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Features
16
15
SRC ENERGY
PDC ENERGY VOLUNTEERS
The rise of SRC Energy in the DJ Basin.
PDC Energy gives employees a day to volunteer.
By Analisa Romano
By Sharon Dunn
8
HEALTH STUDY
In Every Issue
Study of oil and gas health impacts concludes risk is low, opponents demand new study. By Dan Larson
10
Making Hole
21
Tech Talk
EXECUTIVE PROFILE
Six questions for Neil Ray, the president of Colorado Alliance of Mineral and Royalty Owners. By Dan Larson
14
19
ROYALTY OWNERS
Is Colorado big enough for two royalty owner groups? Splintner group and national affiliate claim so. By Dan Larson
ON THE COVER Design by Joshua Aho
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New Mexico oil discoveries By Bruce Wells
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HEALTH STUDY Study of oil and gas health impacts concludes risk is low, opponents demand new study BY DAN LARSON • FOR ENERGY PIPELINE
When a state study of possible health impacts for those living near oil
and gas operations showed the health risks to be low, opponents found fault in the study’s lack of absolute certainty and its “dismissive tone.” The study, released earlier this year, reviewed a dozen earlier studies of health risks for those who might be exposed to the gaseous substances that can be emitted from an oil and gas facility. A second study that will use data recently gathered by researchers at Colorado State University is due next year. Produced by the Colorado Department of Public Health and the Environment, the latest study “evaluates the existing science about whether you are at risk if you live near oil and gas operations,” according to Dr. Larry Wolk, executive director at CDPHE. “Going forward, we will continue to evaluate health risks using more comprehensive, relevant data currently being collected.” The study quickly drew criticism for not recommending the state take action to reduce exposures when it could not assure the public there was no risk. “Oil and gas wells threaten our communities with cancer-causing toxic chemicals, greenhouse gas emissions and possible explosion,” wrote a group of Democratic legislators in a letter to Wolk. The department should act, they said, to protect the public “if the consequences are uncertain and potentially dangerous.” Longtime residents of Northern Colorado observe that the study simply underlines what they have always known: the industry operates very safely and health 8 ENERGY PIPELINE JULY 2017
risks are minimal. “We have been living around oil and gas for eons” said Sen. Jerry Sonnenberg, R-Sterling. “After what happened in Firestone, everybody is alarmed about safety and the health effects of living near oil and gas production. There are still some questions about what happened there so I am reluctant to jump to conclusions. In fact, the industry has a long track record of safety.” Sonnenberg, the Senate majority leader, said he was not surprised by the opposition’s non-acceptance of the CDPHE study. “That’s how it usually works,” he said. “They find someone to produce the results they want and throw the other 99 studies away. There is lot of junk science out there right now. They start with a conclusion and work backward to prove the result. That sort of junk science doesn’t help anything.”
effects from exposures to substances emitted into the air from oil and gas operations.” According to the department, the question for researchers was: “Do substances emitted into the air from oil and gas operations result in harmful exposures to Coloradans living near those operations?” Researchers developed an assessment tool for considering 62 different substances that can be emitted from an oil and gas site while acknowledging that many of the substances are emitted from other sources as well. They then compiled the results of more than 10,000 air samples from areas of Colorado where oil and gas operations are present. The data gathered “were used to estimate potential air exposures to people living near oil and gas operations” and the compared to established “safe” levels for cancer and noncancer effects. Earlier this year, CDPHE released the researchers’ findings.
EXISTING SCIENCE
AT LOW RISK
The department developed the study at the request of the oil and gas task force called by Gov. John Hickenlooper in 2014. The task force requested, among other things, a review of existing scientific literature on oil and gas health effects and for the department to “summarize useful findings.” As part of its mandate, in 2015 CDPHE established the Oil and Gas Health Information and Response program to respond to neighbor concerns and “conduct evaluations of exposure and health science related to oil and gas.” In planning the study, CDPHE said its priority “was to examine the potential health
The study, Assessment of Potential Public Health Effects from Oil and Gas Operations in Colorado, was produced by a team of five health science researchers, led by Tami McMullen, CDPHE program manager and toxicologist, and released on Feb. 21, 2017. The researchers concluded they had “a high level of confidence” that the list of 62 substances examined, ranging from acetaldehyde to xylene, included the majority of compounds that are emitted from oil and gas operations. And they were likewise confident that the dataset of 10,000 individual air samples from 33 different locations in three counties with
oil and gas production, and the conservative assumptions applied to the analysis “minimized underestimating any potential health risks,” they noted. Air concentrations of were below established “safe” levels of exposure for non-cancer health effects, the study concluded. For the three very hazardous substances studied, concentrations were 4-5 times below the established standards while concentrations of other, less-hazardous materials was found to be 5-10,000 times below the reference levels. Risks for exposure to known cancer-related substances were within federal “acceptable risk” ranges, the study indicated, although the three most hazardous substances studied – benezene, acetaldehyde and formaldehyde – represent the highest risk and warrant continued monitoring. Researchers acknowledged the study did not cover all areas of the state with oil and gas operations and that the analysis represented a person’s total outdoor exposure, including exposure to emissions from other sources such as gas stations, landfills or vehicle exhaust. “Overall, data suggest low risk of harmful health effects from combined exposure to all substances,” the study concluded. The department “will continue to collect data from citizen reports” (see box) to characterize, map and respond where symptoms are reported and to address community concerns, it said.
