panel discussion Aug. 23 at the Rocky Mountain Energy Summit at the Colorado Convention Center, said the initiatives — which others say would have devastate the state’s economy — was not the best way to go about change that residents have sought. Residents, he said, have already achieved change through more appropriate channels. “Regulating a complex, rapidly evolving, technologically sophisticated industry through ballot initiatives to amend the constitution just doesn’t make a lot of sense,” Lepore said. “There’s no nuance. … It’s a sledgehammer approach where a flyswatter would do.” He said No. 75, alone, would have created a patchwork of confusing rules to follow. 12 ENERGY PIPELINE OCTOBER 2016
“The industry will talk about the patchwork of regulations, and I’m going to talk about the quagmire of trying to know all those regulations that we may be asked to enforce,” Lepore said of the potential future of interpreting and enforcing those regulations. If local governments were allowed to create their own rules, Lepore asked, how would they get the expertise to enforce them? “If they’re relying on the COGCC to do that, do we have the right manpower, and how do we become educated and knowledgeable about every nuance of local government regulation?” Lepore asked. “You can pick any single simple regulation. Fencing, for example. I can see local governments saying you have to have a fence that complies with local ordinance XYZ.743 and the COGCC has to know what that regulation is to inspect and enforce that rule.” Jamie Jost, managing shareholder at Jost Energy Law, who also is counsel for the Colorado Oil and Gas Association, said such changes to Colorado’s constitution would have put everyone involved in court, as the initiatives would effectively prohibit drilling in 90 percent of the state’s land. In any drilling equation, there’s the surface owner, the leaseholder and the mineral holder. In Colorado, she said, there are 600,000 mineral owners alone. “What both of the initiatives would do put a hold on any development of their own private property, and you’ll have years and years of litigations over takings claims,” Jost said. “If they’re successful, the mineral interest owners have to be compensated for damages and the loss of their ability to develop their private property.” “At the end of the day it could be devastating to Colorado’s economy,” she said. Lepore added that the state of Colorado
would be a major defendant in such litigations. While social change that comes with the additional population has driven the increased regulatory environment in Colorado, Jost and Lepore said residents have had their say in the process, and are responsible for major changes in the laws that have become the strictest in the country. Lepore said that all of the new rules that have been created at the state level to regulate drilling, such as increased setbacks, increased emissions controls, lower spill-reporting thresholds, increased communication between local governments and operators, and increased penalties on the industry, have all come out of citizen pushes through the proper channels, such as working with legislators to make change, and commenting at the COGCC hearings. “Every significant rulemaking we’ve had in the last four to five years, I can tie back to a social dynamic, a social pressure on us, on the industry,” Lepore said. “I’m sure there’s a sense of the underdog or the little guy. The fact is, citizens are changing and moving the conversation.” Lepore said he is in discussions with Weld County officials, who have proposed creating a use by special review on all future oil and gas drilling in Weld County, which would allow commissioners to place propertyspecific mitigations on industry operators, and also allow property owners to have more say in the siting process. If successful, the agreement could become a model for other counties in the state. “We don’t have an agreement with Weld County yet,” Lepore said. “Negotiations have gone well but … we’re not there yet. I think if we get there, other jurisdictions will be interested in a similar kind of agreement with us.”
ROCKY MOUNTAIN ENERGY SUMMIT
WHAT THEY SAID Overheard at the Rocky Mountain Energy Summit BY SHARON DUNN • SDUNN@ENERGYPIPELINE.COM AND BRIDGETT WEAVER
The following is a compilation of quotes heard on stage by speakers at the Rocky Mountain Energy Summit put on by the Colorado Oil and Gas Association in Denver in August. “The opposition can paint the picture they want around the problems. We are not absolutely perfect as an industry. In the big scheme of things and if you’re operators are credible and operate safely, you’ll generally avoid problems. And I will say, as far as more regulation and more control … it would be dysfunctional to have local communities think they can regulate us. Honestly, the state of Colorado is doing a pretty good job. Taking it to the next level would not be the same thing.” — Barton Brookman, CEO and president of PDC Energy, on the possibilities of local governments gaining more control over oil and gas drilling and siting. “It’s how you educate the public. We have to put that almost on ourselves to educate people.” — Chip Rimer, Senior Vice President, Onshore, Noble Energy. “There is no question we’ve seen a change in the banking environment. The stringency we’re under is more severe, and it filters down to us. I think there is going to be more focus on cash flow and these are things that hopefully come out of this downturn. I believe there is a change going on … where you’ll see more
private money” into operations. — Lynn Peterson, CEO and president of Synergy Resources “Be very, very diligent about your operations and the safety of your operations. One hiccup — it only takes one hiccup.” — Brad Holly, Senior Vice President Operations, Rockies, Anadarko Petroleum Corporation. “Good or bad, social change is happening. For the oil and gas industry, that change happens at a breakneck pace. Our industry is changing with it. We’re asked to make it better, cleaner. We’re asked to make it quieter, kinder and be easier on the eyes, but we also have to make it work, and we have to make it work efficiently, economically and socially. We can ensure, what we have witnessed in the last year, a substantial amount of these changes based on a call from some sort of social action and some sort of social change.” — Matt Lepore, executive director of the Colorado Oil and Gas Conservation Commission, on the idea of residents having more say and more control over oil and gas operations in their towns. “We can say that everyone is talking. There have been some tests, I’d say, under the new rules that went into effect March 2016. A big part of the discussion during the rulemaking, with 72 parties and one of the first rulemaking where citizen groups participated with party
