Times have been tough for the Piceance basin, a dry naturalgas producing region in northwestern Colorado that’s fallen victim to struggling commodity prices. Activity levels suffered from significant drops during the past few years, and the future was looking dire.

Then along came the Mancos—a deeper shale play that’s set to benefit from the existing infrastructure used by its upstairs- neighboring predecessor, the Mesa Verde sandstones. It’s a great development for the industry, says David Ludlam, executive director of the Western Slope Colorado Oil and Gas Association.

“Not only do we have a really good infrastructure base in place that is established and has lots of room for growth that’s helped operators drill through price challenges, but we also have the emergence of the Mancos,” Ludlam tells Midstream Business. “It started off with experimental drilling from one operator and has now been tested by nine or 10 operators here in western Colorado. To varying degrees, they all have similar [strong] results.

“For the long game, that’s great news for the Piceance. All of a sudden, you have numerous operators that believe in the source rock and that are going into the Mancos in meaningful ways.”

The Mancos (of which the better-known Niobrara is a part) made headlines earlier this year when WPX Energy released drilling results that indicate the shale has the potential to significantly boost the company’s daily production. WPX said its discovery in the Niobrara formation in western Colorado exceeded 1 billion cubic feet (Bcf) of gas production in about 100 days of operation.

“WPX expects the Niobrara well to produce in its first few months what a typical well in the Piceance basin’s Williams Fork formation produces over its estimated lifecycle of 25 to 30 years,” the company said.

Through the second quarter of this year, WPX’s Niobrara discovery well had produced 1.4 Bcf of gas.

“WPX intends to aggressively delineate this impressive discovery,” the company said. “We are confident the Niobrara is prospective throughout our 180,000 net acres. We expect to finish a current 3D shoot of 24,000 acres by mid-2014.”

Encana Corp. has publicly indicated that it, too, was encouraged by its first test well. The company in 2012 also announced plans to drill a dozen additional Mancos shale gas wells. It’s all good news for the industry, says Ludlam.

“They have found the Mancos is very prolific and in parity with many of the other shale plays around the country, in terms of the natural gas side,” he says. “I think it’s been a savior for morale for the communities. It’s a huge resource for the future.”

Strong economics

Overall, the economics of the Rockies has been flourishing. The Leeds School of Business at the University of Colorado at Boulder released a study indicating Colorado’s oil and gas industry recorded $9.3 billion in production value last year. The total economic impact—including direct, indirect and induced—of the state’s oil and gas industry totaled $29.6 billion in 2012. Transportation accounted for nearly $792 million.

More than 51,200 jobs were supported by the industry, according to the report, with average wages falling at more than $74,800. The industry contributed nearly $4 billion in household income for Colorado last year, says the report.

No information was available regarding the Piceance or Mancos specifically. However, recent deals indicate a great deal of money continues to change hands in the region’s midstream sector. In late 2012, Anadarko Resources sold its gas and pipeline assets in the Piceance to a private company for $325 million.

Summit Midstream Partners LLP in 2011 acquired Encana Oil and Gas’s Piceance midstream assets for $590 million. Acquired assets included 260 miles of pipeline and 90,000 horsepower of compression facilities. And in 2012, Summit acquired ETC Canyon Pipeline LLC from an Energy Transfer Partners LP subsidiary for $207 million. The gas gathering and processing system includes more than 1,600 miles of pipe and 44,000 horsepower of compression with a total capacity of 97 million cubic feet (MMcf) per day. It also includes two natural gas liquids (NGL) injection stations.

Midstream in the Mancos

From a midstream perspective, the Mancos is shaping up to be a low-maintenance shale. This is thanks to existing infrastructure from the Piceance.

“For the companies that have drilled in the Mancos, all of the stuff is already there. The pad locations, the pipeline right-of-ways and the easements are in place,” says Ludlam. “All companies have to do is drive back onto the pad where they drilled the Williams Fork sandstone wells and drill a couple of separate holes. From an infrastructure perspective, the Piceance has a long-term competitive advantage because all of that stuff is already in place.”

However, some current infrastructure will need retooling. For instance, the temperatures and pressures are vastly different between the Mancos and Williams Fork. Since the Mancos is hotter with higher pressure, gathering systems must make the necessary accommodations. Fortunately, time has been on the sector’s side.

“Midstream companies have had several years to think this through and start planning it,” says Ludlam. “And they already have the takeaway capacity, existing processing capacity and plans for future expansion are in the infancy stage of discussion.”

Making a name

With all of this excitement surrounding the Mancos, the shale appears to be on the verge of becoming a household name. With wells showing great promise and midstream infrastructure in place, it seems only a matter of time before the Mancos finds itself on the map. However, there is one thing holding the region back. With gas prices slumped, the Mancos is unlikely to be propelled into shale stardom until the commodity makes an upswing. The same goes for the Piceance.

The Mancos region in western Colorado is currently ruled by a handful of big midstream companies, including The Williams Cos., Summit Midstream Partners LP, Enterprise Products Partners LP and DCP Midstream. Smaller companies also hold assets in the area, but the aforementioned companies own the region’s major cryogenic plants. They include Williams Co.’s the 450 MMcf per-day Willow Creek natural gas processing plant and Enterprise’s Products Partners LP’s expanded Meeker natural gas processing plant, with a capacity of 1.5 Bcf per day.