“I felt the study was really dismissive of people’s health concerns,” said Sen. Matt Jones (D-Louisville). “The commission’s job is to protect people’s health. That means you regulate with caution instead of finding out that there is a problem later.” Acknowledging the ongoing conflict over property rights between mineral owners and surface owners, Jones says the conflict has become one of proximity and scale. “You can’t just put one of these industrial operations in a neighborhood,” he said. “These new well sites involve multiple wells with multiple possible sources of emissions and potential hazards.” “These are not the little wellheads and pump jacks we used to think of,” Jones observed, noting that as a young man, he earned college tuition as a field hand in the Wattenberg oil patch. The burden of proving oil and gas operations are safe belongs with the companies, Jones said. “Anytime you create an industrial activity, you should be able to prove it is not going to hurt the neighbors, especially if you are making a bunch of money.” Jones, the deputy minority leader, continues to lead Senate Democrat efforts to curb oil and gas development, including a latesession bill to increase well setbacks to one-half mile from the nearest building. Asked if the state should deny drilling permits because there is no assurance of zero risk, Jones said “until they can prove it is safe, yes.”
CAUTION FIRST
NO RISK
The results of the study were welcomed by industry and defended by the Hickenlooper administration. When asked if the department should be recommending action to protect public health when its study called for continued monitoring of hazardous emissions, one member of the research team said such an action would “get away from the science.” “The science doesn’t support the supposition that all exposure is harmful,” said Mike Van Dyke, head of Environmental Epidemiology, Occupational Health and Toxicology at CDPHE. “Science does support that there is a safe level of exposure for most of these things,” he said in interview with the Colorado Independent, March 6. Since the study recommended continued study of possible health effects and did not call for government action to rein in oil and gas development, it was quickly targeted for criticism by oil and gas opponents, including clean air organizations and a group of Democratic state legislators. “Health impact studies should not come after oil and gas has already moved into our neighborhoods,” Christine Berg, with the advocacy group Moms Clean Air Force, said in a newspaper interview. She added that the CDPHE study was “preliminary” and accused the administration of “lacking the political will to ensure public safety.” In early April, a group of seven state senators and 11 state representatives signed a letter to CDPHE director Wolk requesting a new health effects study and accused the department of not doing its job. The CDPHE is responsible for protecting public health, the letter said, and so should rely on “the precautionary principle that no action should not be taken if the consequences are uncertain and potentially dangerous.” The study also featured a tone of indifference that reflected the approach taken by oil and gas companies to public health issues, said the state senator who authored the letter.
A demand that all potential risk be removed from oil and gas development remains a top priority for opponents of the industry. When an abandoned flowline from old well to a tank battery longsince removed allowed natural gas to seep into a newly built home in Firestone and resulted in a tragic, deadly explosion, opponents said it proved wells should be nowhere near homes. For many years, opponents of oil and gas have pointed to the various compounds found in a barrel of oil or a cubic foot of natural gas and demanded that no trace of it should ever come in contact with people. The CDPHE health effects study examined reliable, existing data and found that while people may be exposed to some of those compounds, possibly from sources other than oil and gas locations, that exposure is at such low concentrations as to present very little risk to health.
CDPHE OIL & GAS HEALTH INFORMATION AND RESPONSE PROGRAM Created to respond to public concerns about health related to oil and gas activities. The program gathers up-to-date information about oil and gas activities with a focus on health. CO Helpline: 303-389-1687 Website: www.oghir.dphe.state.co.us JULY 2017 ENERGY PIPELINE 9
EXECUTIVE PROFILE
Six Questions for the president of Colorado Alliance of Mineral and Royalty Owners
NEIL RAY BY DAN LARSON • FOR ENERGY PIPELINE
CAMRO was organized last fall to “represent the interests of mineral owners across the state and to encourage and promote exploration and production of minerals.” On June 6, Energy Pipeline interviewed Neil Ray, president of CAMRO, to discuss, among other things, formation of this new mineral royalty owners group and why recent pooling legislation was illconceived and unnecessary. Energy Pipeline: In September, the board of NARO-Colorado voted to withdraw as an affiliate of the national group and form an independent non-profit organization to represent Colorado mineral royalty owners. What brought you to make that decision? Neil Ray: For most of NARO’s existence, the state chapters were fairly autonomous. For example, each state group needed its own IRS charter under the 501(c)(6) rules for non-profits and each group elected its own board of directors. More recently, NARO became more of a top-down organization, adding paid staff to provide added services to members. From our perspective, it didn’t work out that way. When we saw the increase of anti-oil and gas advocacy along the Front Range and we wanted to send our members calls-toaction for hearings at the Capitol or local government meetings, our messages were delayed by two or three days. It just wasn’t working for us. EP: What benefits does CAMRO provide to its members? 10 ENERGY PIPELINE JULY 2017
Ray: We represent the interests of all mineral owners in Colorado. We connect with our members through newsletters and events such as our conference and annual meeting in June. We have a lobbyist in the statehouse to get our message to legislators and, as a volunteer-driven group, our members support mineral owner interests by testifying at hearings and local meetings. We have also supported quite a few members with their individual royalty issues. EP: What bills were you involved with in this year’s legislative session? Ray: We fought against a particularly pernicious bill that would have upended pooling law in Colorado and we won. Our mission is to protect our members by keeping Colorado oil and gas law from being changed in such a way that would harm royalty owners. There were many people who were dissatisfied that more control was not given to local governments in the rulemaking that came out of the governor’s task force two years ago. As introduced by Rep. Mike Foote, HB 1336 would have increased the threshold to 51 percent of royalty owners for a pooling request to go before the oil and gas commission. This could have been used to delay or deny new oil and gas development. That provision was removed from the bill in order to get it passed in the House, but it still would have required the producer to give 90-days notice to
