Uinta Basin

In the remote northeastern corner of Utah, the Uinta Basin is about a two-and-a-half hour drive east of Salt Lake City. Here, flat lands of sagebrush are interrupted by tall buttes, ancient canyons, winding lease roads, and this spring, the occasional dust storm. Independent producers are hunting for oil pay in multiple intervals within the Green River and Wasatch formations in the basin. Yes, North Dakota gets all the headlines these days, and deservedly so, but Utah’s oil plays provide a steady stream of opportunity for independents.

Utah ranks 11th in U.S. oil production, but that could change. “New technologies have been raising oil production,” says Jim Springer, a spokesman for the Utah Division of Oil, Gas & Mining. Indeed, oil output has risen every year since 2004, after a period of long, steady decline. In 2011, oil production rose 6.5% to some 26.3 million barrels. Applications for permits to drill also have increased each year since 2005. Some 539 permits were issued in Duchesne County last year versus 391 the year before, and 802 were issued in Uintah County, compared with 661 in 2010.

What people fail to realize, says one oilman working the Uinta Basin, is that there are huge quantities of oil in place here—by some estimates, 20 million barrels per section.

The nature and size of the Bakken oil play has by now been well-defined by the industry and analysts, and it makes for a great American success story. But in the Uinta Basin, it’s a different story, and one that appears to be much more complicated, explains Kurt Reinecke, executive vice president of exploration for Bill Barrett Corp. in Denver.

Much of the oil accumulation in the basin is overprinted with shattered, highly fractured reservoir rock that defies conventional log analysis techniques. On the surface, the area has overly complicated and tightly held leasing conditions. But Reinecke reckons that on Bill Barrett’s acreage alone, there could be 2- to 4 billion barrels of oil in place.

Newfield Exploration Co. thinks its Uinta Basin assets, between the Green River, Wasatch and emerging Uteland Butte plays, could hold 700 million barrels of oil equivalent of net resource potential spread over 6,000 locations.

These numbers do not even count longer-term estimates by the U.S. Geological Survey of up to 1.5 trillion barrels in place of minable oil shale (kerogen) found here and across the border in western Colorado, with maybe 400 billion in Utah alone. But, developing that resource is a long way off, for now an expensive and intriguing research challenge.

Making headway

Meanwhile, savvy operators are making headway in the Uinta Basin. Like other independents that chased natural gas prospects to great effect, Newfield Exploration Co. is transitioning to an oilier profile. Its crude output grew at a compound annual rate of 20% between 2008 and 2011, but that pace will quicken now, as nearly 30% of its 2012 capital budget will be allocated to oil prospects in the Uinta Basin.

As of year-end 2012, companywide daily oil volumes, including from Utah, had doubled from 2008 to reach about half of total production. Proved reserves were already 40% oil and liquids at year-end 2011.

One of the Houston firm’s key assets has been the Woodford shale in Oklahoma, but it may not drill a single dry-gas well there this year, or in its conventional South Texas plays for that matter, as its assets are held by production. That doesn’t mean, however, that the company has to compete for leases elsewhere or pay a premium to buy something oily, for it is already sitting on some 230,000 net acres in oil-rich northeastern Utah.

In fact, Newfield is already the largest oil producer in the state by twice over the second-ranked producer, Resolute Natural Resources. Third is El Paso E&P Co. Fourth is Wolverine Gas & Oil Corp., which lays claim to the famous Covenant Field in central Utah. (For more, see “Rock of Ages,” Oil and Gas Investor, April 2005.)

Newfield’s foundational asset here is the Greater Monument Butte Unit (GMBU), which is producing nearly 25,000 barrels of oil per day—and it is full of opportunities from multiple sands. The company estimates it has 4,000 locations remaining in the Green River formation, spread over nearly 100,000 net acres. In February, chairman, president and chief executive officer Lee Boothby said Newfield would devote a third of its 2012 budget to Utah’s oil plays. This includes Monument Butte and lands north of this asset that are considered the Central Basin (actually a Paleocene lake, long ago).

Since Newfield entered this area in 2004 with its acquisition of Denver independent Inland Resources, it has continued to add more leases. It has also grown the position by inking three exploration and development agreements (EDAs) with the Northern Ute Tribe, and in May 2011 it acquired 70,000 net acres in the Central Basin from Harvest Natural Resources and a private company.

