The Wyoming D-J Expands

[Editor's note: A version of this story appears in the October 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

What could be better than drilling for the prolific Codell Sand in Weld County, Colo.—one of the most heavily drilled counties in the oil patch? Look north, young man.

A confluence of events is making a Codell play gather momentum in Laramie and Goshen counties, Wyo., east of Cheyenne, as drilling activity in the venerable Denver-Julesburg Basin moves across the state line. This northern extension of the basin is unpopulated compared to the suburban sprawl northeast of Denver that has led to regulatory headaches as housing developers and drillers compete for air time.

Here in Wyoming, one finds windswept plains and roaming pronghorn. But there’s plenty of action too, as lease prices in Laramie County have risen tenfold in the past 12 months, sources told Investor. Due to recent drilling success in the area, leases have sold for as much as $1,500 per acre in auctions during the past year. In the state lands sale in March, several tracts in Goshen County, township 19N, 64W, went for more than $1,000 an acre, topping out at $1,502 per.

Wyoming production rose 20% in 2018 from 2016 levels, the Wyoming State Geological Survey said in a report. Although much of that increase came from the Powder River Basin, some of it came from the northern extension of the D-J Basin, primarily in Laramie County.

Several factors are at work to propel activity. Plays gain steam when a few E&Ps bring in big wells in an overlooked area, or in one that was believed not to be commercial. Or, maybe it’s that geological understanding changes based on new data, or because the new play isn’t as expensive, or doesn’t suffer from takeaway or permitting problems seen elsewhere. Next thing you know, leasing activity and costs per acre pick up and a flock of mostly private E&Ps are scouring the landscape for opportunities. Some well results have been quite good, in several cases better than in Colorado—after all, the Codell’s thickness and porosity here are equal to or better than in Colorado, and it thickens even more as one moves through northernmost Laramie County.

All of the above are pushing operators to take another look, especially at the Codell fairway that runs through Laramie County and extends into Goshen. The application of modern horizontal drilling and completions in this established reservoir is only about a year old; however, some of these earliest wells are setting production records for the entire D-J Basin. Some of the wells pay out in less than a year, even if oil is below $40, sources said.

“As operators expand into more areas of the basin, they will continue to test the hypothesis that where a Codell Sandstone well is drilled is less important than how it is drilled,” said a January 2019 report by the Wyoming State Geological Survey.

Data bases and new analytics help all sorts of players in the Cowboy State. “We have the ability to analyze anyone’s drilling technology and optimized engineering data, even with a small staff. We have 12 employees,” said Michael Rozenfeld, partner with North Silo Resources LLC in Houston. The company, backed by private-equity provider Juniper Capital, is operated by Boomtown Oil Co.

North Silo recently fracked the first of its four extended-reach lateral horizontal Codell wells in Laramie County and at press time was about to receive IP results. (Under a sister company, Longs Peak Resources LLC, it also operates Codell wells in northern Weld County, so it can make comparisons between the two areas.)

Industry players are closely monitoring well performance by two prominent operators who deploy all the latest technology.

In the past several years, industry bellwether EOG Resources Inc. listed its Codell wells in this area as part of its “premium inventory” (locations that can generate a minimum 30% after tax rate of return at $40 oil and $2.50 gas), with 88,000 net acres under lease. The company completed 48 Wyoming Codell wells in 2018 and turned to sales 20 of them in the fourth quarter alone. It plans to drill 35 net wells in the Wyoming Codell this year, using two rigs.

EOG’s investor slide deck indicates its Codell wells in this part of Wyoming have an EUR of 560,000 barrels of oil equivalent (boe) after royalty, costing about $4 million to drill and complete. This kind of performance has attracted plenty of attention—the average initial production over 30 days (IP-30) for these wells was 800 barrels per day (bbl/d) in second-quarter 2019.

But soon, the value of this play will become even more apparent as a few companies seek to monetize their positions. One of the leaders in terms of the best Codell wells yet, New Orleans-based Helis Oil & Gas LLC, is marketing Laramie County holdings, including over 4,000 boe/d and 40,000 net acres, according to industry sources. The company has a track record of proving up assets in unconventional plays, then selling. (For example, in 2012 it sold its Williston Basin Bakken assets to QEP Resources Inc. for $ 1.4 billion.)