identified members of the pool and the creation of a public database of who had leased and who had not. The 90-notice is nearly a moot point since under oil and gas commission rules for an urban mitigation area, the company has to provide notice not just to the mineral owner but to local planning and zoning departments, city councils and the local government designee. After all the required hearings, it could be 270 days before the commission issues a permit. For a mineral owner to say they did not realize the company planned to drill is foolish. What worried the industry was the database issue. If industry were forced to publish a database of who had been leased and who had not, it would encourage modern-day claim jumping. We saw it as a way to encourage lawyers to go in and offer the mineral owner a much higher rate on a lease and bonus with no intention of ever allowing that lease to be drilled. There are others who would take a lease from a nonconsenting mineral owner and sell it back to the company at a horrible rate. Ultimately, industry put language into the bill that prohibited the database from publishing trade secrets, which in this case was the name of the person they were trying to lease. The bill was eventually killed in the Senate. EP: How do pooling laws protect mineral royalty owners? Ray: Mineral ownership is property
ownership and is protected under the state and federal constitutions. One of the rights afforded a property owner is the right of exclusion. This gives the property owner the right to say no when someone says you have to do something to your property. Oil and gas development can trample on the right of exclusion because fluids and gases flow to the lowest pressure point and that’s where the well is. If the minerals you own are going to be drained by someone else, you have a right to be compensated. That’s called a correlative right and that is how oil and gas development compensates the mineral owner for losing the right of exclusion. When a company wants to develop a field where there are multiple tracts, it must go to the oil and gas commission for permission to drain the pool. Often, there are unidentifiable mineral owners due to complex probates or there might be nonconsenting mineral owners. States pass pooling statutes to protect those with leased minerals who would benefit from development. It is also in the state’s interest to see minerals developed for the eventual taxation and economic improvement that a producing well provides. EP: What happens when a producer might be unfairly draining oil and gas from a neighboring mineral owner? Ray: Not long ago, we helped a member who farmed on a tract along the Poudre River. When the mineral owner across the river drilled a well on his property, our member was concerned her minerals were being drained as well. We helped her petition the oil and gas commission and they added her to the pool. She then
hired a lawyer who forced the producer to compensate her. This is a good example of how pooling laws protect those with a minority interest from being put at a disadvantage by the majority interest owner. EP: What can a mineral owner do about unfair deductions a company might take on the cost of production? Ray: Post-production fees can be a very complex issue. Often the producer’s contract with a midstream company comes into play. A midstream company that takes natural gas liquids has to work in a commodity market that swings up and down and may find that the cost of stripping out liquids might be more than they are worth on the market. Other times, a company from out of state acquires interests in Colorado and they might not be familiar with Colorado case law. As a result, their accounting department might operate under other rules and take deductions on processing and transportation costs that are allowed elsewhere but not allowed here. Mineral owners should always look carefully at the check stub attached to their royalty payments. In Colorado, mineral owners are protected by our check stub law that clearly states what is to be included on the statement. We also urge them to talk with their neighbors and compare statements. If they suspect something is wrong, we can recommend accounting firms that specialize in oil and gas revenue. They should also contact the revenue accounting department at the company. We find that most of the time, the company does not want to get involved in litigation over mineral owner payments.
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ROYALTY OWNERS Is Colorado big enough for two royalty owner groups? Splinter group and national affiliate claim co-existence possible BY DAN LARSON • FOR ENERGY PIPELINE
When the board of directors PDC of the Colorado chapter of the National Association of Royalty Owners declared last fall they were leaving to form an independent organization, there was dust kicked up and questions raised. By this summer, the dust has settled. The new group, Colorado Alliance of Mineral Royalty Owners, was active in this year’s legislative session and is forging its own path. The rump organization was reformed, with help from leadership at the national, and now operates as ColoradoNARO. Neil Ray, president of CAMRO, said the former group’s dissatisfaction with the national group had been brewing for several months. “Our board decided the structure just wasn’t working for us,” Carpenter said. “When we met with the national directors in September, they said they could not accommodate us. That’s when we decided to start CAMRO.” Craig Carpenter, elected in January as president of the reorganized Colorado chapter of NARO, says he is still puzzled by the decision to withdraw from the national group. Carpenter, a cattle rancher and consultant for agriculture, water and wind-energy investors, observed that the
CAMRO board of directors is the same cast as the NARO-Colorado board that claimed in September its members’ interests were not being served by the organization. “How can you say members are not being served by the chapter when the new group has the same board as the old; the same people?” Carpenter said. “It’s disingenuous to say the chapter wasn’t serving the needs of its members.”