status, to bring that communication forward. The parties are talking. There are several test cases, with respect to the rule, and local governments involved have welcomed opportunities to have conversations. The operators have gone over and above in many instances working with those local governments on mitigation measures.” — Jamie Jost, founder and managing shareholder of Jost Energy Law in Denver, on how Colorado’s latest rules to require more communication between local governments and operators in the oil and gas siting process are working. “Things have to change and things will change, but nobody’s really quite sure when. So lower for longer may have to be a motto that we get used to.” In south — Weld County, a group of fire Hans-Christian Freitag, departments meets quarterly as a vice president – integrated technology, Baker regional hazardous material training Hughes, on the economic downturn in the industry.group to practice and prepare should a chemical emergency arise. “Whoever the worst The training group in includes Fort is operator our industry Lupton Fire Protection District, — that’s how we all look.” Frederick-Firestone Fire Protection — Chris Wright, CEO, District and Mountain View Fire and Liberty Oilfield Services Rescue, which is based in Longmont. Liberty Resources. “They get together and do hazmat training scenarios, go over equipment and practice their skills,” said Fort Lupton Fire Protection District Chief Phil Tiffany. About once a year, the group tries to arrange a coordinated event — such as the one Halliburton hosted in Fort Lupton on June 23 — to practice in a hands-on training scenario. OCTOBER 2016 ENERGY PIPELINE 13
Oil and gas operations dot the landscape on Steve Wells ranch near Gill. There are currently 800 wells on the ranch making it one of the largest oil and gas operations in northern Colorado. Photo by Joshua Polson/jpolson@greeleytribune.com.
TWO BASINS A tale of two prolific Colorado basins BY DAN LARSON • FOR ENERGY PIPELINE
C
olorado claims two of the most
important oil and gas basins in the country: the natural gas-rich Piceance in western Colorado and the crude oil-driven DJ in the northcentral part of the state. Both are widely recognized as prolific, accessible and with sufficient infrastructure to reach key markets. And both face an uncertain future as federal policy looms over one and growing community resistance encroach-
14 ENERGY PIPELINE OCTOBER 2016
es on the other. As a result, each is operated distinctly and by a different type of company.
DIFFERENT APPROACH As oil and gas companies assemble a capital budget for a each new well, they bake in the cost of the mineral leasing, surface use, rights of way, permits, drilling, completions, production facilities, professional and oilfield
services, and dozens of other miscellaneous expenses. In Colorado, as compared to other states, the number crunchers also must factor in well relocations due to community pressure, well casings that generally go deeper, water-well testing, sound barriers and other “extras” as the cost of being a good neighbor. “While most companies see good community relations as an investment, there are
added initial and ongoing expenses that drive incremental increases in development costs,” commented Reed Olmstead, an analyst at IHS Energy. Such financial considerations play a larger role in wells developed in the DJ than in the rural Piceance, but both feel the effects. Since the time the Piceance development boom began in earnest 14 years ago, natural gas production doubled in 2005 and again in 2009. But by then, the market was flooded with gas from newly developed fields in Pennsylvania, Texas and Louisiana. Figures from the Colorado Oil and Gas Conservation Commission show Piceance production increased another 25 percent to a peak of 2.4 billion cubic feet per day in 2012. For perspective, national demand for natural gas in the U.S. averages 76.5 billion cubic feet per day, according to recent figures from the federal Energy Information Administration. Squeezed by low oil prices, production from the DJ has slid to 9.6 million barrels per month after touching a peak in August 2015 of 10.6 million barrels of oil for the month. Nationally, U.S. production peaked at 299 million barrels in March 2015, and by May 2016 had eased back to 277 million barrels for the month, the most recent period for which data is available. The other big difference between the Piceance and the DJ Basin is the operators. For years, the two biggest companies in the Piceance were WPX Energy, the leader followed closely by Encana. The rest of the pack was lead by Occidental, ExxonMobil’s unit XTO Energy, Chevron, Bill Barrett and Ursa Operating. That all changed this year. First WPX sold its entire Piceance operation to rookie operator Terra Energy Partners for $910 million. The deal includes 5,500 wells on 200,000 acres and production of 500 million cubic feet of gas daily. Terra estimates the acreage holds 2 trillion cubic feet of proved reserves and an inventory of low-risk drilling locations. WPX, which spun off from Williams Companies in 2012, is a $3.5 billion corporation. Terra Energy is a privately held company led by a team of former Occidental executives who headed that company’s expansion in the Piceance a decade ago. Despite its tremendous potential, the Piceance today seems more the province of small, focused operators rather than the large, public multinational corporations. “Private equity funders prefer to back a management team rather than acreage,” said Sarp Ozkan, a senior energy analyst at Ponderosa Advisors in Denver. Terra is one example, Ozkan said. Ursa Resources is another. “Ursa’s management team is made up of Encana guys that drilled up the Piceance 10 years ago; they know the field inside and out. Private equity invests in the managers so of course they invest in the Piceance.” Larger companies with their fiduciary duties to shareholders have to invest where they can expect the quickest and best return with the lowest risk. “At today’s gas prices, the Piceance doesn’t make sense for the bigger guys that have acreage in many basins,” Ozkan said. That’s why the Piceance does make sense for companies that can focus on a one or maybe two plays, he said, adding that a basin with the potential of the Piceance will provide healthy returns as prices return to historic averages.
