Ensconced within the Denver-Julesburg basin, the Niobrara shale had for ages been considered a little fish in a big pond. The spotlight and glory have been previously dominated by the larger and further developed DJ basin.

Now, it appears the Niobrara’s fortune is about to change. As activity picks up in the play-within-a-play, some say the Niobrara is slowly stepping out from the DJ’s shadow. It is establishing its own solid reputation as an attractive reservoir with plentiful potential. But as the Niobrara’s evolution unfolds, midstream players are struggling with the play’s spottiness, as they work to both develop and better understand the region. And in the process, they are learning that the Niobrara is not like the others.

Colorado’s DJ Basin has been an industry staple for about a century, thanks to the great success producers have had in its plentiful oil and gas fields. It runs through northeastern Colorado and stretches into Wyoming, Nebraska and Kansas. The Niobrara sits in parts of the DJ basin, including northern Colorado, southeastern Wyoming and southwestern Nebraska. Attention on the Niobrara began intensifying with the advancement of horizontal drilling hydraulic fracturing.

Though it’s not proving to be a true resource play since its geology and resulting reserves can vary, a great deal of optimism is nevertheless brewing for the liquids-rich Niobrara. This is especially true for areas of the play that have not yet been fully developed. Steve Newby, chief executive of Summit Midstream Partners LLC, says he’s particularly excited about what the future holds for the Niobrara outside the DJ. While the enormous Niobrara resources lying to the DJ’s west aren’t discussed much today, that’s expected to change, thanks to the area’s large dry gas and liquids components.

“The DJ is getting a lot of the press, but the prospectivity and the size of the Niobrara in western Colorado is something you’re going to hear talked about a lot more in the next few years,” Newby tells Midstream Business.

“I think it is going to step out of the DJ’s shadow. I don’t think it’s going to happen next week, but I think you’re going to hear more and more about the formation across Colorado and into western Colorado. When you see the Niobrara today, everybody thinks of the DJ.”

Cracking the code

The midstream world has been eager to tap into Niobrara’s plentiful resources. Numerous companies are working to improve the region’s pipeline infrastructure, storage and processing capabilities. Yet, some uncertainty lingers around the tight oil play, where development is still young. In these early days, much science is being pumped into determining just how the play will shape up to perform.

“We think the Niobrara play is currently where the Bakken was in 2005 as far as testing and collective knowledge around what science, drilling, completion and production techniques work best, and where the sweet spots and edges of the play are,” says a Tudor, Pickering and Holt report released in 2011.

“We’ve spent the last few months talking to the majority of operators in the play, and the general consensus is that there is no consensus. At this point there are only a handful of well results, most with less than six months of production, and results have been spotty, with an uneconomic well seemingly announced for every potentially economic one," the study adds.

More than a year-and-a-half after the release of that report, uncertainty remains.

The Niobrara has maintained its reputation as a variable play that hasn’t shown the consistency of true resource plays such as the Bakken or Eagle Ford. The Niobrara’s future depends on geophysical assessments to determine exactly where the resources lay both within and outside the DJ basin, some industry executives tell Midstream Business.

“The Niobrara has been pretty spotty otherwise,” says Tim O’Sullivan, vice president of Rose Rock Midstream LP. “There has been some success by upstream operators in the western portion of the play, but I think over time the upstream is going to be pretty deliberate in developing the Niobrara.

“The Niobrara has not proven itself to be a manufacturing play like so many of the other better known shale plays. Thus, upstream development is going to be more disciplined except in cases where producers can break the code, kind of like in the DJ basin, and perhaps we are seeing signs of this in some parts of the Niobrara. Many producers are facing capital constraints in the face of lower gas and natural gas liquid (NGL) prices, and from the way they went after acreage. The challenges they face are the opposing forces of figuring out the science while having to drill to hold the acreage.”

As a result, producers will exercise more discipline in their capital deployment, says O’Sullivan.

Of course, this isn’t slowing midstream activities in the region. Access Midstream Partners, for example, has numerous undertakings in the area. Its operations are focused in Converse County, Wyoming, and span across 311,000 acres. Access has gathering, compression and processing services in place for two gas gathering systems and is averaging 22 million cubic feet (MMcf) per day of flow through nearly 90 miles of active pipeline.

Though some don’t consider the Niobrara a true resource play, many midstreamers still consider it a good place to do business.

“Recent well-production results indicate production reserves will justify full development of midstream gas gathering, compression and processing assets in the Douglas area,” Gary Jones, Access Midstream’s area manager for the Niobrara, tells Midstream Business.

Infrastructure build-out

Midstream activity appears to be steadily picking up in the Niobrara despite the play’s uncertainties.

Summit strengthened its presence in the DJ portion of the Niobrara last January with the $513 million acquisition of Bear Tracker Energy LLC. Acquired assets included the development of an 84-mile Niobrara associated gas gathering system and a 20 MMcf-per-day cryogenic plant serving associated natural gas production in Weld County, Colorado, close to the Wyoming border.