BONES OF CONTENTION Under the national-and-affiliate structure, Ray said the board grew annoyed that notices and email blasts to Colorado members were required to be sent through the head office in Tulsa. “We tried to work that out with them,” Ray said of the board’s discussion with the national. “Initially, we were sending out our own messages but they decided they needed to control messages for each state.” Carpenter noted that in his own experience and his conversations with other NARO chapter presidents, there were no complaints about message delays or filtering. “When we send something to Tulsa for our members, it goes out within minutes,” Carpenter asserts. “I have asked the other chapter presidents about it and they all
say, ‘No, that’s not our experience.’ I really don’t know what they are talking about.” The other bone of contention was allocation of revenue from the annual dues paid by members. Both men agree the $150 annual member dues are reasonable; it is the fairness of the portion of dues returned to the state chapter where the disagreement comes in. “Our board felt the national was holding too much back,” Ray said. Under CAMRO, members “pay $75 for membership; all that stays in Colorado. As a volunteer-driven group, we can direct all but 14 percent of dues to programs that benefit our members. At NARO, their non-program expenses for running the Tulsa office were up around 62 percent. I think we offer a better bargain for mineral owners in Colorado.” Dues allocation is indeed a matter of fairness, Carpenter said. “Every state chapter gets same slice of the pie,” Carpenter said. ”If you want to do more, you have to raise money. You can hold events like town halls and golf outings. I don’t know why they thought they should be treated the differently.” Carpenter added that before the split, individual board members provided funds for additional services such as a contract lobbyist and public relations firm. That JULY 2017 ENERGY PIPELINE 13
money went with the board when CAMRO was formed, he said. “Let’s just say that split left some hard feelings,” Carpenter observed. “But our new board wants to move on. If we are going to work them down the road, it is best to let bygones be bygones.” Although it had to reform its nonprofit charter under the banner ColoradoNARO, the group has retained its member roster. “Our membership is about 300 and retention has been good,” Carpenter said. The new NARO chapter has already held a member education seminar: a town hall in Windsor, Feb. 16. On the agenda were an update on the chapter and a presentation on post-production deductions. “In the end, we are here to serve our members,” Carpenter said. “There are always new questions about mineral leases. There is no such thing as a perfect lease; it’s a unicorn. Anyone who is considering a mineral lease should always consult an expert. NARO can help with that.” Looking out for Colorado mineral royalty owners is also front-and-center at CAMRO, Ray said. He noted CAMRO
membership stood at about 200 individual members in early June and added that mineral owner interests are especially threatened for those along the Front Range, where growing suburban communities are confronting new oil and gas development. Ray observed that Colorado’s thousands of mineral royalty owners need an active, independent trade association to protect their interests, which generally run parallel to industry’s exploration and production objectives. Growing controversy over new wells and the shock over tragic accidents continue to drive opposition by community groups and local governments, Ray said. As a result, the ability to realize the ownership benefit of mineral resources faces real obstructions.
COST OF THE RUN An example of that obstruction was highlighted in a study the group funded to quantify what was at stake. In June 2014, NARO-Rockies, an affiliate of the Colorado chapter, released the
results of a study conducted by a petroleum engineering firm that claimed Boulder County would be “on the hook” for more than $1 billion in takings claims if the county were to be successfully challenged over its ban on drilling. Prepared by Netherland, Sewell & Associates, the study asserted that a typical 1/8 royalty owner of a square-mile section in Boulder County could realize $40 million in payments over the life of production. Ray acknowledged the study was built on then-current oil prices but he maintained that improved development techniques would today increase the volume of oil recovered from a typical section. Ray concluded that if the county were judged to have improperly taken royalty revenue, it would be forced to “raise taxes so high very few could afford to live there.” CAMRO’s board is considering raising funds to sponsor a follow up study to review possible impacts of Boulder County’s withdrawal of its moratorium and newly enacted land-use regulations covering oil and gas development, he said.
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PDC ENERGY VOLUNTEERS PDC Energy gives employees a day to volunteer BY SHARON DUNN • SDUNN@ENERGYPIPELINE.COM
Several employees from PDC Energy spent their workday in Weld County on May 16, lending a hand instead of the varied jobs they do in the oil patch. The Denver-based oil and gas company held its sixth annual Energizing Our Community days May 16-17. On the first day, 115 Colorado employees volunteered their time at area nonprofit organizations, such as sorting food and preparing emergency food boxes for the Weld Food Bank, 1108 H St., in Greeley, planting trees and bushes at Centennial Park in Kersey, and setting up tents, fed and brushed horses, maintenance, and more at Colorado Therapy Horses. Several employees turned the Weld Food Bank into a well-oiled machine, as they sorted foods and assembled emergency food boxes. “I just like offering assistance to the
Matt LIlly, an employee of PDC Energy, spends a day in May working at the Weld Food Bank, in PDC’s Energizing our Community event, in which the company allowed its employees to swap their work days for a day of volunteering in their communities. Lilly and several others helped put together emergency food boxes at the food bank in north Greeley. Photos by Sharon Dunn.
community and getting involved to help out locally,” said Jason Thron, environmental health and safety manager with PDC. “It’s a good way of spending some time. It’s just a different day of work.” This annual day of service was created to give PDC Energy employees a chance to dedicate a full day of volunteer time to organizations in the communities where they live and operate, according to a news release.
