With natural gas prices ticking higher, some coalbed methane (CBM) producers in the Rockies region are taking advantage of their ultra-low finding and development costs—along with existing midstream and upstream assets—to make some money. Midstream operators are stepping up as well. In May, Kinder Morgan Energy Partners (KM) completed its $5-billion acquisition of Copano Energy, which operates key pipelines serving CBM regions.

To be sure, CBM is not going to put the pow back in the Powder River basin of Wyoming anytime soon, nor grab headlines from the surrounding Niobrara shale play. But CBM producers are starting to think seriously about bringing shut-in wells back into service and maybe even investing in further production.

From the midstream perspective, existing capacity in the region is not a challenge. Double Eagle Petroleum’s gathering subsidiary is operating at about one-quarter of nameplate volume, and the company is eager to move more molecules, its own or those of other producers.

The KM-Copano deal is a natural fit, Steven Kean, president and chief operating officer of KM, said in a recent interview with The Wall Street Transcript. “What we like about the company is that they have been able to build a good business in the gathering-and-processing sector, and they have been able to migrate that business more toward a fee-for-service basis, which is the way we like to do business,” he said. “We like to get paid for the transportation and storage of energy commodities; we don't particularly like to be exposed to fluctuations in commodity prices. Copano has done a very good job of building a company in a sector that we're finding increasingly attractive.”

KM’s interest is primarily in Copano’s assets in Texas and Oklahoma. But, it would also extend KM deep into the Powder River basin. Currently, it reaches Douglas, at the southern tip of the basin, through the Colorado Interstate Gas (CIG) and Wyoming Interstate pipelines. KM also holds a 25% interest in Thunder Creek Gas Services, a subsidiary of Devon Energy that serves Campbell and Converse counties. ONEOK Partners is also a player through several ownership stakes.

Attractive costs

“Our finding and development costs are something like 30¢,” Kevin Norris, chief executive of 1st NRG Corp., tells Midstream Business. It had total CBM production of 477 million cubic feet (MMcf) in 2012. “This is a good reservoir, and we are only going down 1,800 feet or so. We are talking $120,000 and three days to drill a well. It’s like shooting fish in a barrel. But our transportation costs are about $1 per thousand cubic feet (Mcf) to get from our fields to CIG.”

Completing the rest of the arithmetic, Norris says his Rockies CBM is breaking even at somewhere between $2.50 and $3 per Mcf, which looked fairly good against $3.86 for the mid-April Nymex contract, and $4.90 for the four-year strip, he notes.

“We are reaching the point where it may be economical to drill again. We have several permitted locations as well as for or five more coals behind pipe. Right now we comingle several coals and can go for two more very inexpensively using existing infrastructure. We are going to make a decision very soon,” Norris says.

Even before any drilling, 1st NRG will bring back some shut-in and out-of-service wells. “Prices were so low that it was not worthwhile to support even maintenance. We have a few wells shut-in for price and other out of service because of pumps and things,” says Norris. Bringing those back into service will be the first step in growing CBM production.

Based in Denver, 1st NRG has been focused on developing the Clabaugh Ranch field, in the basin. The targeted coal seams are part of the Tongue River member of the Fort Union formation and have been extensively mapped. The company has drilled 42 wells and has developed coal seams in the Werner, Upper and Lower Smith, Wyodak/Anderson Lower, Gates and Wall formations.

The area has lots of prospects for future development. Clabaugh Ranch is about 20% developed and, in total, the company has identified 515 separate coal seams for development of which only 126 have been completed. There are eight permitted locations for future development and acreage for 28 additional locations, which will be permitted in the future.

Niobrara assets

Not surprisingly, 1st NRG is also developing shale assets. It has expanded its Niobrara acres and recently acquired Utica leases as well.

“We are diversifying from CBM, but it will continue to be a flywheel to support the company’s other, more intensive operations,” says Norris. That does not mean, however, that at some point he would think about getting out of CBM. Quite to the contrary. “Our Clabaugh Ranch development is not sexy, but it is sustainable, and we would look to expand it if an opportunity arose. If we could pick up acres at a good price, we would seriously consider it.”

Double Eagle’s Atlantic Rim play, in Carbon County, Wyoming, is a 40-mile long trend in the eastern Washakie basin. The Mesaverde coals in that area differ from those in the Powder River because they are thinner but generally have higher gas content, Double Eagle asserts. Its primary areas being developed within the Atlantic Rim are the Catalina Unit, where Double Eagle is the operator and the Spy Glass Hill Unit, where Warren Resources is the operator and Double Eagle has an interest.

