West Slope oil and gas producers facing extinction

Well pads dot the once the panoramic landscape in western Garfield County during the oil & gas boom years. Enough is enough.

Living with oil & gas, we are regularly subjected to industry propaganda. The Denver Post is notorious for featuring articles that read more like infomercials for the oil & gas industry than actual news. The latest was emblazoned with this seductive headline: Western Colorado natural gas drilling may never boom again. The article was published on November 1 at Colorado Public Radio, and on November 4, in the Denver Post, and again on November 6, in the Glenwood Springs Post Independent.

As per usual with industry propaganda, the title is misleading. While it’s true that the West Slope will likely never see another oil & gas boom, the outlook is much worse than that. In this case, the title serves as a guise for catapulting the propaganda.

The article begins innocently enough.

The one constant in the oil and gas industry is the boom-bust cycle. Prices spike, drillers rush in. Prices drop and the drilling ends.

But what if the boom doesn’t come back?

Some in the industry say that’s the unique situation facing Colorado’s Western Slope, a previous hot bed of drilling development that’s struggled in a prolonged price downturn. Drillers here have become a victim of their own successes …

Well, not exactly. The US shale boom weakened OPEC’s control of global oil & gas markets. OPEC is dominated by Saudi Arabia. In 2014, as oil & gas prices began a steady decline, the Saudis were faced with a dilemma. As prices dropped, profits tanked and their economy suffered. If they cut production, the US and other countries would surely fill in the supply gaps. Instead the Saudis pressured OPEC to ramp up production levels with the goal of reducing global crude oil prices and drive the US shale players out of business.

At the end of 2015, Danilo Onorino, portfolio manager at Dogma Capital, told the UK’s Independent: “At one time the marginal drillers in North America were completely unprofitable. With the return of fracking, oil rigs in the US were deployed again. Saudi Arabia is now looking to destroy them.”

And destroy them they did. Oil prices came crashing down causing a slow-motion bust across the US shale industry. Since 2014, hundreds of oil & gas companies have gone bankrupt.

The truth is the West Slope drillers, like the rest of the US companies, are victims of the Saudis’ successful plot to glut the shale gas market and drive hundreds out of business.

Next the reporter interviewed Ursa VP Don Simpson, “one of those longtime oilmen” who contributed little else to the discussion than, “Sometimes a bust lasts just a year or sometimes ‘they last a lot longer’.” But he’s optimistic.

Simpson still seems optimistic, probably in part because of the region’s abundant resources.

“We’re producing at lower costs than we normally have, and it’s a cleaner burning fuel for the U.S.,” Simpson says.

A U.S. Geological Survey analysis in 2016 found 66 trillion cubic feet of recoverable gas in the Piceance Basin in western Colorado. That’s enough to power the entire country for two years. It’s the second largest gas reserve in the country.

This outlandish new data was the result of a “reassessment” of the 2003 USGS estimate that the Piceance holds 1.6 trillion cubic feet of natural gas. That was before the boom years, when there was some semblance of sanity involved in oil & gas development.

The timing of the USGS “discovery” in June 2016, was more than a little suspect amid the drastic downturn as major players like WPX and Encana were unloading their Piceance assets for wetter shale gas plays. Oil & gas drilling requires a constant flow of money and operators were bleeding cash, but with the severe market decline and no end in sight, investors were losing confidence. The industry’s house of cards on Wall Street was on the verge of imploding. The industry desperately needed to jolt investors from their ennui. The news went viral across the financial and industry media outlets and jittery investors held on.

Knowing how the industry has influenced other federal agencies — like Interior and EPA. And knowing the industry is infamous for putting their support behind research with a pre-determined outcome, it’s no tin-foil-hat conspiracy to believe that market influences came to bear on the USGS to inflate the potential for future oil & gas development in the Piceance. After all, the US economy has become totally dependent on oil & gas production and tax revenues. It’s the leap from 1.6 trillion cubic feet to a whopping 66 trillion cubic feet that borders on the realm of science fiction.

Not only was the news a shot in the arm for the oil & gas markets, it gave the industry an end-justifies-the-means rationale that shows up in all their propaganda, including this article.