A PDC employee listens to the town of Kersey’s Arbor Day program before helping the community plant trees and bushes at its Centennial Park.
Ken Simpson, left, and Jason Thron, spend their volunteer day at the Weld Food Bank during PDC Energy’s Energizing our Community event on May 16.
Roughly 85 percent of all PDC Energy employees participated this year, volunteering at 28 different organizations.
Cliff Baker, a pumper with PDC Energy, works to plant rose bushes at Kersey’s Centennial Park on May 16 during PDC Energy’s Energizing our Community event, in which employees could trade their work day with some volunteer work. JULY 2017 ENERGY PIPELINE 15
SRC ENERGY The rise of SRC Energy in the DJ Basin
BY ANALISA ROMANO • FOR ENERGY PIPELINE Lynn Peterson, CEO and president of SRC Energy, left, James Henderson, executive vice president of finance and CFO, and John Richardson, vice president of investor relations, discuss the company’s rise to success in teh Wattenberg Field. Photo by Analisa Romano.
This a story about an oil and gas company created just before the industry reached
the edge of a precipitous drop. Yet instead of faltering as oil dipped to just over $30 per barrel in 2008, the small company born in Platteville used the downturn to its advantage. What followed were nine years of a unique and sometimes unconventional business plan that, today, has brought success to what is now SRC Energy Inc. Since its inception as Synergy Resources Corp., the Weld County-based company grew up fast. SRC began as a two-man venture capital investment for oil and natural gas extraction. In less than a decade, the company has changed management, moved to Denver, expanded its employee base to more than 100 people and, in recent months, changed its name. Today, SRC is worth more than $1 billion, and strategic moves in the greater Wattenberg Field have the company positioned to double production over the next year. “Our team has worked diligently over the past several months and quarters to bring our shareholders to the cusp of what should be a very robust year,” SRC CEO and Chairman of the Board Lynn Peterson said in an April earnings call. 16 ENERGY PIPELINE JULY 2017
Peterson stepped on in mid-2015 as coCEOs Ed Holloway and William Scaff slowly moved out, bringing with him one of the single biggest moves that would define that expectedly robust year for 2017. One year ago this May, SRC announced plans to purchase 33,100 acres of the Greeley Crescent for $505 million, a mostly contiguous block of land around Greeley that will allow the company smooth and easy access for horizontal drilling in the Wattenberg Field. “That acreage really was a company-maker in and of itself,” said John Richardson, SRC’s manager of investor relations. “It gave us a really strong footprint in the basin.” With that footprint, Richardson said, Peterson designed a two-rig drilling plan that will keep SRC busy for the next 10 years, as long as the company stays focused on ramping up acreage and activity. The land acquisition and hyper-focus on one area will take SRC from producing about 10,000 barrels of oil per day to an average of 25,000 per day in 2017, he said. In its first quarter this year, SRC reported $45 million in revenue. “2017 is going to be a transformational year for SRC,” Richardson said.
Peterson was the one to take the reins on the Greeley Crescent decision, but it echoed of moves made in Synergy’s past that took advantage of political and economic uncertainty. Back in 2008, Synergy officials spent a few short months making good money on oil sales as they reached up to $140 per barrel. A few months later, then-co-CEO Holloway said he and Scaff did a reverse merge with a company that was already public – a common move for incubator companies to save countless dollars and several years in the process of going public. By 2009, no one else was drilling. The rates for pipe, fracking and essentially any commodity associated with oil and gas were a steal, and SRC took advantage. In 2008, Holloway said one directional vertical well cost about $1.2 million to complete. The following year, SRC drilled 35 wells for under $400,000 total. “We were able to raise $18 million to pay for the completion and the rest of the drilling costs,” Holloway said. “And that really set the platform for the company going forward.” Fast-forward to the end of year 2014 and 2015, when oil and gas experienced a second slump that many companies are still feeling. As low oil prices and an uncertain political
climate with the 2016 election prompted Weld County companies such as Noble Energy and Anadarko Petroleum Corp. to downsize employees and hold off on completing wells, Peterson had stepped on at SRC and began to broker the Greeley Crescent acquisition with Noble. It was a risky move for SRC, as no one knew what the industry would be facing in the next year. SRC cashed in on the gamble. “It took Noble over 20-something years to put (the Greeley Crescent acquisition) together, and within months we picked it up,” said Holloway, who at the time was advising SRC on the sidelines. “It was really a big moment for the company.” SRC also seized the opportunity to handpick employees with extensive knowledge and experience specifically in the DenverJulesburg Basin. Noble Energy shaved close to 100 employees from its Greeley operations alone from 2015-16, while layoffs with other companies such as Anadarko, DCP Midstream, Bayou Well Services, WPX Energy and many others amounted to several thousand jobs lost throughout state. As other companies worked to shore up their balance sheets, SRC scavenged for talent. “I think to hire the quality of employees that I have, in my opinion is something I have taken pride in,” Peterson said, after deflecting SRC’s recent success to a standout staff that is honest with investors and communities. “I’m just part of a big cog,” he said. At the end of 2014, Holloway and Scaff had identified a buyer for Synergy, but that was when the industry dipped into a tailspin. Instead of selling, they set SRC’s sights on growth. At the same time, Peterson, co-founder of North Dakota-based Kodiak Oil & Gas Corp., had just sold Kodiak to Whiting Petroleum Corp. for $6 billion, and was on the lookout for his next opportunity. Having been at the helm of Kodiak as he grew the company from zero to 45,000 barrels of oil produced per day, Peterson had the know-how to grow SRC to the next level. Peterson stepped in with SRC to about 20 employees. Geophysicists, exploration, accounting and other areas were outsourced, as had been common practice in the company’s history to keep overhead costs low. Richardson noted that if the plan was to grow the company into something bigger, SRC needed to bring those things in-house. The company’s offices moved to Denver in mid-2016 and has since expanded to employ
about 120 people total. In order to utilize the industry’s network on a larger scale with the likes of analysts and legal consultants, the move was a necessary step, Richardson said. It also meant that Peterson stayed in the same offices downtown from his time with Kodiak. Still, Peterson insists that SRC has a steady commitment to the community from which it extracts all of its natural resources. About half of the company’s employees still live and work in Greeley. A self-described “Colorado boy” and a former business classmate of Holloway’s at the University of Northern Colorado, Peterson said SRC’s responsiveness to the Weld County community was since day 1 and continues to be, a priority that contributes to SRC’s success. Indeed, in the company’s April earnings call, SRC’s management team makes several mentions of deploying new noise mitigation technology, constructive relationships with local officials, and the benefits of contiguous acreage, long lateral wells and water pipelines that will take more truck haulers off of county roads.