Another longtime private company, Kaiser-Francis Oil Co., recently began marketing its assets in Laramie County, including 50,000 net acres and over 3,000 boe/d. In April in a separate package, it said it would sell 1,378 net nonproducing acres with 300 wells that are producing—and 861 offset wells that are already permitted. (That sale closed but no deal details were made public, according to A&D sources.)

Other operators with activity or permits include Elk Mesa Energy LLC, Samson Exploration LLC, Clear Creek Resources and Ossidiana Operating LLC.

The spark to look again

Several operators cited Helis’ well performance as an important impetus to look again at this area of Wyoming. Its Hodges 1-CH well in Laramie County’s sections 3 and 10, township 16 N-63 W, IP’d at a rate of 655 bbl/d over 30 days. It was fracked with 60 stages. The EUR was about 1 MMbbl of oil. The Hodges 6-CH performed equally well. Both wells have produced over 200,000 bbl since coming online in 2017, according to public data.

Better yet, the company’s nearby Sandberg 1-CH showed an IP-30 of 1,468 bbl/d and averaged over 1,300 during the first 90 days. That well’s EUR is 1.9 MMbbl of oil.

“The geology here is interesting; it’s had the industry intrigued for quite a while, but seeing the Helis wells is believing,” Rozenfeld said.

The team saw that the geology gets better as you move to the north, and that EOG’s designated Tier 1 Codell wells were in Wyoming, not Weld County. The Codell here is about 75% sand and 25% clay, so Rozenfeld calls it “a shaley sand or a hybrid,” but with more natural permeability than a true shale. That has resulted in a generally slower decline curve than found in equivalent wells to the south in Colorado, or in other shale plays.

“We saw that this was potentially the next big play as the Codell went north from the Hereford and Silo fields,” he said. The porosities in the area are generally 12% to 15%, and the thickness of the Codell’s productive interval can exceed 40 feet, providing a large “tank” for hydrocarbons, he added.

“Some of the Helis’ wells might be the most economic unconventional wells ever drilled in the Rocky Mountain region, and that’s including the best Bakken, Powder River Basin and Colorado D-J wells drilled to date,” echoed John Obering, president of Helm Energy LLC. (In partnership with Nebraska’s Evertson Cos., the Denver company has acquired more than 150,000 net acres in Kimball and Banner counties just over the state line in western Nebraska, where no horizontal Codell production is present—yet. See sidebar.)

“More importantly, Helis forced a change in the basin mindset, which previously lumped the Codell in as almost another bench of the Niobrara. The Codell is completely separate from the Niobrara,” Obering said.

“You talk to all the best technical people in the basin, and they thought the area where Helis was drilling was going to be mostly water, when in fact it is low-resistivity oil pay. Clearly the Codell oil window goes way beyond what we all thought. If Helis had drilled a couple of marginal wells, that wouldn’t have changed people’s thought process, but Helis has some of the best horizontal wells ever drilled in the D-J Basin, if not in all the Rockies. People said, ‘Hey, wait a minute. What’s happening?’”

Although the geological picture is coming into focus, there is still ongoing debate in the industry about whether the Codell was sourced from the Niobrara or migrated from the Greenhorn Formation. Some, including the team at Evertson, vote for the Greenhorn, thinking the Greenhorn extends the play northeast.

A two-play area

Another operator with its eyes on the prize is Elk Mesa Energy LLC, currently with about 40,000 net acres, the majority in Goshen County with some in Laramie and Platte counties as well.

“This is not a wildcat play,” said Nick Manuel, chief commercial officer for the Yorktown Energy Partners-backed company, which is based in a Denver suburb.

“Chesapeake Energy Corp. and Devon Energy Corp. came through this area some 10 years ago and did a lot of leasing, so there is a lot of technical data available (cores, seismic etc.)—there’s a lot more data than people think,” he said.

“But new frack technology is blowing this wide open.”

He said the company’s focus is in the thick of this competitive northern D-J extension, based on a grassroots leasing effort on its part. But it was an idea that president and CEO Bob Gardner had in 2017 from his experience drilling the Codell in Colorado. “A couple deals were being shown around, we worked up the geology and geophysics to identify the sweet spots, and then we started leasing those.”

