A previous hot bed of drilling development, Colorado’s Western Slope is struggling in a prolonged price downturn
November 4, 2017
The one constant in the oil and gas industry is the boom-bust cycle. Prices spike, drillers rush in. Prices drop and the drilling ends.
But what if the boom doesn’t come back?
Some in the industry say that’s the unique situation facing Colorado’s Western Slope, a previous hot bed of drilling development that’s struggled in a prolonged price downturn. Drillers here have become a victim of their own successes.
Boom-bust cycles are such a part of the industry’s DNA that some guys can measure their career by them. Don Simpson, a senior vice president of Ursa Operating Company, is one of those longtime oil men. Sometimes a bust lasts just a year or sometimes “they last a lot longer,” he says.
“I’ve been through probably six or seven cycles since I’ve been doing oil and gas work.”
When drilling on the West Slope was booming 10 years ago, prices were double and even triple where they are now, around $3 per million British thermal units. Drilling naturally stopped, and the Grand Junction area lost about 10,000 jobs that never came back. Simpson still seems optimistic, probably in part because of the region’s abundant resources.
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“We’re producing at lower costs than we normally have, and it’s a cleaner burning fuel for the U.S.,” Simpson says.
A U.S. Geological Survey analysis in 2016 found 66 trillion cubic feet of recoverable gas in the Piceance Basin in western Colorado. That’s enough to power the entire country for two years. It’s the second largest gas reserve in the country.
So there’s plenty of natural gas. But most importantly, the drillers have figured out how to lower the cost of drilling, so even with low prices, they can make a profit.
David Ludlam, director of the Western Slope Colorado Oil and Gas Association, has seen a “silent resurrection” with just about 10 drill rigs operating in the region.
“Just a few years ago, we were at two,” he says.
That’s nothing like the 90 plus rigs of a decade ago, but he’s not picky at this point.
The prolonged downturn forced some companies to turn their focus to more profitable gas fields, like in Texas, Ludlam says, opening the door to a new set of operators. “They have transformed the Piceance Basin into a truly low cost natural gas producing region.”
These new operators really understand the geology of where they’re drilling and they’ve perfected their process.
“One of the things about a market where prices are depressed is the most efficient operator wins,” says Bernadette Johnson, an analyst with DrillingInfo in Littleton. “You’re ability to cut your costs, to do things better and faster really starts to matter. It’s not just our industry, it’s any industry.”
Even with those advances and efficiencies, not every company can make it work in western Colorado — the costs are just too high. Part of the problem is much of the land is federal, meaning lengthy approval times for drilling. The Trump Administration has signaled a desire to move much quicker, but according to the most recent data, it can take two and three times longer for the feds to approve a permit compared to regulators at the State of Colorado for private land development.
Environmentalists say those delays are for a good reason. Sometimes the land is valued wilderness space. There are lengthy studies required, but even when a permit is issued, environmentalists often fight these developments in court. They most recently sued to stop a development near Paonia, where it has taken 10 years just to get the final approval.
Even if permit times improve, western Colorado is probably never going to be the cheapest place to produce natural gas. It’s competing with gas finds everywhere.
“So the problem is the resource on the Western Slope is massive, but the resource in the northeast is massive,” Johnson says. “And the resource in the Permian is massive. And the resource in Louisiana is massive. And the resource on the Gulf of Mexico is still massive.”
New technologies have opened up drilling on previously unreachable gas reserves. That’s why there’s renewed interest in exporting and the potential of the Jordan Cove export terminal in Oregon. Just recently the company refiled for a project permit after several failed attempts. Colorado has a pipeline that runs near the area.
That makes Asia a tantalizing customer for all this energy. Johnson points out that new demand is important because “today it’s a buyer’s market.”
“We can grow as much production as demand will grow,” she says. “Demand is the limiter.”
When demand spikes operators can increase production so quickly that gas prices soon fall again. That’s great news for customers since natural gas is a key for electricity generation and heating. It’s not great for drillers though.
“It puts an upward lid on prices,” says industry trade representative David Ludlam. “If you get a signal much higher than $3 and .50 cents a lot of new drilling comes online.”
And here’s another twist: oil producers on the Front Range, and in Texas, are also finding a lot natural gas, almost as a byproduct. New, unconventional techniques like horizontal drilling are adding new supply to the market. A greater supply pushes prices down. That’s just another natural gas source competing with the Piceance Basin.