Experts provide information on energy projects

phrbcenergymeeting2RBC I More than 40 community leaders attended an informational meeting June 10 in Meeker, with Don McClure, vice president of EnCana, and Dean Tinsley, director Piceance Highlands Division for Williams Energy, at Mountain Valley Bank.
The Meeker Chamber of Commerce facilitated this meeting, which was attended by individuals representing Rio Blanco County, the towns of Rangely and Meeker, contractors, bankers, chamber members and other community leaders. Another follow-up meeting will be held, which will be open to the public and include perspectives from most of the gas and oil operators within Rio Blanco County.
McClure said he wished to talk to our community because, in his words, “If there is a communication gap, then folks will fill in the blanks with the worst possible outcome.”
phrbcenergymeeting7Four things that impact the gas economic projects are the resource base, commodity prices, cost structure and political environment.
The Piceance resource base or “gas tank” holds 200 trillion to 300 trillion cubic feet equivalent of natural gas. Across the U.S., we have experienced a profound increase in the supply of natural gas, of which the Piceance Basin is a key part. This can supply the entire U.S. for all of our needs on the order of 90 to 100 years, according to a recent Department of Energy study.
The commodity price of natural gas is driven by the gross domestic product, which is tied directly to industrial demand. As industry slows, so does its demand for natural gas. Industry consensus suggests that gas commodity prices will stay down in the immediate future. Crude oil on the other hand has been trading on the basis of optimism. Rig counts are a key indicator and they are starting to stabilize even though they are down in the Piceance Basin by 70 percent. Looking at 2010 prices, the question is how many operators are going to “drill through” the down cycle. Some within the industry believe that a number of around 700 rigs will be required to bring the prices in line with costs.
Cost structures are being brought down by “technology at work.” The average time to drill and complete a well is down 25-30 percent, due to “space-age technology” below ground level, fit-for-purpose rigs and more experienced rig crews. Natural gas production has grown 9 percent per year during the past three years, largely due to better technology including horizontal drilling and multi-stage fracturing operations used to unlock natural gas from shale as well as technological gains in tight sands and other non-conventional formations, like the Piceance Basin. With the rig count reductions, contractors have been lowering their prices due to simple supply and demand.
The political environment directly affects production costs. McClure indicated that Gov. Ritter recently has talked about the importance of natural gas in the nation’s portfolio of energy sources. McClure believes that where coal is providing 75 percent of energy and natural gas provides 25 percent, they can be reversed for a number of reasons. Greenhouse gases are reduced by 36 percent CO2 and 65 percent sulfur through the use of natural gas. He said that natural gas is clean burning by half as much as coal and third as much as oil. Natural gas can and should be an integral part of our new energy economy. Transportation plans should include cars and heavy haulers burning cleaner natural gas. We now have an opportunity as a state and as a nation to make a meaningful impact on climate change without waiting on renewable technology to become commercially viable. Natural gas now represents more energy production than coal and two-thirds that of oil in the North American market. Renewable energy such as wind generation are an important part of the overall portfolio of fuel sources in a cost-effective and thoughtful manner. Just as an example, to generate electricity comparable to a 1,000 megawatt gas-fired plant using wind requires 1,500 windmills occupying more than 30,000 acres. Similarly, solar power generation of those 1,000 megawatts of electrical generation requires roughly 20,000 acres. A natural gas-fired generation plant for the same output requires less than 40 acres. McClure believes that each of our votes counts a great deal and government administrations are listening and folks need to make informed choices. We need to make a meaningful change with respect to energy policies.
During questions after his presentation, McClure compared the time to obtain a permit in Louisiana at five days versus Colorado at 40 days. Colorado consumes only 40 percent of its production and currently exports the rest principally to California and Midwest markets. While additional pipeline capacity would be helpful, McClure believes Colorado has the opportunity to increase the utilization of natural gas right in our home state, moving the needle on both climate change and reducing our dependence on hostile foreign oil sources by increasing the utilization of natural gas for electrical generation and the transportation sector.
Tinsley of Williams Energy spoke next about the “dynamic situation.” In the big picture, natural gas meets our needs for climate change and emissions because methane (CH4) is a tremendous alternative to fuel our automobiles.
The Piceance Basin is a huge, “world-class” natural gas deposit and its profitability is a function of acreage, infrastructure, transportation and costs. It is relatively low risk for drilling because in a five-county area, they will find natural gas just about everywhere. Energy companies are now producing 1.8 billion cubic feet on 1.4 million acres with 6,000 wells including Williams, ExxonMobil and others. On a pie chart, he showed that in the highland area Williams has drilled 271 wells with 5,100 remaining to be drilled. These remaining wells represent an additional capital investment of $125 billion, at $2.5 million for each remaining well during the decades to come.
Tinsley said that contractor prices for fracturing, welding, rigs, steel and dirt have all been reduced due to supply and demand. Last year they had 28 rigs going and this year only eight. Last year they had four and this year one going in Rio Blanco County. Williams is still spending $600 million to $700 million in this area during 2009 and expects the same investment for next year. Tinsley believes our economy is going through a “semi short-term adjustment.” Williams delivers 850 million cubic feet per day as the largest operator and they view their Piceance reserves, properties and people as their “bread and butter.” Their investment here represents 70 percent of their proven natural gas reserves. Tinsley thinks that the flat activity suggests that prices will rise slightly and they hope to add one more rig in RBC in 2010. Williams is “bullish on Piceance.”
The ability to take away or export product is Williams’ key to profitability. The combination of their business marketing and strong transportation system, are huge components of their profitability.
McClure stated that EnCana is operating four rigs in Garfield County from 15 earlier and a max peak of 36 before that.
Discussion ensued about the common need for viable roadways within the county. David Morlan, road and bridge director, emphasized the county needs to protect its highways and how, due to the strong usage during the past years, repair costs have escalated astronomically into replacement costs. As oil and gas revenues decline along with the economy, the county tax base is also declining and the population tax base is not sufficient to keep our roadway infrastructure in good repair. Both Tinsley and McClure expressed their strong desire to continue working with and supporting the county in the maintenance of these roads and seemed willing to place the animosities of the past behind them.
Recent proposed legislation regarding federal regulation of hydraulic fracturing was also discussed. It was pointed out that there are protective regulations that have been in effect at the state level for over forty years and that many studies refute risks posed within the regulation. The entire Piceance Basin uses hydraulic fracturing processes, so this is an extremely important issue for all of us. A recent fact sheet presented to the Congress stated that 99.5 percent of the material used in fracturing is made up of water and sand.
This meeting lasted for nearly two hours and was very informative. The Meeker Chamber of Commerce is happy to facilitate these meetings in the interest of providing our members and the community with good communications and perspective.
David Cole, executive director
Meeker Chamber of Commerce