PICEANCE POTENTIAL Why then is the Piceance, a basin that went through a tremendous
growth spurt 10 years ago, now seen as the gas play of the future? When The U.S. Geological Survey released its revised assessment of the Mancos Shale formation in the Piceance Basin in June, many in the industry felt finally vindicated after years of exclaiming its potential. “There are many who see the USGS as a laggard on this,” said David Ludlum, executive director of the West Slope Chapter of the Colorado Oil & Gas Association. “Companies have been talking about the potential of the Mancos formation for five years. In fact, we were planning an event at Colorado Mesa University featuring the Potential Gas Committee. We asked them to talk about the Mancos because nobody else was.” “Well, the USGS did it for us and with authority,” Ludlum observed. “Because they are a trusted third party, when they say the Mancos Shale contains 66 trillion cubic feet of natural gas, you can take that as a very solid, but conservative estimate.” The USGS on June 8 released what it called the “second largest assessment of potential shale and tight gas resources it has ever conducted.” Its report estimated the Mancos Shale, one of several resourcebearing formations in the Piceance, contains 66 trillion cubic feet of gas, 74 million barrels of shale oil and 45 million barrels of natural gas liquids. This year’s assessment updates a previous USGS estimate in 2003 and says the Mancos contains 40 times the recoverable natural gas than the earlier estimate. Yet, even that whopping increase underestimates what many in industry see as a more realistic forecast for the Piceance. “The survey looked only at the Mancos,” Ludlum said. “When you consider there are 30 years of locations left to drill in the Mesa Verde formation, some in the industry believe there are more than 100 trillion cubic feet of recoverable gas. That puts the Piceance at the top of the list for gas-producing basins in the country, ahead of the Marcellus.” And this being Colorado, the USGS assessment was quickly drawn into the political arena. That the Piceance contains so much more natural gas than was officially considered became a rallying cry for industry and for the elected officials who see energy development as an important part of state and regional economies. It also earned a scoff from the environmental community. The assessment was cited as one of two key facts overlooked when the Federal Energy Regulatory Commission in March denied a permit to construct the Jordan Cove LNG export terminal at Coos Bay, Ore. The FERC said the demand outlook for liquefied natural gas did not justify construction of a connector pipeline and a new export facility on the Pacific Coast. And, long-term projections showed a limited, insuf-
COLORADO’S DRILLING FIELDS • Piceance Basin: primarily natural gas production from public lands. It has seen little previous development, is rural and now in the fifth year of a market downturn and seeing unprecedented pressure from a climate-conscious federal energy policy. • DJ Basin: primarily oil production on private land. It is now more than half a century into energy development and production but facing low-price headwinds and increasing resistance from growing suburban communities. OCTOBER 2016 ENERGY PIPELINE 15
ficient supply of natural gas originating in the Rockies, the commission noted in denying the permit. Not so fast, rejoined Ludlum. Several large Asian energy trading companies were on record as willing to purchase long-term supplies of natural gas to serve the Pacific Rim’s growing demand for electricity, he said. And, as the expansive USGS assessment shows, Western Colorado’s Piceance Basin is capable of providing an ample, enduring supply. The USGS report was also dropped into the middle of a long-running controversy over drilling leases in a portion of the White River National Forest south of Glenwood Springs known as the Thompson Divide, which stretches from De Beque on the west to Carbondale on the east and generally south of Interstate 70. Covering 221,500 acres, it includes parts of Pitkin, Gunnison, Delta, Mesa and Garfield counties. The BLM reports that oil and gas wells have been drilled in the area continuously since 1947. Included in the BLM history report is the Wolf Creek Storage Area with its average 3 billion cubic feet of gas in storage and room for another 3 billion cubic feet if needed. Wolf Creek is considered a critical supply point for natural gas customers from Glenwood Springs to Aspen. In 2004, three oil and gas drilling leases issued by BLM in Pitkin County were challenged as improper and sent for review at the Interior Department’s Board of Land Appeal. Four years later, the board ruled BLM must “either do its own environmental analysis or formally adopt” an Environmental Impact Statement issued in 1993 by the U.S. Forest Service that allows drilling leases to be issued. The lease challengers contended the leases were issued without undergoing a formal environmental review and as a result, were invalid. The issue remained in limbo until last fall when BLM announced it would produce a new EIS and conduct its own environmental analysis of all 65 drilling leases in the White River forest issued since the 1993 USFS analysis. The bureau stated that its analysis would determine whether “the leases should be voided, reaffirmed, modified, or subject to additional mitigation measures.” In February, BLM announced revisions to its draft EIS that included cancellation of up to 25 non-producing oil and gas leases in the Thompson Divide area. It formalized that plan with release of its final EIS July 29. In opposing drilling leases, the Thompson Divide Coalition, based in Carbondale, called 16 ENERGY PIPELINE OCTOBER 2016
