Powder River Basin: In the Zone

[Editor's note: A version of this story appears in the March 2020 edition of Oil and Gas Investor. Subscribe to the magazine here.]

For years, the brittle rock beneath Wyo­ming’s Powder River Basin has whispered promises of greatness to wildcatters, geol­ogists and explorers seeking oil.

And for nearly as many years, the basin has been pitched as a sequel to the Bakken, heir apparent to the Eagle Ford, the Rockies’ an­swer to the Permian Basin.

Upstream companies see now as the time to make believers of the rest of the oil and gas world. After Samson Resources II LLC was largely dismantled by a $4 billion bankruptcy, its leaders chose the Powder River to make the company’s last stand.

In March 2017, Samson Resources emerged from bankruptcy after peeling off assets in the Permian, Williston and Anadarko basins—among others—as it unspooled nearly 500,000 net acres of oil and gas leasehold.

“We’ve exited everything,” president and CEO Joseph A. Mills told Investor. “This is our last large asset. And we’re very excited about it.”

In 2018, Wyoming production hit a 25-year high, according to federal data. About a half of the state’s oil production comes from the Pow­der River Basin, according to the Wyoming State Geological Survey (WSGS). In 2019, E&Ps trotted out one successful well after another in the Shannon, Frontier and Turner formations. And Wyoming oil production con­tinued to grow through the first 10 months of 2019 by an average 15%.

But E&Ps, some for the first time in years, are returning—in force—to what’s always been considered the hinge point for the Pow­der River Basin: the Niobrara.

The ascension of the “Nio,” as some oper­ators refer to the formation, may be at hand.

“This is the next big oil play, and we’ve heard it for years,” said Ryan Birkenfeld, CEO of private E&P Northwoods Energy LLC. “But I think we’re on the cusp of it now.”

Wood Mackenzie noted in a January report that the Powder River Basin’s sandstone plays have yielded “headline-grabbing wells” but doesn’t expect that to translate into a surge of rigs in the basin. “These [formations] are niche plays that are more akin to conventional fields than resource plays,” the report said.

The Powder River Basin’s “Niobrara type curves are tracking higher every year,” Wood Mackenzie said, noting that gas-to-oil ratios are less than 3:1, and Wyoming is taking steps to clear up a permitting glut. With Colorado’s regulatory environment in flux, Wood Macken­zie said some operators might also shift from the Denver-Julesburg (D-J) Basin Niobrara to Wyoming in 2020.

RELATED:

Executive Q&A: Samson Resources’ ‘Last Stand’ In The Powder River Basin

“We expect Niobrara breakevens in the Powder River Basin to test the $45 per-barrel marker, down drastically from nearly $70 per barrel in 2016,” the firm said.

In the third quarter, some operators began to signal plans to shift toward the Niobrara. Samson, Northwoods, Chesapeake Energy Corp. and others are launching delineation in the formation.

“I think we’re seeing [the basin] being un­locked by multiple operators,” Birkenfeld said. “Across the basin, everybody’s kind of pivoting toward the Niobrara Formation.”

In November, Chesapeake CEO Doug Law­ler said the company’s plan for the Powder River would shift to the Niobrara after the company drilled its first Niobrara well in five years.

“With the longer lateral and a modern com­pletion design, the well has quickly become the best-performing Niobrara well in the ba­sin,” Lawler said, adding that in less than 90 days it had produced 106,000 barrels of oil.

Lawler anticipated Chesapeake would spend about 25% of its 2020 Powder River capital program in the Niobrara and would run two or three rigs in the Powder River Basin—essentially the same as its drilling plan in South Texas.

To some extent, E&Ps are refocusing on the shale formation to finally answer doubts that the Niobrara offers the same repeatabil­ity as the other great oil producing plays of North America—the Bakken, Eagle Ford and Permian.

Mills said Samson’s offset competitors are all talking about Niobrara wells, and most companies in general seem to be focusing on the Niobrara.

“That’s really where the juice is,” Mills said.

But Mills also argues that the Niobrara is key to the Powder River Basin.

“For the PRB [Power River Basin] to be­come the great basin that we all know that it can be, it’s all about the Niobrara,” he said.

“For this basin to have 50 to 60 rigs running in it, is all about the Niobrara.”

Big laboratory

In 1832, explorer Army Capt. Benjamin Bonneville found a tiny, unctuous stream of what fur trappers called the “Great Tar Spring” oozing under the peaks of the Wind River Mountains of Wyoming.

As later recounted by the writer Washington Irving, Bonneville had sought out what was thought to be a medicinal substance for his company’s horses and men. Irving recognized it as the “bituminous oil, called petrolium [sic] or naphtha, which forms a principal ingredient in the potent medicine called British Oil.”