Gardner has 28 years of Rockies experience, including with a major, Amoco Production Co., and with independents such as Aspect Energy LLC, Barrett Resources Corp., Ute Energy LLC and others. He led the formation of Elk Mesa in second-half 2017. The whole Elk Mesa team has drilled hundreds of Codell and Niobrara wells on the Colorado side of the D-J. Part of that experience was realized at Tekton Energy LLC, which drilled 60 horizontals in Weld County and later was divested to Extraction Oil & Gas Inc. for $230 million.

The previous round of development in this area of Wyoming had been done with directional drilling and some nascent horizontal stimulation methods, but that was nearly 10 years ago—an eternity given the fast-paced assault of better completion techniques. “Looking back to 2010 and 2011 are valuable data points, but we see a lot that can be improved, based on our experience drilling more than 150 wells in Weld County,” Gardner said. He was drilling vertical Codell wells there as far back as 1998.

“Today we know that the Niobrara is the source rock for the Codell, but the Codell is much better, so it’s the primary target now. The Niobrara will also be good in some areas, so we think this will become a two-play area in the next 12 months. We’re on the cusp of seeing a major increase in development drilling, I’d say.”

Gardner said he looked at the area back in 2014 when fracking was on its second major iteration, but by 2017, he started looking much more seriously and began discussions with private-equity provider Yorktown. At that time, the first Hodges well had been made public after being held tight for a long time; people knew Helis had drilled a good well, but didn’t have any details until late 2017. By that time Elk Mesa was well underway on its leasing program when information on another Hodges well came out. It turned out Helis had drilled six wells almost simultaneously right after its first Hodges well.

Gardner thinks that, based on thermal maturity and petrophysical and geophysical data on the company’s leases, the geology under Elk Mesa’s leases is as good as or better than that under EOG’s position in Laramie County, which is south of the Hodges wells.

‘Moving on up, to the north side’

“Folks who might have decided to duke it out in Weld County before have now decided to come up here. It’s already a tough enough business. It’s no surprise that an anti-industry environment has pushed some people to redirect their attention away from Colorado to Wyoming’s side of the D-J,” said Manuel. “As more well results come out, you’re going to see strong results that will attract a lot more people.”

Denver’s Ossidiana Operating LLC has staked 13 horizontal wildcats to the Codell-Niobrara in Goshen County, Wyo. The High Noon lease is in section 17-20n-64w. These wells will go to about 8,000 feet vertically and then out about 10,000 feet.

And it has proposed a joint-interest, 2-mile lateral after recently drilling a vertical well to take core, Gardner said. North Silo also has proposed to drill two vertical tests to take core. Gardner said he thinks that over the next 12 months, as many as a half dozen more wells with 2-mile laterals will be drilled to the Codell and the pace will pick up from there as well results come in.

The thorny regulatory environment that is bedeviling the Colorado D-J has indeed prompted many E&Ps, in addition to Elk Mesa, to travel to townships north and east of Cheyenne. Numerous operators have been acquiring acreage in Laramie, Goshen and Platte counties.

With about 10 years of hindsight, these companies believe they can bring new frack techniques to this new theatre of operations. Midstream infrastructure is starting to get built out also, with much of the infrastructure that originates in the Bakken running through here.

“Several midstream entities are out there looking—they’ve seen what we see and it’s not like we have to drill 20 more wells to get their attention.”

What’s next for Elk Mesa, which is nearing the end of its leasing campaign, but has no production here yet? Gardner said the company has applied for more than 300 well permits already and has another 300 planned after that, with a vertical strat test in this year’s fourth quarter, and the first horizontal wells next spring. The company has been analyzing 93 square miles of 3-D seismic as part of its well planning.

“We think the science says four Codell and four Niobrara wells can be drilled per 1,280-acre spacing unit. We know some of our competitors have applied for greater well density than that but no one has tried it yet in our immediate project area,” Gardner said.

Favorable geology

It turns out that the geology here is quite favorable, with better porosity. There is less natural gas and fewer NGLs than in Weld County’s Codell wells. There is a more hospitable political climate. Good infrastructure. Compelling well economics.