natural gas supply from the area “unneeded” given the current low-price market and that development would be disruptive of a vibrant “hunting, fishing, ranching and recreation economy” that supports 300 jobs and generates $30 million in economic activity. David Ludlum, executive director of West Slope COGA, characterized the Thompson Divide area of the forest as “nothing special” forest-wise. “Everyone thinks their little slice is unique; in this case you have to consider the demographics,” he said.
DJ BASIN About 260 miles to the east of the Piceance hub at Parachute, the DJ Basin, centered in Greeley, has seen a fundamental transformation from a liquids-rich natural gas field to the seventh largest oil production area in the U.S. The list of top DJ operators is a mix of public corporations worth billions and private companies with a half dozen employees and operations in a single basin. An example of the former is Noble Energy. It is second largest oil producer in the DJ Basin and just reported strong second quarter 2016 numbers globally and for its Colorado business. During the recent quarter, Noble drilled 26 wells in the DJ with an average lateral reach of more than 8,100 feet. It continues to hold a leading spot among all oil companies in terms of lowest cost to drill and complete a new unconventional well. The company reports drilling 9,000-foot lateral wells in eight days and completing slickwater hydraulically fractured wells that see more than 1,000 pounds of proppant per lateral foot, feats nearly unimaginable just five years ago. Noble’s success in new well development resulted in quarterly DJ Basin sales of 113,000 barrels of oil equivalent per day, an increase of nearly 5 percent over last year. Other top operators in the DJ Basin reported similar steady production increases, lower development costs and incremental improvements in acreage positions. And above all, companies are talking about growth and positioning despite, or even because of the downturn. An example is Extraction Oil & Gas, famously private as a company. It is now looking to go big and go public. In early August, the company, backed by Yorktown Partners, the same private equity firm that supported Extraction’s rapid three-year growth curve, was reported to have filed a registration with the
Securities and Exchange Commission, an indication the company plans to launch an Initial Public Offering to sell shares in the company. As any investor knows, public offering of company shares carries risk. A recent example of how much risk comes via Synergy Resources, one of the leading operators in the DJ. Announced to shareholders a year ago, Synergy’s growth strategy included adding to its acreage position in and around the Wells Ranch east of Greeley. Earlier this year, the company acquired 33,100 acres from Noble in a $55 million deal. The acquisition was a significant step forward in making Synergy “a leading operator” in the DJ Basin, said Lynn Peterson, Synergy chairman and chief executive officer. “By consolidating our properties into a more focused footprint, we should be able to gain operating efficiencies.” The company’s stock price was hammered in trading this summer following release of a quarterly report showing it posted a loss and that it missed revenue targets. Despite the choppy stock market, the company “has accomplished a great deal in a very challenging market,” Peterson said. “The transformational acquisition of assets in the first half of 2016 makes us very optimistic about our future.” Spend enough time with an oil and gas industry veteran and eventually you’ll be told that “everything is always for sale.” Unfortunately, the rough seas the industry has been sailing through for the past 18 months means the volume of asset sale transactions in the DJ has continued apace with no sign of slowing down. On one hand, Encana has exited the oil side of the business in northern Colorado. On the other, small independent PetroShare Corp. acquired more than 7,000 acres of producing assets in Adams County for $6 million in July. The big story came to a close in early August, when Encana confirmed it closed on the $900 million sale of 51,000 acres along the western side of the DJ Basin to newly formed Crestone Peak Resources. Encana is also said to be considering sale of its natural gas assets in the Piceance and elsewhere so it can concentrate on highly productive operations in western Canada and Texas. With the closing, Encana drops from the list of top operators in the DJ with PDC Energy moving up to the third spot behind Anadarko and Noble.