The oil that seeped from salt bluffs in the 1830s is not the oil of the Niobrara, which is trapped some 8,000 feet below ground in rock roughly 66 million years old.

But explorers of the basin don’t believe they’ll need to crack codes to rapidly bring the formation under heel for widespread de­velopment.

Birkenfeld, a geologist who served as EOG Resources Inc.’s area manager for the Pow­der River Basin, said he fell in love with the distinctive rock in Wyoming, which features up to 5,000 feet of stacked pay potential and multiple targets within that pay zone.

“You only have one other basin that I’m aware of in all the work that I’ve done over the years—and that’s the Delaware Basin,” he said. The Powder River “has a similar geolog­ic makeup.”

And, admittedly, the Powder River is in its “early days.”

“We are still in inning one of the play, so we’re not subjugated to the parent-child re­lationships that you’re seeing across other plays,” he said.

That means Northwoods and other E&Ps can siphon off what’s been learned from all the other Lower 48 plays, including the Delaware, Eagle Ford, Midland Basin and Scoop/Stack.

From that, companies get a leg up on under­standing the ultimate wellbore densities that the Niobrara can tolerate.

“All those other plays that have been drilled and harvested to date, that’s our laboratory,” he said. “So you take those learnings and say, ‘Oh, well, that works here.’ And ultimately rock is rock. Good rock is good rock. You pump sand, water downhole under high pres­sure and frac it.”

Mills said that Chesapeake, EOG and Oc­cidental Petroleum Corp. are bringing their technical talents and expertise from drilling in the Permian to the Powder River Basin.

The result, he said, is that penetration rates have increased and days from spud to turning wells to sales have fallen dramatically. Re­searchers cited performance efficiency 15% to 22% higher in the Powder River by using drillbit geomechanics to measure variabili­ty along lateral walls, then spacing stages to minimize horizontal stresses, according to research presented at the Unconventional Re­sources Technology Conference in July.

E&Ps’ results in the Shannon, Turner and Frontier formations have so far been remark­able, particularly for their oil cuts.

“That’s obviously very encouraging,” Mills said.

As of January, a Northwoods well in the Shannon had produced 89% oil in its first 90 days while a Frontier well’s IP30 produced 81% oil. Its Niobrara entry, the Spruce 21W33-2NH well, by contrast, produced 67% oil in its first 60 days.

Such results are typical of the Niobrara, which tends to lack the higher oil cuts of other formations. But the Niobrara scores better in two respects: It drills far easier than the Shan­non and Frontier—“like butter,” Birkenfeld said. And it is vast.

“The Shannon is great, but the thing about the Shannon and the Frontier that is different than the Niobrara is the fact that it is not ubiq­uitous,” he said. “It’s not everywhere across the basin where you can set up a full-fledged development plan and run multiple rigs like you see in the D-J Basin.”

“The Nio is literally everywhere,” he said, “and you find it in the right thermal maturity, right geologic window.

“At that point, you’re off to the races. What you’re beginning to see unlocked across the play is that all you have to do is put a mod­ern-day, high-density completion on this par­ticular rock and it generates a phenomenal oil cut if you’re in the right spot.”

Capture the flag

The early days of the Powder River Basin’s rise were chaotic, Mills said. That’s because Wyoming has faced a race, as Mills describes it, to file drilling permits. Samson itself holds 1,600 operated permits.

“I’ve got to be honest—it was the Wild West out here,” he said.

With stirrings by offset drillers in the Nio­brara, Mills even talks about drilling wells to “protect our flanks.”

Wyoming’s first-to-file regulations have resulted in what Birkenfeld called a race to “capture the flag” by filing permits to lock up resources. Last year, for instance, Texas E&Ps applied for 10,764 oil and gas drilling permits. Wyoming received nearly that number of per­mits in the first three months of 2019.

On Dec. 20, the Wyoming Secretary of State approved new rules that significantly limit the time allotted for drilling a well under the state’s first-to-file regulations.

The Powder River Basin isn’t without its chal­lenges. While the basin, once a magnet for coal­bed methane production, has plenty of gas infra­structure, it still lacks a solid network of crude pipeline and gathering. Operators say many of those problems are also being addressed.

Chesapeake executives, for instance, said in November they expected to reduce gathering, processing and transportation in the basin by about 25% in 2019. In part, that reduction was the result of moving from trucking its oil pro­duction from the wellhead to an oil gathering system. The addition of infrastructure is par­ticularly important to Chesapeake, which has grown oil production to about 8.3 million bar­rels in 2019—a 270% increase from 2017.

Samson, likewise, historically trucked much of its oil, and “a portion is still being trucked today,” Mills said. However, Samson had already engaged in building crude infra­structure to get its oil to the Rockies oil hub at Guernsey, Wyo.