The Greater Monument Butte area was unitized in 2010, in essence rolling 110,000 acres together, most on federal land overseen by the Bureau of Land Management. “I’m told it is the largest federal secondary-recovery unit in the U.S.,” says Daryll Howard, vice president of Newfield Exploration-Rocky Mountain Business Unit.

Today Newfield holds an 82% working interest in GMBU and is well under way with infill drilling and waterflood operations. Production is commingled throughout the unit from 20-plus named sands within the 2,500-foot (gross) oil-bearing Green River formation. The company has done technical assessments of each of these.

“All of these sands are not necessarily present in each well, though. The Green River appears to be very discontinuous, but makes an effective waterflood target,” says Howard.

When fully developed, there will be 16 producing wells and 16 injectors per section.

The company currently injects approximately 57,000 barrels of fresh and recycled produced water. Last year during a tour, Utah Gov. Gary R. Herbert praised the company’s state-of-the-art treatment plant, which handles about 5,000 barrels a day so that water can be reinjected. Water is sourced from the Green River and the Johnson Reservoir.

“We consider Monument Butte a foundational asset with greater than a decade of highly repeatable drilling, but we plan to invest a significant amount of capital this year to transform the Central Basin also,” says Jim Addison, general manager for the Rockies. “This is a meaningful book of business for us.”

Enter the GeoCube, a tool that enables the company to better understand what lies below the surface. Data show that as you move north to the Uinta Mountains from the GMBU, where the Green River formation is shallowest, the sands get deeper until the Green River formation pinches out. Reservoir pressures get higher to the north also.

All told, the Uinta Basin, including the Green River waterflood and new Central Basin plays, could have up to 700 million barrels of oil equivalent (BOE) of net resource potential.

The Central Basin

North of Monument Butte lies what New-field refers to as the Central Basin, which was an inland lake eons ago. It is rimmed by the massive Altamont-Bluebell oil field to the north, Bill Barrett’s Blacktail Ridge project to the west and Monument Butte to the south. Here, there are multiple targets. The Wasatch play occurs between 9,000 and 11,000 feet with a gross pay interval of about 1,500 feet. Newfield has drilled and completed 20 verticals—but will test the horizontal potential this year. The company usually completes its verticals in five intervals within that pay zone.

It has more than 70,000 net acres in the Wasatch and several hundred potential vertical locations to drill. Estimated ultimate recovery (EUR) is about 260,000 barrels for the verticals, but that number should climb if the horizontal test works.

At this point, the company has no expectation that it can drain the entire Wasatch with a single horizontal wellbore per section, but according to Addison, spacing is one of the key technical questions common to all resource plays.

But, the industry is watching two other intervals in the lower section of the Green River that could provide more upside: the Lower Black shale, which is a highly organic-rich resource play; and the Uteland Butte, a carbonate at the base of the Green River, where Newfield has drilled a dozen wells to date.

The Uteland Butte appears to be prospective across the entire Central Basin and the GMBU, where Newfield has 230,000 net acres—and some 1,800 potential locations. To date, the company has drilled nine normally pressured Uteland Butte horizontals in GMBU, but is now drilling its first two high-pressured Ute-land Butte wells in the Central Basin.

Says Addison: “It’s a big deal and we’re anxious to get our horizontal wells online.”

The horizontal legs will go 4,000 feet, limited only by lease lines and Utah regulations.

In the Lower Black Shale, Newfield has drilled, tested and commingled production from that shale and the Wasatch formation in 10 vertical wells, with plans for a horizontal Lower Black shale test this year. The company has plans to test multiple high-pressure targets throughout the Central Basin, says Howard, and fortunately has some flexibility in the timing, permitting and location selection.

All in, Newfield is running four rigs in the Central Basin and three in Monument Butte. It plans 60 wells this year in the Central Basin (23 horizontal) and 170 to 180 wells in Monument Butte (12 horizontal). In addition to its E&P operations, it owns and operates three of the rigs, 25 water trucks and three workover rigs.

Addison says he and his Newfield colleagues were fortunate to have been involved at the front end of Newfield’s horizontal operations in the Woodford shale and Granite Wash plays; those lessons can be applied in Utah.