The Niobrara also lies on the other side of the Rockies. In western Colorado, Summit is building an additional processing plant and gathering system for Black Hills Exploration and Production to gather and process liquids-rich gas from the Niobrara and Mancos shales. The plant is expected to go online in the fourth quarter. Summit also gathers Mancos and Niobrara gas for Encana.

“The DJ-Niobrara basin is going to be an attractive growth region for years to come,” says Newby. “In western Colorado, we think you’re just starting to hear more the Niobrara formation in this area. Summit is well positioned to provide midstream services as this area further develops.”

Summit isn’t the only company eying the western portion of the play. On the production side, WPX Energy recently announced completion of its sizable first well in western Colorado. That company is working to become more active in the area as well.

Newby says Summit was drawn to the area given the size of the potential resource and the need for significant midstream development to transport crude oil and process gas from the area. In the DJ basin, development has fallen behind, he says, since crude has been trucked and gas has been flared. Summit’s gathering system in Weld County is taking gas off flare and will instead gather it once that system is in place.

Meanwhile in March, Noble Energy Inc. announced plans to build Colorado’s first dedicated liquefied natural gas (LNG) plant in Weld County. The $45-millionplant will produce as much as 100,000 gallons per day. The company is also building an equally expensive natural gas plant in Keota, Colorado, that will process 30 MMcf of gas per day.

Growing activity in the Niobrara has been met with takeaway constraints, which some companies are working to alleviate. Right now, there’s just one direct pipeline route from the DJ basin to the industry’s Cushing, Oklahoma, hub: the White Cliffs Pipeline. Together, SemGroup Corp. and Rose Rock Midstream LP own a majority stake in the 527-mile line, which moves crude from the DJ basin to the Cushing market. Current capacity on the 12-inch pipeline is 70,000-barrels (bbl.) per day, though that figure is expected to rise to 76,000 bbl. per day with the completion of a debottlenecking project in June. The additional expansion of a parallel 527-mile pipeline, set for completion in mid-2014, will increase capacity by another 80,000 bbl. per day. Rose Rock owns 7 million bbl. of storage in Cushing and has the capacity to receive or deliver 240,000 bbl. per day of crude connected to all the major inbound and outbound pipelines.

“If I could describe our greatest advantage in two words, it would be great assets in terrific upstream plays,” says Rose Rock’s O’Sullivan.

“For example, consider our crude oil assets in the DJ basin. The expected production growth is significantly increasing throughput on the White Cliffs Pipeline, which ultimately drives highly attractive capital opportunities for Rose Rock. We happen to be associated with two great operators who have experienced incredible upstream success with horizontal drilling in the DJ basin, Anadarko and Noble.”

Congestion has posed the greatest challenge for Rose Rock in the DJ, particularly in rural areas north of Denver in Platteville. A lack of area infrastructure has left the region heavily dependent on trucks to transport crude from the wellhead to Platteville, where trucks unload on Rose Rock tanks to White Cliffs Pipeline.

Thankfully, the congestion is being alleviated, thanks to Rose Rock’s White Cliffs Pipeline as well as Anadarko’s crude oil gathering system, which is expected to eliminate much of the heavy truck traffic. As well, Rose Rock’s general partner, SemGroup Corp., is in the process of completing its Wattenberg Oil Trunkline, a 37-mile, 12- inch pipeline and storage system it is building on behalf of Noble. SemGroup will own the pipeline and Rose Rock will operate it. It will serve the same purpose as the Anadarko gathering system, thus eliminating even more truck traffic in Weld County.

While the need for trucking may be diminished but not alleviated altogether, the same can’t be said for rail. O’Sullivan says rail is here to stay.

“It serves the purpose of meeting the producers’ immediate needs and offers flexibility from better markets until pipeline infrastructure can be put in place,” he says. “By pipeline infrastructure, I mean long-haul pipeline. Once long-haul pipeline is placed in service, the economics are going to be better than rail. It’s a more efficient mode of transporting crude and so it’s the long-term winner, and by far and away the safest mode of transportation today.”

A number of the Niobrara’s new infrastructure projects contain a rail component. Take, for instance, Enserco Midstream LLC, which announced in March that it would build and operate a crude oil transloading terminal to serve producers in the Niobrara, the Bakken and Canada. The new facility will be built in Douglas, Wyoming, in the Powder River basin. The Douglas Rail Terminal will have unit train capability on the main line of the BNSF Railway, along with crude oil storage capacity for efficient operation.

The multi-million dollar facility will be capable of receiving crude oil trucks and will be connected to local crude oil pipelines. Rail-loading capacity will be approximately 60,000 bbl. per day of crude oil with expansion capacity to 120,000 bbl. per day. Manifest operations are expected to begin in June.