“HAND-IN-HAND” WITH TECHNOLOGY Holloway said SRC’s humble beginnings were nevertheless ahead of the game in terms of environmental impact. Even as a burgeoning company, Synergy pledged to use closed loop systems that eliminate pits and reduce emissions – a practice that Holloway now calls “archaic,” as it is now widely practiced across the industry. But those kinds of exponential changes in technology and advancements are the name of the game in oil and gas extraction these days. Seven years ago, companies were just beginning to embrace horizontal drilling in the Wattenberg Field, Holloway said. Those first wells sometimes took around 30 days to drill. Today, he said, they take less than five days to drill, and they reach almost twice as far. The same goes for the rigs themselves, which accomplish about three times what one rig did just four years ago. In this way, SRC’s timing couldn’t have been more perfect. A homegrown company with no debt that scavenged for opportunity, SRC has been able to capitalize on its leasehold of 69,000 acres in the Wattenberg with just two drilling rigs. That includes nearly 200 horizontal wells either in production or in various stages of completion in the Wattenberg, as well as more
than 1,000 drilling locations identified in the Greeley Crescent area for coming years. “Execution is the name of our story in 2017,” Peterson said. Even the timing of SRC’s focus on the Wattenberg played to its advantage. “This play here developed a lot slower than others,” Peterson said of the Wattenberg, noting that more was happening at the forefront in the Bakken formation in North Dakota with horizontal drilling. “A lot of people took their expertise from other plays and took it here … It all kind of came hand-in-hand.”
James Henderson, CFO and executive Vice President of SRC Energy, left, and company CEO, president and chairman Lynn Peterson, look at a map of the company’s holdings in the Wattenberg Field around Greeley.
HIS OWN THUMBPRINT Synergy Resources originally got its name from the investment group that hired Holloway and Scaffe. As new employees and management came on board, fewer people had a connection to the name – but it was, by that point, well-used and recognized. Richardson said that is why Synergy’s legacy remains in the new name, SRC (Synergy Resources Corporation). It’s just different enough to separate it from Synergy, offering a new identity and a fresh start. “It’s a new era,” Peterson said. From here, SRC has every intention of staying focused on the high-producing and predictable wells of Wattenberg – at least, for the near future. And after that? What comes next? Perhaps it depends on the economic climate, and whether SRC will continue to do what it has done so well in the last decade. Peterson answers the question with a joke. “If I told you,” he says, “I’d have kill you.” JULY 2017 ENERGY PIPELINE 17
DATA CENTER
The oil and gas industry is a large part of Colorado’s economy. Below, find statistics on drilling production, well permits and rig counts.
2017 DRILLING PERMITS
RIG COUNT BY STATE
COUNTY
NO. (% OF STATE TOTAL)
Weld 1,043
(67%)
Garfield 164 State June 9 Colorado 34 Louisiana 64 Oklahoma 131 New Mexico 59 North Dakota 46 Texas 460 California 9 Alaska 5 Ohio 27 Pennsylvania 34 Wyoming 26
May Avg. 31 63 121 56 44 453 9 7 23 34 24
April Avg. March Avg. 29 28 59 55 125 109 56 47 43 40 425 399 8 7 6 5 22 21 34 32 19 17
Source: Baker Hughes Rig Count, Feb. 3. Source: Baker Hughes Rig Count, June 9.
2017 GAS PRODUCTION
(10.5%)
Mesa 110 Adams 81 La Plata 54
(7%) (5.2%) (3.5%)
2017 OIL
Rio Blanco 31 (1.98%)
State 1,565
PRODUCTION COUNTY *YTD
Source: Colorado Oil and Gas Conservation Commission as of June 1, 2017.
US RIG COUNT The U.S. rig count peaked at 4,530 in 1981 and previously bottomed at 488 in 1999. Area June 9 May Avg. April Avg. March Avg. U.S. 927 893 853 789 Canada 132 85 109 253 Source: Baker Hughes Rig Count, June 8.