KEEP MOVING For most of its 45-year operating life, the Wattenberg portion of the DJ Basin, an expansive region which stretches into Nebraska, has seen oil and gas companies large and small set up shop, prosper or struggle, sell or acquire, and ultimately come and go. The nature of the oil and gas business is that it never stands still. The Piceance is a more recent development that came on strong with high gas prices 15 years ago and is transforming into a long-term gas play that looks to overseas markets for customers. During the summer, optimism grew as prices weaved through the mid-$40s for oil, providing enough assurance that some companies in the DJ added a rig while others began working through their list of drilled uncompleted wells, or DUCs. In the Piceance, gas drillers were encouraged by a gradual strengthening of prices due to a steady increase in demand from utilities switching from coal to gas and from an unusually hot summer. It is not news that the industry continues to weather another downturn. This time, like earlier slowdowns, the sustained Arctic blast of low prices and oversupply eventually will give way to the unremitting demand for energy to power our irresistible need for heat, light and mobility. In Colorado, this recovery will face new challenges from a federal government interested in slowly choking off production on public lands in the Piceance, and to growing community resistance at the intersection of energy development and suburban sprawl in the DJ.
This is an Ursa Resources operation on the edge of Battlement Mesa, an unincorporated Garfield County community of 5,000 near Parachute in the Piceance Basin, one of two major drilling areas in Colorado. Photo for Energy Pipeline/ Glenwood Springs Post Independent
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MAKING HOLE The Rock Eater
BY BRUCE WELLS • AMERICAN OIL & GAS HISTORICAL SOCIETY
First Lone Star discovery “Fishtail” drill bits became obsolete in 1909 when Howard Hughes Sr. patented the dual-cone roller bit. By pulverizing hard rock, the new bit with two rotating cones brought faster and deeper rotary drilling – transforming the petroleum industry worldwide. History notes many men who were trying to improve bit technologies at the time, but Hughes and business partner Walter B. Sharp made it happen. Just months before receiving a patent in 1909, they established Sharp-Hughes Tool Company in Houston. After several years of experiments, Hughes and Sharp introduced the novel drill bit suited for deep boring through medium and hard rock, according to the American Society of Mechanical Engineers. “Until then, the rudimentary ‘fishtail’ bit limited drillers to reservoirs near the surface,” noted ASME. Traditional rotary bits were also useless for penetrating hard rock. “Instead of scraping the rock, as does the fishtail bit, the Hughes bit, with its two conical cutters, took a different engineering approach,” explained ASME in 2009 — when designating it as an Historic Mechanical Engineering Landmark. “By chipping, crushing, and powdering hard rock formations, the Hughes two-cone drill bit could reach vast amounts of oil in reservoirs thousands of feet below the surface,” ASME said. Biographers note that about the time Sharp and Hughes were developing their bit, Hughes had a chance meeting in Louisiana with another inventor trying to improve drilling technology. Hughes ran into Granville Humason in a Shreveport bar one evening in 1908. Humason had tried unsuccessfully to sell his bit design to drillers. He showed Hughes a wooden model made with spools. Humason, who said his idea came to him one morning when grinding coffee, described meeting Hughes during a 1951 interview now in the 18 ENERGY PIPELINE OCTOBER 2016
collection of the University of Texas Briscoe Center for American History. In the center’s oral history recording, Humason says Hughes “bought my idea and paid me $150 for the idea, and I stood in the bar with the oil boys, and
BRUCE WELLS, is the founder of American Oil and Gas Historical Society, a 501c3 nonprofit organization dedicated to preserving the history of oil and gas. He is a former energy reporter and editor who lives in Washington, D.C. The “twin cone” bit drilled faster and deeper than “fishtail” rotary bits . Photo courtesy U.S. Patent and Trademark Office.