So there’s plenty of natural gas. But most importantly, the drillers have figured out how to lower the cost of drilling, so even with low prices, they can make a profit …

Yes, they lowered the cost alright — by drilling in residential areas.

At the COGCC rulemaking hearing in November 2015, industry representatives predicted that future well pads will be constructed closer to municipal boundaries, and that low prices are forcing operators to use larger well pads. Anadarko Petroleum expects 40% of future wells will be near or within municipal boundaries.

Residential communities have roads and infrastructure, in some cases pipelines, already in place. In most communities, the operators don’t need to build much more than a driveway to their large urban mitigation facility, keeping well pad construction costs to a minimum. And with large multi-well facilities, they can drill dozens of wells from one location. During both construction and operations phases, the operators and their sub-contractors are free to use existing residential streets without any road use tax placed on them by the municipal governments to cover the costs of road damage caused by increased truck traffic. In return the operators instruct sub-contractors to buy water from the local municipality. Just one frack job requires at least 3 million gallons of water, or more depending on the length and depth of the hole. In residential communities the operators are blessed with an endless supply of water and the town councilors fill their coffers with cash in a win-win for both sides.

By allowing drilling in residential communities the state is forcing hundreds of thousands of citizens to sacrifice their health, safety, and welfare to keep the oil & gas companies in business.

Of course no industry propaganda piece would be complete without an appearance by David Ludlam, director of the Western Slope Colorado Oil and Gas Association (WSCOGA).

[Ludlam] has seen a “silent resurrection” with just about 10 drill rigs operating in the region.

“Just a few years ago, we were at two,” he says.

That’s nothing like the 90 plus rigs of a decade ago, but he’s not picky at this point.

There’s no way to know for certain if “just about 10 drill rigs” is true anymore. It was as of June 1, but the COGCC has not updated their monthly activity report since then. But we can’t be picky at this point. We’ll just have to take his word for it.

The prolonged downturn forced some companies to turn their focus to more profitable gas fields, like in Texas, Ludlam says, opening the door to a new set of operators. “They have transformed the Piceance Basin into a truly low cost natural gas producing region.”

These new operators really understand the geology of where they’re drilling and they’ve perfected their process.

If the Piceance was “a truly low cost natural gas producing region” it seems like there would be more than 10 drill rigs active on the West Slope. This isn’t a “silent resurrection,” it’s the 21st century version of the gradual extinction of the dinosaurs.

From there, the reporter consults with Bernadette Johnson, an industry analyst with DrillingInfo in Littleton, who makes equally contradictory statements.

“One of the things about a market where prices are depressed is the most efficient operator wins,” says Bernadette Johnson, an analyst with DrillingInfo in Littleton. “You’re ability to cut your costs, to do things better and faster really starts to matter. It’s not just our industry, it’s any industry.”

Even with those advances and efficiencies, not every company can make it work in western Colorado — the costs are just too high.

So if an operator is efficient they can cut costs except for western Colorado where the costs are too high for efficiency to have an impact.

The reason why Ursa makes it work is because they’re drilling in Battlement Mesa. The existing roads, abundant water supply, shorter pipeline and trucking distances save them millions on the backs of the residents whose health and safety are jeopardized.

What follows is a familiar industry talking point as well as old news.

Part of the problem is much of the land is federal, meaning lengthy approval times for drilling. The Trump Administration has signaled a desire to move much quicker, but according to the most recent data, it can take two and three times longer for the feds to approve a permit compared to regulators at the State of Colorado for private land development.

Evidently the reporter was unaware that last summer Interior Secretary Ryan Zinke signed a secretarial order to streamline the process for federal onshore oil & gas leasing permits. So they can’t use that as an excuse anymore.

Environmentalists say those delays are for a good reason. Sometimes the land is valued wilderness space. There are lengthy studies required, but even when a permit is issued, environmentalists often fight these developments in court. They most recently sued to stop a development near Paonia, where it has taken 10 years just to get the final approval.

Another industry talking point. Blame the “environmentalists.” Except it’s not just environmentalists that fight drilling on public lands. Farmers, ranchers, sportspersons, and people from all walks of life pay close attention to lease sales and permit applications for drilling on public lands. There has ALWAYS been a lengthy approval process for drilling on public lands and it should always be that way. Public lands don’t belong to the government and they don’t belong to the industry. Public lands belong to we the people and we have the right to monitor the application process, no matter how long that takes.