County *YTD‘16 .......................................Production Weld............................................161,630,022 (37%) Garfield....................................126,628,710 (28.7%) La Plata .....................................85,953,178 (19.5%) Las Animas ................................. 19,466,093 (4.4%) Rio Blanco ................................... 14,714,924 (3.3%) Mesa ............................................ 11,018,010 (2.5%) State.......................................................440,160,187
Weld Rio Blanco Cheyenne Garfield Lincoln Arapahoe Larimer Adams State
‘16 PRODUCTION
23,713,088 (88%) 1,030,338 (3.8%) 302,404 (1.1%) 449,865 (1.6%) 237,274 (0.88%) 223,543 (0.82%) 215,421 (0.79%) 184,686 (0.68%) 26,948,520
Source: Colorado Oil and Gas Conservation Commission as of June 10.
Source: Colorado Oil and Gas Conservation Commission as of June 10.
COLORADO ACTIVE WELL COUNT
18 ENERGY PIPELINE JULY 2017
Weld ..........................................................................23,399 Garfield .....................................................................11,282 Yuma ...........................................................................3,875 LaPlata........................................................................3,322 Las Animas .................................................................2,935 Source: Colorado Oil and Gas Conservation Commission as of June 10.
Rio Blanco ...................................................................2,890 Adams ............................................................................957 Boulder...........................................................................310 Larimer...........................................................................279 State .........................................................................54,509
MAKING HOLE New Mexico oil discoveries BY BRUCE WELLS • FOR ENERGY PIPELINE
geologists, “because the land was too flat,” noted one expert. “Unlike much of west Texas, where surface formations gave the oilmen a hint of where underground formations might be located, the flat, level land in Lea County, New Mexico, shared none of its deep secrets.” Samuel Myres, author of “The Permian Basin: Petroleum Empire of the Southwest,” further explained: “Since no surface formations were present to serve as markers of possible underground formations, much guesswork, possibly accompanied with prayers, entered into the exploration process.” It was expensive to explore for oil under those conditions, Myres added. Through the end of 1928, “oil companies had spent between $15,000,000 and $18,000,000… for exploration, leases and tests in the county.” Following oil discoveries in the Scarborough field of A 1928 New Mexico oil well brought prosperity to Hobbs, named for James
In the early 1920s, one roughneck described Hobbs, New Mexico, in the infancy of its oil fields. “It was desolate country - sand, mesquite, bear grass and jack rabbits,” declared the roughneck. “Hobbs was a store, a small school, a windmill, and a couple of trees.” Although traces of oil and natural gas had been found in New Mexico as early as the late 1800s, the
Hobbs, who homesteaded there in 1907. Photo courtesy HobbsHistory.com
first natural gas well did not arrive until 1921, nine years after statehood. The first commercial oil well was completed a year later on the Navajo Indian Reservation near Shiprock. Midwest Refining Company’s Hogback No. 1 well produced 375 barrels of oil a day. The company drilled 11 more wells to establish the Hogback oilfield in the San Juan Basin. A pipeline to Farmington was completed in 1924. Then came discoveries in southeastern New Mexico that showed the basin’s true potential. Most historians cite a June 1928 wildcat well near Hobbs as the single most important oil discovery in New Mexico history. The Midwest State No. 1 well – spudded in late 1927 using a standard cable-tool rig – revealed the first signs of oil from the Hobbs oilfield at about 4,000 feet deep. Finding commercial amounts of oil in southeastern New Mexico had perplexed
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.
A cable-tool rig placed by the American Petroleum Institute in 1952 commemorated the discovery of the Hobbs oilfield. JULY 2017 ENERGY PIPELINE 19
Winkler County, Texas, exploration a well 3 miles northwest of Hobbs that moved north to Hobbs in 1927. began producing a spectacular 9,500 Midwest Refining, which would later barrels of oil a day. Humble Oil also become Amoco, drilled in a farmer’s introduced a new drilling technology remote pasture leased on public land. to the field – the rotary rig. The well was a cable-tool rig drilling As the boom expanded, oil tank challenge from the start. batteries were built and pipelines laid, Disaster struck at 1,500 feet when but getting oil to markets posed a exhaust from a Franklin engine problem until the first train, operated ignited the engine house. Fire by Texas & New Mexico Railways, destroyed almost everything, including arrived in April 1930. the wooden derrick. “Men with less In 1976, Hobb’s historic discovery vision would have given up, but not well was still producing oil near the the drillers of Midwest,” notes Paige intersection of Grimes Street and Christiansen in “The Story of Oil in Stanolind Road, unnoticed by most New Mexico.” “A steel derrick from passersby. Learn more U.S. petroleum Amarillo, Texas, was set in place, the history at www.aoghs.org. engine was rebuilt by local mechanics, and the cable tools were ‘fished’ from “Making Hole” is a term for drilling the hole.” coined long before oil or natural gas Views of Main Street in Hobbs, which in 1930 had 19 The well was completed at 4,330 were anything more than flammable pool halls, 34 drug stores, 53 barbershops, and 50 oilfield feet in November 1928. Midwest’s curiosities. Bruce Wells is the founder supply companies. Photos courtesy Permian Basin Petroleum State No. 1, the discovery well of the of American Oil and Gas Historical Museum. Hobbs oil pool, produced 700 barrels Society, a 501C3 nonprofit organization of oil a day. Production from the dedicated to preserving the history Hobbs oilfield quickly drew investors of oil and gas. He is a former energy States, according to the 1930 census. and more exploration, transforming Hobbs reporter and editor who lives in Washington, A second boom occurred in January 1930 into the fastest growing town in the United D.C. when Humble Oil Company of Texas drilled
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TECH TALK
Real-time ‘kick’ monitoring can help prevent blowouts BY GARY BEERS • FOR ENERGY PIPELINE
Gushers are signs of failures — not successes. We vicariously enjoy movie scenes when a well gushes oil and showers characters such as those portrayed by James Dean in “Giant” and Daniel Day-Lewis in “There will be Blood.” Under authentic settings, gushers often were viewed from a distance (Figure 1). However, to oilmen, a gusher is a dramatic sign of failure with an accompanying loss of valuable oil, expensive equipment, and — in many instances — a loss of roustabouts. Many formations contain gases, oil, and water under high pressure and these start flowing, or blow out, when or after a well has been drilled through the formation. Blowouts of water are artesian wells and blowouts of oil are gushers.