I spent about $50 in the bar.” While waiting for approval of the patent in 1909, Hughes and Sharp had a machine shop manufacture a prototype bit to test in the field. Their secret drilling experiment took place near Houston. In June, the partners loaded their newly cast steel bit on a horse-drawn wagon and took it to the Goose Creek oilfield, according to historian Donald Barlett. After stopping at an oil well that had defied conventional drills, the men ordered field hands away and secretly brought out the bit and attached it to the pipe stem of the rotary rig. For the next
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Water is always a RESOURCE Sharp-Hughes Tool Company manufactured its new drill bits in Houston. Circa 1915 photo courtesy Houston Public Library. A
11 hours, the bit bored through 14 feet of solid rock, “a feat so miraculous for the time that drillers dubbed the mysterious device the “rock eater.” Production models of the Sharp-Hughes Tool Company coned bit became a crucial (and exclusively patented) tool for drilling deeper wells, beginning in Texas and then around the world. The foundations of the Hughes fortune had been laid, noted Barlett in a 1979 book. “Exactly what role, if any, Humanson’s spools may have played in the final design of the rock bit is impossible to determine today.” When Walter Sharp died in 1912, Hughes bought the rest of the company, changing the name to Hughes Tool Company. Hughes died in 1924 at age 54 of a heart attack in his company’s Houston offices. With the money earned from Revolving cones drilled “by the drill bit patent, 19-year-old chipping, crushing and powdering Howard Hughes Jr. expanded hard rock formations.” Photo the oilfield fortune while making courtesy American Society of movies, setting aviation records Mechanical Engineers. and helping build much of Las Vegas. Hughes Tool engineers invented the tri-cone bit in 1933. Drill bits today rely on the design principles introduced by the 1909 Hughes patent - one of the greatest inventions of the petroleum industry. Help preserve U.S. petroleum history, please give to the American Oil & Gas Historical Society. Go to www.aoghs.org. “Making Hole” is a term for drilling coined long before oil or natural gas were anything more than flammable curiosities. Bruce Wells is the founder of American Oil and Gas Historical Society, a 501C3 nonprofit organization dedicated to preserving the history of oil and gas. He is a former energy reporter and editor who lives in Washington, D.C.
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News Briefs DESTINO JOINS PACWEST BANCORP PacWest Bancorp announced that Donald Destino was appointed as executive vice president, investor relations and corporate development. In this new role, Destino will focus on enhancing PacWest’s investor relations program and evaluating opportunities to generate improved financial results and increase shareholder value, according to a news release. He will serve as a member of the firm’s executive management team and will be based at PacWest’s headquarters office in Beverly Hills, Calif. Destino brings nearly 25 years of professional experience to his new role. Most recently, he served as portfolio manager-Harvest Financial Partners at Harvest Capital Strategies focusing on investment opportunities in the financial services sector. Before that, he was a director at KKR & Co. L.P., where he managed an investment portfolio across multiple industry sectors and has also served in a variety of equity research roles for JMP Securities, Banc of America Securities and Jefferies Group. Destino earned a bachelor’s degree in economics and sociology from the University of San Diego and an MBA from Yale University’s School of Management.
BONANZA CREEK ENERGY STRUGGLES WITH STOCK LISTING The New York Stock Exchange in late August warned Bonanza Creek Energy, Inc. that it was in danger of losing its public listing, as its share price fell below $1. The company’s 30-day average closing share price as of Aug. 22 was $0.98, in violation of the listing standard set forth in Section 802.01C of the NYSE Listed Company Manual, requiring the trailing 30-day average closing share price to remain above $1, according to a news release. As outlined in the NYSE Listed Company Manual, upon receiving notice, the company has a six month cure period 20 ENERGY PIPELINE OCTOBER 2016
to regain compliance. Within this cure period, the Company must have a closing share price above $1.00 on the last trading day of a given month or at the end of the cure period. In addition, the Company’s coinciding trailing 30-day average closing share price must also be above $1. Bonanza’s stock price began climbing in early September, hovering the $1 mark, closing Sept. 9 at $1.30. During the cure period, the release stated, the company’s stock will continue to be listed on the NYSE, subject to its ability to remain in compliance with other continued listing standards. The notice received from the NYSE does not affect the ongoing business of the company, nor does it trigger any violations of its secured or unsecured debt, the release stated. In a separate matter, the company elected to pay interest on its senior unsecured notes due 2023. Interest on these notes was due on Aug. 1, at which time the company elected to not make the interest payment and enter into a 30-day grace period. By paying the interest within the 30-day grace period, the company remains in compliance with its senior unsecured notes due 2023, the release stated.