“Part of our assessment is to figure out the right recipe for our completions,” says Howard. “And we’re not sure how far west this play goes. You start running into mountainous terrain and topography challenges, and you get out of the depositional environment of the paleo lake. We are chasing a source rock in a basin-centered setting.”

Production is tricky too, because the crude from this area is known as “black wax.” It is high-quality, low-sulfur crude, but highly paraffinitic (15% wax content), API gravity 32 degrees, that cannot be poured at room temperature. It trades at about 80% of the Nymex West Texas Intermediate price, including transportation costs. “It looks like shoe polish,” says Howard.

Newfield has to maintain enough heat to get that oil up and out of the wellbore and heat the oil once it is in surface tanks, so it can be more readily transferred into the dozens of trucks that take the oil each day from its leases.

Production gains lie ahead as evidenced by two recent deals. In December, Newfield signed a seven-year contract to provide 18,000 barrels of oil a day to Tesoro’s refinery near Salt Lake City, beginning in 2013. The following month, it announced a 10-year deal with HollyFrontier Corp. to supply 20,000 barrels a day to its 31,000-barrel-a-day refinery in Woods Cross near Salt Lake City.

Blacktail Ridge

Bill Barrett Corp. declares in investor presentations that it is not just a gas company any more. In fact, it already has enough oily assets in the portfolio to grow sales volumes from 27% oil and liquids now, to 40% by 2014. On March 1, chief executive Fred Barrett announced that he will stop drilling for gas in West Tavaputs Field in Utah, and reduce the gas rig count in the Piceance Basin to two rigs, from three.

The move to increase oil production was already under way. Last year, while total proved reserves grew 22%, oil reserves grew 135%. It is targeting 80% oil production growth this year.

Its Uinta Basin oil program is widespread, with acreage on the southeastern end of the Altamont-Bluebell complex in its East Bluebell prospect area, and on the southwestern side of Altamont-Bluebell in the Blacktail Ridge and Lake Canyon prospect areas. At year-end 2011, it boasted some 1,688 gross 3P (proved, probable and possible) locations—up from 383 the year before—on a minimum of 114,000 net acres. Utah will be the focus of 34% of its 2012 capital spending, with five rigs running by year-end. Some 67 vertical wells and 10 horizontals are planned.

New horizontal targets, increased well density and completion enhancements are on the evaluation menu.

“We are dealing with a true hydrocarbon storehouse,” says Reinecke. “But it’s complicated. You really have to sit down and take some time to understand the geology, the multiple oil horizons we have, and the tremendous amount of resource in place.”

The Uteland Butte program has been successful so far, with seven horizontal wells completed, with a peak-rate average of 900 BOE per day and a 30-day average of about 500 BOE per day. The productive zone is 30 to 40 feet thick and highly fractured. This year the company plans to keep one rig busy drilling eight horizontal wells.

In addition to pursuing the Uteland Butte, Bill Barrett has other fish to fry in some other “unofficial members” of the Green River-Wasatch sequence. This June, the company plans its first horizontal test in the oil-saturated Black shale just above it at 6,500 feet. The well is in Duchesne County.

“Every time we drill, we go through the Black shale and see hydrocarbons in it,” Reinecke says. The depth is similar to the Uteland Butte, that is, a 6,000- to 7,000-foot vertical with a 3,000- to 4,000-foot horizontal leg.

It also plans two horizontal tests in what it calls the Wasatch CR-4, a deeper reservoir below the Uteland Butte at about 8,500 or 9,000 feet. “The CR-4 is one of the more persistent sandy intervals we see in the Wasatch. It produces in almost all of the vertical wells. It’s one of the last reservoirs present as one approaches the edges of the field, or the edges of the ancient lake, if you will,” Reinecke says.

While a DOE-funded study estimates 20 million barrels of oil in place per section for the Green River-Wasatch petroleum system, Bill Barrett Corp. has estimated almost that much for the Uteland Butte alone, he says.

“Here’s the rub: we think we are being conservative for the oil in place. The truth is we don’t know how much oil is out here. Nobody does. It all comes back to the fracture porosity.”

