Slow but steady: Gas drilling up a bit last year from deep lows, but didn’t mirror big price rises
Grand Junction Daily Sentinel
Local natural gas drilling levels last year recovered slightly from particularly low levels in 2021, though not as much as might be expected given soaring prices for the commodity in 2022.
“I think the short answer is we can’t move as fast as prices move,” said David Keyte, chairman and chief executive officer of Caerus Oil and Gas, a major local producer.
He said that when prices spike, it’s not a simple matter for Caerus at least to simply start operating more rigs. He pointed to work required in areas such as geological assessment, permitting, infrastructure development and rig contracting that all need to occur before a rig can start drilling.
According to the U.S. Energy Information Administration, natural gas prices at the Henry Hub, a key gas distribution hub in Louisiana, rose from below $3 per million British thermal units in early 2021 to well over $5 later that year, and then reached nearly $10 at points last year. It had fallen back to just below $2 this week, though Keyte said prices in the western United States have been somewhat more elevated due to the level of demand in the region and limits on supply.
According to the Colorado Oil and Gas Conservation Commission, Garfield County last year had 108 well starts, which refers to drilling beginning on new wells. That’s up from 30 the prior year, but 2021 was a particularly slow year for drilling in the county that typically leads the region in natural gas drilling levels. The county hadn’t had fewer well starts since the 1990s, and its drilling activity built up in the early 2000s to a peak in 2008 with 1,690 well starts before gas prices and drilling levels fell.
Rio Blanco County actually had more well starts in 2021 than Garfield County, with 48, but it had only 16 last year. Mesa County hasn’t had any wells drilled for a few years now, though that could change later this year. Laramie Energy has been operating a rig north of De Beque, but a company representative recently told the Garfield County Energy Advisory Board the company planned to suspend use of that rig, potentially resuming use of it this fall, mostly likely in the Collbran gas field in Mesa County.
Terra Energy Partners is operating one rig locally, in Garfield County, and plans to continue for the foreseeable future to operate one rig, a company representative told the Garfield energy board. Caerus also has one rig going in that county. It also began using a rig late last year to do some pilot testing of an oil and gas field it acquired in the Uinta Basin across the border in Utah, and now is bringing that rig to Rio Blanco County for similar pilot testing of acreage it bought from ExxonMobil.
CPX Piceance Holdings also has been pursuing permitting in hopes of doing some drilling south of Rifle.
Western price bump
One factor that could influence local drilling levels, to the benefit of gas producers but not consumers, is what Keyte said has been a price premium for gas in the western United States compared to the East. He said gas in the West was selling throughout January at probably more than $20 per thousand cubic feet (which is basically the equivalent of million Btu), when eastern gas was around $3.50 to $4. As of later March, when the Henry Hub price was about $2.10, producers were getting probably about $2.60 or $2.70 in Colorado, and probably $3.75 to $4 in Utah, which gets even more of a western premium price, Keyte said.
He said the West currently is getting gas from two pipelines from the East and two from Canada, which are full. That means the West has to rely on gas produced in the West to cover remaining demand, and investment in western natural gas drilling rigs is currently very low, with just four such rigs currently operating in the West, he said.
“It’s good for prices but it sure isn’t good for consumers and the constituents of the West,” he said.
While Caerus hopes to keep two rigs running locally this year, prices aren’t currently good enough, even at the western premium price, for Keyte to be certain whether that can happen. He said it also could depend on whether it gets better-than-expected results from wells it is drilling. He said he envisions Caerus continuing to ramping up activity over time, “but it won’t be a huge increase from this point forward likely.”
Economic impacts still big
Even at its limited scale, the current pickup in activity by Caerus will have economic impacts for the region. Caerus anticipates spending $175 million this year on drilling wells and on well completion activities, which involve hydraulically fracturing them and putting them into production. Keyte said that compares to $65 million in 2021, and almost all of this year’s spending will occur on its western Colorado holdings rather than in Utah.
He said some of the growth in spending comes from adding the rig, some reflects inflation, and some pertains to spending needed when beginning to work outside an established area, such as on gas gathering lines and processing facilities.
Caerus also plans to spend about $25 million this year, mostly in Utah but also somewhat in Colorado, on an environmental project involving replacing some 8,000 pneumatic devices that help run wells and gas gathering facilities. The devices run on natural gas, and will be replaced with solar devices “so the gas gets sold down the line instead of being used,” he said. The current devices also account for some methane gas emissions, which will be eliminated. Methane is a potent greenhouse gas.
Keyte said Caerus also will be spending about $40 million this year, compared to about $15 million in 2021, on facilities like pipelines and water infrastructure.
In total, Caerus will be spending about $240 million this year versus $80 million in 2021, he said.
The company now has about 160 employees at its Parachute office, up from maybe 130-40 two years ago, Keyte said.
It estimates that running two rigs directly employs nearly 200 contractors, including about 50 per rig to run the rigs themselves, as well as contractors involved in well completions, production, compliance/permitting and construction.