ARB MIDSTREAM ACQUIRES PLATTE RIVER GATHERING SYSTEM ARB Midstream, LLC, an energy midstream, logistics and marketing company based in Denver, in September acquired a controlling interest in the Platte River Gathering System from Rimrock Midstream Holdings, LLC. The PRG system provides gathering for crude oil production in the heart of the prolific Denver-Julesburg Basin, which is home to the Niobrara and Wattenberg plays in Weld County. The system is backed by multiple long-term producer commitments, and started transporting crude oil in April 2016, according to a news release. PRG is capable of moving up to 157,000 barrels per day and includes more than
40 miles of crude oil gathering lines, truck unloading at the Lucerne Hub, and planned storage capacity of up to 600,000 barrels. PRG delivers to the Grand Mesa Pipeline, which delivers barrels to Cushing, Okla. “The system is a strategic fit with our existing footprint of midstream infrastructure and marketing capabilities in the one of the fastest-growing crude oil plays in North America,” said Adam Bedard, CEO of ARB Midstream, in the release. “As the DJ Basin has grown, infrastructure has struggled to keep up. The PRG System allows Weld County producers to move barrels to market efficiently and economically, while replacing the need for trucks in the regional communities.” In the release, ARB also announced that Pat McMurry has been named the senior vice president of gathering and transportation. McMurry joined the ARB management team after overseeing the development of PRG for Rimrock. McMurry has more than 40 years of experience in midstream construction and business development, including multiple pipeline and terminal projects at Enterprise, TEPPCO and ExxonMobil, the release stated. ARB provides complete midstream and marketing solutions for crude oil, LPGs and refined products, by acquiring, developing and operating high-quality assets in plays with sustainable growth and low-cost production economics. In combination with ARB’s existing crude marketing and logistics business in the Denver-Julesburg and the greater Rocky Mountain market, the PRG transaction will support ARB’s goal of offering a fully-integrated midstream and marketing solution to producers in the DJ, the release stated.
PDC ENERGY ENTERS THE CORE DELAWARE BASIN PDC Energy, Inc. announced in September it had entered into dagreements to acquire two privately held companies managed
by Kimmeridge Energy Management Company for approximately $1.5 billion, subject to due diligence and certain customary closing conditions. The privately negotiated transaction includes approximately 57,000 net acres in Reeves and Culberson counties, Texas, with an average working interest of approximately 93 percent, according to a news release. Current net production is approximately 7,000 barrels of oil equivalent per day from 21 horizontal wells, with two additional wells in the completion and flowback phase. The transaction is expected to close in the fourth quarter of 2016, the release stated. The acquistion also comes with more than 700 gross estimated horizontal drilling locations targeting the Wolfcamp A, B and C zones with significant upside potential through downspacing and additional intervals, the release stated. Approximately 530 million barrels of oil equivalent of preliminary estimated net reserve potential based on combined total of only four to 12 wells per section. “This is truly a remarkable
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opportunity for PDC, its employees and its shareholders,” said Bart Brookman, president and CEO of PDC, in a news release. “Through a methodical approach, we were able to execute our stated acquisition strategy and add an extensive inventory of highly-economic drilling locations that complement our already strong portfolio.” The deal includes roughly $915 million of cash and approximately 9.4 million shares of PDC Energy common stock privately placed to the sellers and valued at approximately $590 million. PDC officials intend to fund the cash portion of the acquisition through potential equity and debt financings prior to closing. Through committed financing from J.P. Morgan, the company has secured incremental liquidity, bringing its current liquidity to approximately $1.4 billion. In the remainder of the year, PDC plans to spud approximately nine horizontal wells — seven of which have 1.5- or 2-mile laterals — and expand certain midstream infrastructure for an expected total capital outlay of approximately $55 million to $65
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million, the release stated. Additionally, the company is finishing completion operations on two horizontal wells and plans to operate two drilling rigs by yearend 2016. “This acquisition is a significant step toward executing our vision of becoming a premier mid-cap E&P company,” said Lance Lauck, executive vice president corporate development and strategy, in the release. “Adding this Delaware position to our core Wattenberg acreage gives us more than 1 billion net Boe of liquid-rich reserve potential in two of the top-tier U.S. onshore basins. We are very well positioned to continue providing strong returns and delivering long-term shareholder value. PDC will continue to emphasize the importance of a strong balance sheet while we pursue additional value creation through operational enhancements and inventory expansion.” — Staff Reports
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TECH TALK
Micro-filtration of produced water with sound waves BY GARY BEERS • FOR ENERGY PIPELINE
PROBLEM OF MICRO-RESIDUALS There are many conventional processes for the separation of particles and oil from produced water; however, a shared major problem is the inefficiency at removing micro-residuals (i.e., dispersed particles or droplets less than 20 microns). Follow-on complex processes, involving membrane filters and chemical additions, are usually employed to remove the micro-residuals. These polishing efforts involve the use of consumables (filters, membranes, chemicals), have high energy costs, and – unfortunately, still exhibit inefficient separation.
A SOLUTION : MICROFILTRATION WITH SOUND WAVES In 2012, a novel application of acoustic technology was developed to capture and separate microresiduals without using physical membranes, chemicals or centrifugation. This breakthrough approach is sustainable, environmentally benign, and operates a lower energy cost.