The company will also test the much shallower Mahogany oil shale at 4,500 feet with two vertical wells, in order to figure out the best place to drill a horizontal well. This zone has given free oil to the surface while drilling to deeper targets, and also has produced marginal amounts of oil from historical vertical well-bores.

There are several leasing and technical challenges here. “This isn’t Monument Butte. This is a different beast geologically and land-wise,” he emphasizes. For example, while the latter is mostly on federal land, some sections at Blacktail Ridge have 70 to 100 mineral owners with very small interests. In some cases, the minerals are split from the surface, so in many places the company works with multiple layers of state, local and tribal regulations.

Monument Butte is already being successfully drilled on 20-acre spacing, while at a May hearing, Bill Barrett Corp. will ask the state for permission to try its second 80-acre pilot at Blacktail Ridge. In March it received permission for the first such pilot.

“In our first well at Lake Canyon back in 2005, we drilled 16,000 feet through the Mesaverde, targeting over-pressured gas,” explains Reinecke. ”When that proved sub-economic, we moved up hole and completed in Wasatch sands that we’d seen on the way down, but at the time, conventional thinking said the Wasatch wouldn’t flow economically. When it came on at 400 barrels a day, we jumped quickly…to acquire the Blacktail Ridge acres, which were along the old historical field’s edge.”

The company started with two wells per square mile, but as it has applied the lessons of elliptical drainage patterns from its successful Piceance Basin program in Colorado, it soon found it could drain more oil from the reservoir with four wells per section.

The Wasatch and Green River formations are not easily understood and don’t lend themselves to simple log analysis, says asset development geologist Jason Anderson, who works the project for Barrett. The geology is tricky throughout the Green River-Wasatch sequence, and in the Uteland Butte wells.

“In one 3-inch-diameter core we took, I counted 14 fractures in just one foot of core. These were very small fractures, but in some image logs we see fractures on average literally every two feet. Some are open; some are closed. These fractures result from the hydrocarbon generation and expulsion in a very organic-rich sedimentary sequence.

“It’s great for production, but it can make it difficult to drill.”

Bill Barrett’s Uteland Butte drilling program is undergoing completions refinement, he adds. The company has used swell packers and sliding sleeves, but will soon try cemented liners and the plug-and-perf method to get better isolation of the 15 or so frac stages along the 3,500-foot lateral leg of these wells.

Utah-focused IPO

Ute Energy Corp. will soon be a new name on the scene, almost a pure play on Utah, as the Denver E&P proposes to go public this year. Staffed by several former Bill Barrett employees, it is led by president and chief executive Joseph Jaggers.

Now operating under the name Ute Energy Upstream Holdings LLC, it’s concentrated in the Uinta Basin with some 165,608 net acres, approximately 94% of which is undeveloped. The company has seven main project areas, including North Monument Butte and Blacktail Ridge. Its amended S-1 registration statement says it is seeking further acquisitions and leasing opportunities in the region.

Now in its pre-IPO quiet period, company officials could not talk. But the S-1 says Ute Energy LLC was formed in 2005 by the Northern Ute Tribe to participate in exploration and development of its mineral estate in the Uinta Basin. The Tribe contributed to its parent non-operated net acreage in the Lake Canyon, Wolf Flat, Blacktail Ridge and North Monument Butte project areas, in exchange for equity in the parent.

Ute was formed to acquire all of the parent’s oil and natural gas participation rights under the EDAs relating to these project areas and to manage oil and gas operations distinct from the parent’s other energy investments. In March 2010, the parent assigned all of its oil and natural gas participation rights under the EDAs to Ute.

Since then, it has entered into two EDAs where it has operated interests. In December 2010, it entered into an EDA for the operated Randlett project area for an initial lease bonus of $1.3 million, and in March 2011, it entered into an EDA for its Rocky Point project area, which it jointly operates with Newfield, for an initial net lease bonus of $1.5 million.

For the three months ended December 2011, Ute Energy’s average daily production was 5,200 BOE. But the potential for growth is significant, as the company’s S-1 indicates some 6,084 gross locations in the basin.