NEED TO CONTROL WELLBORE PRESSURE When drilling oil or gas wells, rig operators maintain wellbore pressure above adjacent formation pressure to avoid blowouts. In cases where wellbore pressure drops below formation pressure, a kick occurs. This is an early sign of a potential blow-out and the operator needs to take steps to “kill” the kick before it
evolves into a dangerous blowout. Operators rely upon management of the drilling mud flows to identify and mitigate kicks. During drilling, heavier mud is used to increase wellbore pressure and, in some instances, blowout preventers are installed to shut the well until the pressure stabilizes. During tripping, or periods when drillstring is out of the hole, the operator adds supplemental mud to compensate for the void caused by this removal. A basic introduction to causes of kicks, detection methods, and corrective actions is available in an article by Schlumberger engineers (“Improvements for Kick Detection,” Oilfield Review, Volume 2, Issue 1, pages 43-51, 1990). This traditional approach relies upon surface measurements on the rig floor to identify a kick that has occurred several thousand feet below. This time delay is critical and limits the operator’s ability to promptly mitigate the potential impacts of a kick.
REAL-TIME MONITORING OF KICKS AT DRILL BIT Engineers at the National Energy Technology Laboratory (NETL) and at University of Southern California have developed a conceptual method for early, low-cost kick detection by using geophysical measurements from whiledrilling instrumentation located near the bit (Kick Detection
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.
Figure 1. Gushers such as this maybe combined with he term “Eureka!” in the movies, but they really are signs of failure, not success.
JULY 2017 ENERGY PIPELINE 21
at the Bit: Early Detection via Low Cost Monitoring, NETL-TRS-2-2016, EPAct Technical Reporting Series, U.S Department of Energy, June 2016). According to this report, the viability of this approach was tested with a simulated scenario developed for a gas kick occurring in a Figure 2. This depiction shows a simulated scenario well. Literature developed for a gas kick occurring in a well. was reviewed on local properties of annular fluids and data telemetry equipment and these results synthesized into a scenario that was considered typical for oil and gas exploration wells. The graphic depiction of this model scenario is provided as Figure 2. NETL reports that no modifications or additions to the drillstring are necessary to implement this technique.
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The prime advantage of this real-time approach is the time required to inform operators of a kick. The NETL report states: “Initially kick travel time is faster than kick detection time because of the data transmission limitations inherent in mud-pulse telemetry. For the given set of parameters, the break-even depth is approximately 800 feet. Beyond this depth, the kick detection time is faster that kick travel time. For the depth of typical exploration wells, which is approximately 6,000 to 7,000 feet, the time advantage presented by the kick detection method is significant. For the given parameters the Estimated Method Detection Time is approximately 75 seconds, and the Estimated Kick Travel Time is approximately 1,000 seconds. The difference between these two values represents a significant time advantage for the well operator to take steps to avert any further loss of well control.” In other words, the well operator would receive a warning in 1.25 minutes and there would be a predicted 15.4 minutes before the kick reached the surface – ample time to implement a mitigation measure.
NEXT PHASE OF COMMERCIALIZATION In the Available for Licensing announcement, NETL states: “The technology is available for licensing and/or further collaborative research. Currently, NETL is looking for a partner to provide additional datasets from unfiltered LWD, MWD, and/or SWD datasets to use in further algorithm development and validation. Collaboration on development of those algorithms, as many operator software systems are proprietary, would be welcome as well. NETL is also looking for a partner to test and demonstrate this technology in the field during drilling operations in a configuration that would allow for secondary validation of kick events.” When asked for a status comment, the Public Affairs contact for NETL replied: “NETL has had interest from stakeholders. The kicks phenomenon our technology monitors and detects happens in almost all wells. So the broader the coverage we can get on the technology, the more likely we can translate it into licensing of the technology and a partner that will help accelerate its movement into daily use.” Any Interest from operators in the Wattenburg Field? Given the Niobrara and other gas-bearing zones are moderately over-pressurized, with many instances of blowouts in the Fort Hayes Limestone member, one or more operators should assist further development of this valuable monitoring technique and supply datasets from their wells.
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