HOW DOES TECHNOLOGY WORK? When a liquid containing tiny particles and oil droplets flows through a horizontal, standing acoustic, forces are setup to create an “invisible” filter. The energy of the wave drives particles to the node (Figure 1) and, once in close proximity to each other, the particles agglomerate. The particles remain “trapped” at the nodes while the water continues to flow through the standing wave. When the water passes through this two-dimensional array of standing waves, a layer of agglomerated particles exists along the common axis for each set of nodes. 22 ENERGY PIPELINE OCTOBER 2016
An animation showing the creation of these particle layers is available on the internet (www.fdsonics. com/technology). Through a patented process (FloDesign Sonics), another standing wave is added and the particles in the layer are further aggregated at new nodes – which can be seen in the above animation. To complete the separation process, the waves are turned off and then the heavier particles sink while the oil droplets and buoyant particles rise. The settled particles can be disposed of as a solid waste and the oil can be recovered.
APPLICATION FOR PRODUCED WATER TREATMENT This proprietary technology (Acoustic Wave Separation, AWS), funded by a $1.6 million grant from National Science Foundation) and by investors ($25 million), is designed to treat produced water from hydraulic fracturing (fracking) operations. Initial testing has been completed with a 170 barrel/ day prototype and efforts are underway to fund and develop a pilot plant. Compared to current methods for treating produced water, energy and chemical costs can be reduced by 75 percent with this approach. The after treatment with the AWS system, the produced water meets or exceeds the EPA’s standards for a safe discharge (Acoustic Technique Presents Fresh Take on Water Treatment, National Science Foundation, 2016).
FIGURE 1
For over 50 years, GARY BEERS, has worked in numerous fields of environmental science as a consultant, regulator and educator. This career included senior management position with major consulting, nonprofit and public organizations. He has founded several successful firms to capture emerging resource management markets. One of his latest ventures, EnviroScienceINFO, provides content for public media.
DATA CENTER
The oil and gas industry is a large part of Colorado’s economy. Below, find statistics on energy pricing, drilling production, well permits, spills and rigs.
2016 DRILLING PERMITS COUNTY
RIG COUNT BY STATE
NO. (% OF STATE TOTAL)
Weld.................................................................................................954 (62%) Garfield...........................................................340 (22%) La Plata....................85 (5.5%)
State Sept. 19 Aug Avg. July Avg. Colorado 19 21 20 Louisiana 43 42 44 Oklahoma 62 62 58 North Dakota 28 28 27 Texas 245 231 209 California 5 5 6 Alaska 4 4 7 Ohio 14 14 12 Pennsylvania 21 17 14 Wyoming 13 8 8 Source: Baker Hughes Rig Count. Sept. 19
Jun Avg. 16 45 57 24 185 5 9 12 13 7
2016 GAS PRODUCTION
COUNTY *YTD PRODUCTION (% OF STATE) Weld........................................307,948,893 (37.9%) Garfield...................................242,414,028 (29.9%) La Plata ..................................149,531,629 (18.4%) Las Animas ................................ 30,017,357 (3.7%) Rio Blanco .................................. 26,249,025 (3.2%) Mesa .........................................15,969,479 (1.97%) State ......................................................811,093,334
Jackson ........41 (2.6%) Adams...........39 (2.5%) Rio Blanco...30 (1.9%) State.......................................................1,546 Source: Colorado Oil and Gas Conservation Commission as of Aug. 1
2016 OIL
PRODUCTION COUNTY *YTD
US RIG COUNT
The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999. Area Sept. 9 Aug. 19 July Avg. June Avg. U.S. 508 481 449 417 Canada 134 129 95 63 Source: Baker Hughes Rig Count, Sept. 9
PRODUCTION (% OF STATE)
Weld 51,612,076 (89.3%) Rio Blanco 2,143,380 (3.7%) Garfield 746,033 (1.3%) Cheyenne 633,072 (1%) Larimer 456,031 (0.79%) Arapahoe 481,631 (0.83%) Lincoln 406,843 (0.70%) Adams 335,769 (0.58%) State 57,786,446 Source: Colorado Oil and Gas Conservation Commission as of Sept. 5
Source: Colorado Oil and Gas Conservation Commission as of Sept. 5
COLORADO ACTIVE WELL COUNT
Weld ..........................................................................22,753 Garfield .....................................................................11,100 Yuma ...........................................................................3,879 LaPlata........................................................................3,323
Las Animas .................................................................2,960 Rio Blanco ...................................................................2,895 State .........................................................................53,724 OCTOBER 2016 ENERGY PIPELINE 23
Source: Colorado Oil and Gas Conservation Commission as of Aug. 1
A BETTER WAY in Commercial Real Estate Serving your Northern Colorado Commercial needs… Industrial • Office • Retail • Land Investment Properties
Colorado Native Over 23 Years Experience Focused on your investment Blaine Herdman Commercial Broker Office : 970.616.5214 | Cell: 970.381.0300 email: bherdman@remax.net 24 ENERGY PIPELINE OCTOBER 2016