Berry, Wapiti and more

Berry Petroleum Co. intends to grow its oil production 20% this year, with a focus in the Permian Basin, California and Utah. It gained its first toehold in the Uinta Basin in 2003. Since then it has acquired interests on private, tribal and federal leases. Its inventory is now as much as 800 locations (700 horizontal ones in the Uteland Butte and several more in vertical Wasatch). These are distributed throughout the basin between Brundage Canyon, Ashley Forest and Lake Canyon—all fields that rim the Central Basin.

In 2011, Berry grew its Uinta production 4% to about 5,500 BOE a day, and drilled 45 wells. It plans up to 85 wells in a three-rig program this year, spending approximately $130 million. The focus is on developing areas of higher oil potential in the Green River, Ute-land Butte and Wasatch formations.

Last year it completed three horizontal operated wells in the Uteland Butte formation. Chief operating officer Michael Duginski spoke about this during the firm’s recent fourth-quarter 2011 conference call. “We were not able to achieve a full completion on one of these three wells. While we do not have 30 days of production from the two remaining wells, we expect our 30-day average initial production rates on these two wells will be approximately 300 BOE per day, with approximately 90% of the production stream being oil. The 24-hour peak production rate for these two wells was in the range of 600 to 675 BOE per day.”

Berry is still in the early stages of this play, he emphasized. He estimates it could ultimately have between 800 and 1,400 locations in the Uteland Butte and Wasatch formations.

“Results from our vertical Wasatch test wells have also been positive, with average initial production rates in the 100-BOE-per-day range, with oil making up approximately 90% of the production stream on average.”

Denver independent Gasco Energy Inc., which is 92% natural gas, recently agreed to sell a half share of its Uinta Basin assets to Wapiti Oil & Gas II LLC for approximately $35.75 million. The latter is a new affiliate of Wapiti Energy LLC, a private Houston company that has closed on about $900 million of property sales and acquisitions since 2000.

This marks Wapiti’s first foray in the basin. It will be the designated operator, but will contract that back to Gasco. The partners will pursue some natural gas drilling, but plan to increase their hunt for Uinta Basin oil as well, most likely starting in the third quarter. Production is from the Wasatch, Mesaverde and Man-cos gas formations, with Blackhawk and Dakota prospective as well. About 11,000 net acres are prospective for the Green River oil play, of which two vertical wells have been drilled. Gasco’s proved reserves at year-end 2010 were 42.5 billion cubic feet of gas. Upside includes an estimated 5,000 drilling locations.

Wapiti will take an undivided 50% stake in Gasco’s Uinta Basin producing oil and gas assets for $20.75 million in cash, and an undivided 50% interest in its nonproducing assets. Wapiti has committed to fund $30 million of the drilling and completion costs associated with these transferred assets. Some $15 million will be paid upfront and the company has agreed to provide an additional $7.5 million of drilling and completion costs.

“Fortunately, we have a deep inventory of low-risk opportunities in both the Green River (oil) and Wasatch (gas) formations,” says Wapiti president and chief executive Bart Agee. “Commodity prices have caused us to front load the Green River wells early in our program. We would obviously like to see gas prices improve significantly so we can develop the enormous gas reserves on the acreage.”

Wapiti acquired and is evaluating exploration opportunities on additional leases in the basin, he adds. “Our Sunday School Canyon prospect is about 5,000 acres located about 12 miles northeast of Flat Rock Field in Uintah County. It is an Entrada Dune (gas) play over which Wapiti has 3-D seismic.”

Gasco chief executive and president King Grant said the company’s 2012 capex budget in the Uinta will test infill pad drilling in the eastern part of its acreage, where the liquids content in the Wasatch and Mesa Verde formations is higher. It also plans to further test the Green River oil potential.

“While our direct investment in Utah is small this year, at $3.6 million, we expect to receive the benefit of an additional $2.25 million in carried interest in the Utah program from our joint-venture partner. This would bring our before-payout total drillbit exposure in Utah to $5.85 million.”

One size does not fit all in this corner of Utah, Reinecke sums up. “You have to look at each company’s properties as standalone entities. You can’t just say, ‘If Company X has this initial rate and that equals this EUR, and Company Y has 2x that initial rate, it must have 2x the EUR.’ Multiples differ on different properties that have different flowing conditions. You can’t just do an easy ‘rule-of-thumb’ out here. It’s too complex, and besides, it’s still early on for the Uteland Butte in particular.

“But it’s definitely a fun play.”