In January, WSGS noted several pipeline projects are in progress in the state. In east­ern Wyoming, Saddlehorn Pipeline Co. is expanding its pipeline to Fort Laramie and expanding its capacity by 30% to a total of 290,000 barrels of oil and condensate per day. The expansion should be operational in late 2020.

Kinder Morgan Inc. and Tallgrass Ener­gy LP are also converting two natural gas pipelines into crude oil pipelines to transport crude from the Powder River and Denver ba­sins to the hub in Cushing, Okla.

In July, Phillips 66 Co. and Bridger Pipe­line LLC opened a supplemental open season for a line to run from the Rockies and Bak­ken and connect with Gulf Coast destinations. The 24-inch pipeline would run from Guern­sey to Cushing.

Still, “the big issue we had was over the past, call it decade, obviously was that Bak­ken barrels were flooding Guernsey,” Mills said. “The Guernsey hub obviously is the ma­jor trading point for all PRB barrels.”

Mills said the likelihood of blowout differ­entials for Powder River crude subsided after the Dakota Access Pipeline came online.

“Ironically, it left Guernsey somewhat emp­ty of barrels and left traders scrambling to fill pipes,” he said, noting that differentials now range from $2.25 to $4.50 per barrel.

Those changes have made Samson and oth­er companies less reliant on moving oil by truck. “I can’t tell you the commercial rates, but I can tell you that it is far cheaper, obvi­ously, than trucking barrels,” he said.

Room to roam

Emily Dickinson called hope “the thing with feathers.” David Moore, president of Deep Imaging Technologies, calls it “a four-letter word.”

What Moore has observed in three recent jobs in the Powder River is that operators sometimes struggle to break rock during some of the stages. The company worked from Au­gust through November in Wyoming.

Fracs are also “fairly contained, so they’re not running out … as erratic as some of the other plays,” he said.

Moore said what his company has seen as it assists drillers by monitoring the flow of flu­ids up to 16,000 feet subsurface is promising.

“I think there’s got to be more completions, more science and more monitoring,” he said. “There’s not enough science that’s been done yet to really come up with a definitive answer. But from what we’ve seen, there is hope.”

Proving the repeatability of the Niobrara remains an imperative for oil and gas compa­nies in the Powder River.

“The laterals that we’ve done, the single wells have been a little shorter than what was seen in the Permian, though larger pads have drilled laterals of 10,000 feet,” he said.

Moore said he sees many operators in the Powder trying to prove that their assets can match the quality of the Eagle Ford or Perm­ian. But like all plays, the question remains whether the wells will be consistently high performing or if the current, promising results are due to E&Ps choosing the “most efficient rock to drill in first.”

“They’ve got to figure out if they can keep that up, because they’ve chosen the best rock,” he said.

“I think that’s what everyone’s doing in the Powder,” he said. “They’re trying to prove out that their assets are good. They haven’t been fracking up there for a bunch of years, not in mass.”

Operators have already made up their mind that the Niobrara will show the consistency of other shale plays.

Mills said Samson has so far been the only company that has truly chased after the Shannon and seen remarkable success. In January, the company noted that two Ogalal­la wells in Converse County, Wyo., both had IP30 production exceeding 2,000 barrels of oil equivalent per day (boe/d)—both with at least 93% oil.

Mills said the company’s Spearhead Feder­al well, in the Shannon, is a 1.4 million boe well with 90% to 95% oil.

“I put that up against any Wolfcamp well,” Mills said.

Still, Samson has 100 to 150 Shannon well locations. “We have three times that in the Ni­obrara,” he said. “Obviously the Niobrara is a widespread reservoir over large areas. It’s also repeatable.”

Mills said the Niobrara’s widespread pres­ence is essential for the basin’s future. As of January, the company had drilled one Nio-brara well.

“There’s not enough running room either in the Turner or the conventional [reservoirs] to have 50, 60 rigs running here,” he said. “Ulti­mately for us to see this basin really ramp up to its potential, it’s going to be us figuring out how to unlock the secrets in the two uncon­ventional reservoirs.”

Birkenfeld, too, said the Niobrara is repeat­able—it’s simply a matter of understanding the play’s ultimate density of wellbores and creating economies of scale by turning on large pads high-volume producing oil wells. He noted that the play’s rock is soft enough to allow 10,000-foot horizontal wells to be drilled in two-bit or even one-bit runs.

“It’s phenomenally easy to drill,” he said, adding that a step into the wrong geologic conditions is not just tougher to drill but lacks the right relationship between permeability and porosity.

“That’s what I love about the resource in place,” Birkenfeld said, comparing the forma­tion to the Permian’s Wolfcamp and Spraber­ry. “You have that same type of scenario.”

Mills offers a prediction, not unlike those made many times before about the Powder.

“I do think in the next three to five years,” he paused to emphasize three to five, “the PRB will become one of the great oil basins of our country.”