Late last year, Double Eagle exercised its preferential purchase right to acquire additional working interest in both Catalina and Spy Glass Hill, which includes the former Sun Dog and Doty Mountain Units, from Anadarko Petroleum for $4.9 million. Double Eagle’s development of the Catalina began in 2007 with the 14 original producing wells in the Cow Creek Field and has expanded to 83 production wells at year-end 2012.

For 2012, Double Eagle had net sales volumes from CBM in the Atlantic rim of 8 billion cubic feet equivalent, which represented 76% of its total 2012 gas equivalent sales volume. The company states categorically that “wells have historically been economic, even in periods of low gas prices, and we intend to continue to focus our efforts to development and enhancement of wells in this area.”

A significant indicator for Double Eagle was the discovery that wells drilled in this area on 80-acre spacing are communicating with each other, which may indicate that by increasing the spacing, the company may be able to exploit the same reserves with less capital expenditures. Based on these studies, the 12 wells within the exploratory area of the Catalina Unit were drilled on 160-acre spacing.

In the Atlantic rim, both Double Eagle and Warren have permits allowing produced water to be reinjected through injection wells. Double Eagle also has permits for treated water to be release on the surface; it is the only operator with such permission. Double Eagle hired EMIT Technologies to build a pilot waste-water treatment facility within the Catalina that can treat and release up to 10,000 barrels of water per day. Double Eagle would pay EMIT a fee per barrel of water processed, but given current water production volumes and the cost of treatment, currently all of the produced water is reinjected.

Midstream assets

Double Eagle owns Eastern Washakie Midstream (EWM) Pipeline, which includes a 13-mile pipeline and gathering assets, which connect the Catalina with the pipeline system owned by Southern Star Central Gas Pipeline. The pipeline provides Double Eagle with both access to interstate gas markets, and the ability to move third-party volumes. The pipeline has a capacity of 125 MMcf per day, but is only operating at about one-quarter of that.

“The pipeline is expected to provide reliable transportation for future development by us and other operators in the Atlantic Rim,” says Double Eagle. “EWM also owns survey and right-of-way permits for a potential extension to the Wyoming Interstate Co. pipeline.”

For Spyglass Hill, things are less clear. Double Eagle had an agreement to move gas for Anadarko. Double Eagle stated in mid-March, “Although the agreement remains in effect with Warren, the successor operator, Warren has not indicated its plans for further development of Spy Glass Hill. Without future development, the production volumes from Spy Glass Hill are not expected to reach a level that would necessitate use of our pipeline.”

Double Eagle adds that, “the federal exploratory agreement governing Spy Glass Hill states that 25 wells must be drilled by June 2013 or this unit will terminate. None of the required 25 wells has been drilled to date. If the unit terminates, any undeveloped acreage at the time of termination would be extended for two years and then expire, if still undeveloped. Warren, as operator, has not communicated any plans for drilling or development to date.”

ONEOK’s role

ONEOK is also an important player in the Powder River CBM midstream, with a 49% interest in Bighorn Gas Gathering and a 37% interest in Fort Union Gas Gathering. Copano owns the balance of Bighorn and is the manager and operator. It remains to be seen how KM and ONEOK sort out all the fractional interests now that KM’s acquisition of Copano is done.

The Bighorn system consists of 43 compressor stations and approximately 210 miles of gathering lines running from southwest of Gillette to north of Spotted Horse and west to Sheridan. This system is capable of gathering more than 250 MMcf per day of CBM gas for delivery to the Fort Union system.

Under various agreements, producers have dedicated their reserves to Bighorn, giving Bighorn the right to gather CBM produced in areas of Wyoming covering approximately 830,000 acres.

Copano, Anadarko and Bargath Inc. hold the remaining ownership interests in Fort Union, in Northeast Wyoming. Copano is the managing member, while Western Gas, a subsidiary of Anadarko is the operator. Fort Union’s facilities include a gathering trunk line with 106 miles of pipe from Gillette to Glenrock and a treatment plant to extract carbon dioxide. Fort Union recently completed a system expansion that doubled its existing gathering capacity by adding 148 miles of new gathering lines resulting in approximately 649 MMcf per day of additional capacity.

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