Little drilling, lots of wells
Even though local drilling activity in recent years is far below what it once was, local wells typically go on producing for decades, dropping off in production over time. Garfield County currently has 11,971 active wells, nearly a quarter of the total 48,930 in the state, according to state data. Oil-abundant Weld County leads the state with 17,593 active wells, and last year also led counties in the state with 745 well starts. Mesa County has 1,193 active wells, and Rio Blanco County, 2,875.
Caerus alone has more than 7,400 producing wells in the Piceance Basin in northwestern Colorado and the Uinta Basin in Utah, producing about 600 million cubic feet of gas a day. Terra Energy produces some 620 million cubic feet a day from some 7,000 wells in Garfield and Rio Blanco counties, its company representative reported at the recent Garfield County energy board meeting.
Nationwide, daily gas production last year averaged 119 billion cubic feet per day, according to the Energy Information Administration. That indicates that Caerus and Terra combined account for about 1% of all gas produced nationally.
Kirby Wynn, Garfield County’s oil and gas liaison, reported at the energy board meeting that Summit Midstream Partners, which operates compressor stations and other facilities in the area to move locally produced gas, is currently moving 230 million cubic feet a day and is expecting more volumes this year related to new Terra Energy production in the area.
Higher prices, more tax revenues
Local gas production also is an important part of local tax bases. Last year, oil and gas production and oil and gas personal property accounted for 56% of Garfield County’s assessed valuation, at more than $1.6 billion, 89% higher than the year before, according to the county assessor’s 2022 abstract of assessment and tax levies. The jump reflected higher gas prices. The assessed value from oil and gas production in the county grew from about $377 million in 2021 to $1.1 billion.
Oil and gas production assessed valuation in Colorado is based on 87.5% of the actual value, a far higher rate than what is applied to other properties such as homes and commercial properties.
The increased value of production in Garfield County is translating to big revenue jumps for firefighting and other tax districts that have seen revenues from oil and gas decline over the years as drilling activity and the value of gas production has dropped off.
The Mesa County Assessor’s Office 2022 abstract shows that oil and gas accounted for about 6.5% of the county’s total $2.38 billion in assessed value, but Laramie Energy had the highest assessed value of any single taxpayer in the county, at nearly $137 million. According to the Rio Blanco County Assessor’s Office, oil and gas accounted for more than half of the county’s $834.6 million in assessed value last year.
‘Price to play poker’
Owning oil and gas wells also comes with a responsibility to plug those that are at the end of their economic life and reclaim well sites, work that also supports jobs. Keyte said Caerus plans to plug about 100 wells this year, up significantly from 2021.
“We want to stay ahead of the game there as well,” he said.
Colorado’s oil and gas commission last year adopted new rules boosting the requirements for bonding or other financial assurance from companies to assure money is available to plug wells and reclaim sites. The rules also incentivize companies to retire low-producing and uneconomic wells.
The rules are among many the agency has implemented to tighten state oil and gas regulations as required by a 2019 law, Senate Bill 181, that seeks to better protect people, the environment and wildlife from oil and gas development. Keyte said that while Utah is “very pro oil and gas,” with regulations not as stringent as in Colorado, his company’s experience in Colorado hasn’t been a bad one.
“I think that the fears that we had with Senate Bill 181 have been worked through,” he said.
He said the rules aren’t an impediment to oil and gas development by Caerus at this point, and the oil and gas commission has shown an understanding of the differences between companies operating in neighborhoods, such as on the Front Range, and the operations by a company like Caerus in remote areas.
“From my perspective I think the COGCC has been good to work with. They understand, they listen and they are responsive,” he said.
He said Caerus is probably spending $3 million to $5 million a year on rules compliance that it wasn’t spending five years ago, “which is certainly not a small amount of but it’s the price to pay poker, so we’re doing it.”
COGCC data shows the agency approved 143 drilling permits in Garfield County last year, a number similar to recent previous years. Forty were approved in Rio Blanco County last year, and 26 more were approved there this year through March 1. None have been approved in Mesa County in several years. In Weld County, 680 were approved last year.
Keyte said the replacement of gas-run pneumatic devices with solar-powered devices will get Caerus ahead of a new federal methane fee that is going to be imposed under the Inflation Reduction Act on companies operating gas fields. That fee will apply to methane emissions, which changes in Colorado regulations also have sought to curtail.
According to a fact sheet from Caerus, it has been involved in numerous initiatives to reduce methane emissions. These include looking for leaks using low-altitude flyovers; doing nearly 1,400 ground-based inspections with infrared cameras last year to find and fix leaks; conducting more than 9,000 inspections last year in which personnel relied on their own senses to look for, listen for and sniff out leaks; and installing continuous leak-detection monitoring technology on about 100 new wells. It plans this year to replace more than 900 gas-actuated heat trace circulation pumps in Utah with solar-powered pumps.
It says more than 85% of the leaks it finds using infrared cameras are fixed immediately upon discovery, up from 50% four years ago. Last year it performed almost twice as many leak detection and repair inspections as required by regulations.
This story is being shared with the Glenwood Springs Post Independent by permission from the Grand Junction Sentinel.
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