"Our Douglas Rail Terminal will be one of the first to provide rail export to companies in this growing producing region of the country. It expands our ability to provide our customers with cost-effective transportation of excess production,” Tim Kirwin, the company’s senior vice president of crude oil marketing and midstream, said in a public statement.

Rail will likely play a role for Access Midstream as well. Ultimately, it plans to install pipeline and compression facilities in the area to support gas gathering and compressions service needs for is customers. However, the company has met its share of challenges along the way. One, says Jones, involves the limited amount of downstream infrastructure, which has made it tough for midstream assets to work in tandem with the area’s natural resources. There’s been an infrastructure shortage on the midstream side as well, particularly with respect to NGL takeaway constraints.

“Trucking and rail transportation for NGLs is an option but has its limitations, depending on the NGL quality,” says Jones. “With continued drilling success, there is great opportunity to expand the gas gathering business and with that comes the need to expand the gas processing and NGL transportation business.”

Storage power

With increasing gas production in the Niobrara and the must-flow requirements of associated gas production, natural gas storage will undoubtedly become a much larger part of the Niobrara equation moving forward.

Merchant Energy Holdings LLC's East Cheyenne Gas Storage facility is the only market-based independent storage operator with direct access to the Cheyenne gas pipeline hub and the growing Front Range market.

Strategically located in Logan County, Colorado, East Cheyenne is adjacent to the Rockies Express, Trailblazer and Tallgrass interstate transmission lines east of the hub. It is currently in operation on the Trailblazer Pipeline. Merchant touts East Cheyenne as a “much needed source for seasonal, daily and intra-day load management on intrastate pipelines” in the Front Range, West and Midwest regions. The facility was designed to offer services to utilities, power generators, pipelines, producers and marketers that require storage in order to meet demand peaks that exceed production and long-haul pipeline throughput.

It has been met with overwhelming market interest, the company says. Merchant announced in March the conclusion of an open season held for its firm storage capacity at East Cheyenne. The open season revealed that market demand exceeded the available 8 billion cubic feet (Bcf) of storage by more than two-and-a-half times. East Cheyenne is in the second phase of its expansion, which will increase the injection and withdrawal capacity to 200 MMcf per day. The East Cheyenne facility received its Federal Energy Regulatory Commission 7(c) certificate in 2010 for total working gas capacity of 18.9 Bcf.

High demand for the facility has been driven by a lack of independent storage in the Front Range market. The East Cheyenne facility is providing more flexibility for shippers to use storage for balancing the market and increasing the value for gas supplies in the area, says Merchant Energy President Andy Lang. In the Niobrara’s case, he says the facility will aid in the growth of gas production— particularly associated gas—as storage can help provide a consistent outlet for associated gas from projects near the Cheyenne Hub “at the same time you’ve got some major changes in the flow dynamics for production from the Rockies as a result of Marcellus production, which is backing up Rockies Express volumes. As well, new pipelines that carry gas to West Coast markets— notably Ruby Pipeline—are having some influence on flows,” Lang tells Midstream Business. “People are recognizing that there’s a much larger role for storage to play in managing their supplies, getting it to market and extracting the best values they can.”

Scott R. Smith, Merchant Energy’s chief commercial officer, says he believes more storage capacity in the Rockies is needed over time. The question, he adds, is how much expansion capacity is available in existing Front Range storage facilities where all of the operating fields are depleted hydrocarbon reservoirs.

East Cheyenne is being developed from a depleted oil and gas reservoir that was originally discovered in the 1950s. The development team at Merchant Energy spent years and substantial capital validating the site’s ability to operate as a storage field. Construction on the project began the summer of 2011. Right now, Merchant Energy is expanding to 14 Bcf of working capacity in the Dsands of the West Peetz D Field. Additional expansion opportunity exists in the West Peetz J-Sand and in the adjacent Lewis Creek field, which could ultimately bring another 30 Bcf of working capacity to the region.

“We expect as our facility grows, and is further integrated into the network and infrastructure, you’ll see a fairly diverse group of market participants that will utilize our East Cheyenne facility,” Smith tells Midstream Business.

Customers will range from producers managing Niobrara-associated gas production to electric generators requiring load following service to meet power generation needs, he adds. “Market growth will vary over time as regional production and demand ramps up.”

Storage development in the Rockies has been lagging largely due to nearly impossible task of finding an appropriate spot for developing storage, says Smith. Finding a depleted reservoir that’s in a prime location—with close proximity to pipeline connectivity—can be challenging, to say the least. As well, the geology and reservoir characters of a facility site must be just right. The challenge is to bridge geography and geology in the quest to find the right location.

Merchant Energy’s team, which has extensive experience in developing storage projects, was able to find just the spot, says Smith.

“We were fortunate, we’ve identified the East Cheyenne location, which has a good combination of those factors,” he says. “It was a challenge.”

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