“Two years ago, everyone thought the area north and east of Silo Field was 100% water and the play would be limited to the areas where the Codell was only 10 or 20 feet thick along the Wyoming-Colorado border,” said Helm’s Obering.

“Helis has proved that low resistivity Codell can be prolific. Areas once thought to contain 100% water or to be outside the Niobrara maturity window can clearly be oil saturated in the Codell. Because the Codell thickens dramatically as you move north and updip to the east, the size of the tank is much larger as you move towards the northeast,” Obering explained.

Boomtown’s hopes

Houston-based North Silo Resources is focused on this area as well. The state has granted the company 175 permits to the Niobrara-Codell in the county: it’s applied for over 550. Most will be 2-mile laterals drilled with a north-south orientation.

Hopes are high, bolstered by the good geology as evidenced by some excellent wells drilled in offset locations by Helis, EOG and others, including the former Anadarko Petroleum Corp. (now those leases come under the purview of new owner Occidental Petroleum).

“To date, the very best wells in the entire D-J Basin have been drilled here,” said Boomtown partner Rozenfeld, who also cited the Hodges wells as an important marker.

The Codell Formation is anywhere from 20 to 40 feet thick here, or up to twice as thick as the Codell that is so actively drilled in Weld County. Also, there is more storage capacity with equivalent or better porosity, he said. “We call it the bigger, better Codell,” Rozenfeld said.

That aspect has led to a backlog of more than 25,000 applications for permits to drill. Wyoming law gives drilling authority to the first company to get a permit in a section so even companies not ready to drill yet apply to secure a permit before other firms do so. In May 2019, the Wyoming Mineral and Surface Owners Association was formed to educate and motivate mineral owners, given the permitting war going on east of Cheyenne. Meanwhile, the state is trying to address the backlog.

“Wyoming is a big deal,” summed up Elk Mesa’s Manuel. “Everyone recognizes the operator-friendly environment and prospectivity, which is driving a frantic amount of permitting activity.”

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[SIDEBAR]

NEBRASKA CALLING

In western Nebraska, just over the Wyoming line, where Denver-Julesburg Basin drilling started decades ago, the Evertson Cos. and its Denver partner, Helm Energy LLC, have more than a 150,000 net acre block. No horizontal Codell wells have been drilled there—yet. As a longtime Nebraska Panhandle operator, Evertson knows the area very well.

In August, the partnership started marketing its position from the Greenhorn to the surface, including the Codell and Niobrara zones. “Our goal is to sell the horizontal Codell rights lock, stock and barrel, but we’ll retain rights below the Greenhorn for vertical exploration,” said Helm president John Obering. “Our acreage starts at the Wyoming-Nebraska line—but it’s all the same rock!”

Partner Phil Kriz of Evertson said the partners are strictly vertical players in the D and J sands, and too small to drill $4 million horizontal wells. Evertson, which was started in 1974 by Bruce Evertson, has no debt and has always drilled out of cash flow. Its vertical dry-hole wells only cost about $400,000.

The opportunity is that the Codell oil has migrated from the Greenhorn so the areal extent of the Codell is more than experts once believed, and it is a blanket sand, not just a bench of the Niobrara, he explained. “We believe the oil is charged more to the east and north; our mud logs show that. It’s in our home base where we have historically been active and have first-hand knowledge from our vertical drilling.”

Obering called the area a “no man’s land.” First, there is a gap between where EOG has drilled in eastern Wyoming and the Nebraska border. Anadarko Petroleum Corp. has the leases in this area and has filed thousands of drilling permits to hold them, but it is not drilling. Its famed Union Pacific strip of checkerboard royalty acreage goes right through here. “That will probably take a couple years to sort out since Oxy [Occidental Petroleum] has bought Anadarko,” he said.

Second, “Luckily, we think Nebraska is the single best state in the U.S. in which to conduct oil and gas business due to its positive regulatory environment, and it hasn’t been exploited horizontally like the Colorado D-J. It’s kind of weird—it’s not exactly the Rockies and not really the Midcontinent either, so people tend to not pay attention to it. But Nebraska had tremendous activity in the 1950s, ’60s and ’70s. In Kimball County alone, almost 189 MMbbl have been produced.”