With positions established by industry majors, and midstream infrastructure already in place, it’s not yet clear whether additional build-out will be needed.

“Time will tell in terms of how prolific the Mancos becomes,” says Ludlam. “At this time, we’ve got a solid, established midstream sector that has big infrastructure. I think they’ll have plenty of room for expansion and additional capacity as it is.

“The prospect of entry into the Piceance might be a challenge, but it’s not out of the question.”

The Uinta

Though the Mancos is drawing a great deal of buzz, it isn’t the only show in town. To the west of the Piceance is the Uinta basin in eastern Utah, where activity remains steady despite weak commodity prices. Producers there are hoping that a commodity-price increase will give the Uinta its next leg of major growth. But even in the current pricing environment, the tight-gas and associated liquids play is considered a top-notch location for companies such as Western Gas Partners, LP (an affiliate of Anadarko Petroleum Corp.) whose focus in the Uinta has been in the Greater Natural Buttes region.

“When you’re in the midstream business, the quality of the resource play always matters,” Donald R. Sinclair, president and chief executive officer of Western Gas Partners LP, tells Midstream Business. “The Uinta basin/Greater Natural Buttes area is a high-quality resource play; producers are experiencing relatively low development and operating costs, which has led to a consistently strong level of activity that is overwhelmingly positive for the midstream business. ”

Western Gas Partners has a presence throughout the Rockies. It has operations in southwest Wyoming, the Powder River basin and the Wattenberg field in eastern Colorado’s Denver Julesburg basin. In the Uinta, it owns processing facilities that have 970 MMcf per day of total processing capacity. Western Gas’s Chipeta Processing LLC complex in northeastern Utah includes three natural gas processing trains (two cryogenic trains and one refrigeration train), the Natural Buttes refrigeration plant and a 17-mile NGL pipeline that maximizes price realizations by connecting the plants to Enterprise’s Mid-America Pipeline where the NGLs are ultimately delivered to Mont Belvieu, Texas, for fractionation and sale.

Western Gas has captured opportunities to generate attractive returns in the Uinta basin, which can be very capital intensive, but the payoffs can also be worth the risk. For example, Chipeta Train III went into service in 2012 and cost more than $100 million to construct. “Train III returns are in excess of 18%,” says Sinclair. “Overall, we have invested considerable capital in the Greater Natural Buttes area, and we are very pleased with both our returns and the fee-based cash flow stream our assets have generated.”

Pricing challenges

Though companies such as Western Gas have found success in the Uinta, that’s not to say the region is without its challenges. The two economic headwinds facing the basin right now are less than $4 natural gas prices, coupled with weak ethane prices. This has caused development to come off its peak, but producers have found a way to work through this pricing environment by enhancing efficiencies through reduced drilling rig spud to release times and lowering completion costs.

“Producers have found lower-cost ways to develop the resources,” says Sinclair. “They’ve been able to enhance returns by lowering costs through increased drilling efficiencies, overcoming the lower gas and NGL price environment.”

Though low gas prices have moderated development, it’s clear that companies have not given up on the Uinta, as there is a very large resource opportunity in the basin with more than 8,000 drill sites identified on Anadarko’s acreage, says Sinclair. This means that when gas and ethane prices improve, the basin will be in place to cash in on the inevitable upswing.

“Even in this current environment of low natural gas prices, everyone can still see the upside potential,” says Sinclair. “That’s the hallmark of a high-quality resource play.”

Flood Damage May Hamstring Operators for Months

By Darren Barbee, Hart Energy

Core operators in Colorado’s flooded-out Wattenberg field may be more affected than expected and the overall impact could be more severe than most Wall Street observers believe, said David Tameron, Wells Fargo Securities senior analyst, in a report.

As investors’ concerns about the catastrophic storm fade, most operators are continuing to assess how bad of a hit they might take on production. Most management teams expect to have a more definitive update on upcoming third-quarter calls, Tameron said.

“Bottom line for us is we think the Street was quick to dismiss the flooding as a short-term event, and we don't think the Street is taking in that the oil and gas industry effect from this storm could be closer to two quarters,” Tameron said.

Tameron said operators in the core of the play, including Anadarko Petroleum Corp., Noble Energy, PDC Energy Inc. and Encana Corp. are likely to be more affected.

Anadarko provided an early October update of its operations in the Greater Wattenberg area in Colorado, where it operates more than 5,800 wells, 2,500 storage tank facilities and 3,200 miles of pipeline.

The company is experiencing disruptions to its drilling, completions and construction activities. Damaged roads, bridges, rail and other problems have impeded the movement of rigs, compression units and other heavy equipment.

Anadarko anticipates temporary delays to its expansion of capacity in the field, reducing its total estimated full-year sales volumes by approximately 2.5 million barrels of oil equivalent (boe).

However, the company anticipates its total annual sales volumes to still be within the previously provided guidance of 281 to 287 million boe.

Before and during the flooding, the company shut in approximately 675 operated vertical wells. As a result of the company’s adherence to environmental standards, safety guidelines and facility construction requirements, “the vast majority of Anadarko's locations remained intact, and there were no environmental impacts associated with its drilling or hydraulic fracturing activities,” according to a company news release.

Anadarko contributed $500,000 to various agencies, including The Community Foundation serving Weld County, The American Red Cross, Colorado Flood Victims Relief Fund, the United Way Foothills Relief Fund and the United Way Larimer County Relief Fund.

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