However even with a streamlined application process and a cozy relationship with the COGCC, West Slope operators are plagued with low prices and high drilling costs.

Even if permit times improve, western Colorado is probably never going to be the cheapest place to produce natural gas. It’s competing with gas finds everywhere.

“So the problem is the resource on the Western Slope is massive, but the resource in the northeast is massive,” Johnson says. “And the resource in the Permian is massive. And the resource in Louisiana is massive. And the resource on the Gulf of Mexico is still massive.”

The problem is geology. Because of geology, it’s cheaper and easier to drill in all the regions Johnson ticked off than it is to drill on the West Slope. Both the Piceance Basin and the Denver-Julesburg (D-J) Basin along the Front Range are part of the Niobrara Formation. The deep rock Piceance differs from the D-J Basin because of tight shale formations that make drilling a challenge. According to Porter Bennett, president of Ponderosa Advisors in Denver, the Piceance Basin has traditionally had high drilling costs.

Here we get down to the final proof this article is Colorado Oil & Gas Association (COGA)-sponsored propaganda in two words: Jordan Cove.

New technologies have opened up drilling on previously unreachable gas reserves. That’s why there’s renewed interest in exporting and the potential of the Jordan Cove export terminal in Oregon. Just recently the company refiled for a project permit after several failed attempts. Colorado has a pipeline that runs near the area.

That makes Asia a tantalizing customer for all this energy. Johnson points out that new demand is important because “today it’s a buyer’s market.”

“We can grow as much production as demand will grow,” she says. “Demand is the limiter.”

When demand spikes operators can increase production so quickly that gas prices soon fall again. That’s great news for customers since natural gas is a key for electricity generation and heating. It’s not great for drillers though.

“It puts an upward lid on prices,” says industry trade representative David Ludlam. “If you get a signal much higher than $3 and .50 cents a lot of new drilling comes online.”

Okay. That discussion makes absolutely no sense.

All you need to know is David Ludlam and Jordan Cove. Jordan Cove is Ludlam’s pipedream. COGA and WSCOGA are propping up the future of natural gas drilling on the West Slope on plans for a pipeline and LNG (liquefied natural gas) processing facility in Oregon. Except the Federal Energy Regulatory Commission (FERC) rejected the Jordan Cove project in March 2016, because Veresen was unable to show sufficient demand for LNG in the form of signed contracts from potential customers in the Asian Pacific. Since then COGA, WSCOGA, and plenty of misguided politicians from both parties have been touting this Ponzi scheme to swindle investors into dumping more money into the market. The con is selling them on the next big thing, the global LNG market, by promoting a pipeline and processing plant neither of which actually exists.

The truth about Jordan Cove is that the project is owned by a Canadian company. Last May Veresen, the original Canadian company behind the project, merged with Pembina, a Canadian company that specializes in transporting condensate and crude oil from Alberta’s tar sands region. Canada’s oil sands sector was hit hard when the Saudi’s began flooding the market with cheap crude in 2014. Tar sands extraction is even more expensive and requires far more capital investment than drilling in the Piceance. It’s likely Pembina is looking to unload hard-to-sell oil sands condensate on the global LNG market, which would explain the acquisition of Veresen and the Jordan Cove project. So even if by some miracle Jordan Cove is approved and built, if they buy any Piceance natural gas at all, it will be a miniscule amount.

And it would take a miracle. The global LNG market suffers from a weak demand and over supply problem. In September, independent energy information provider S&P Global Platts reported: “The global LNG market is not likely to rebalance before 2023 or even 2024 given the expected rise in supply outpacing demand growth, Paris-based industry group Cedigaz said in an update to its long-term market forecast … ‘Demand will struggle to keep up with supply ramp-up and an oversupply situation should prevail,’ the group said.”

As a result buyers are under no pressure to sign long-term contracts, which not only makes it difficult to obtain financing for construction of new LNG facilities, but also next to impossible to gain regulatory approval necessary to move forward. Last summer Pacific NorthWest LNG cancelled a $36-billion LNG project on the British Columbia coast after “a careful and total review of the project amid changes in market conditions.” Anuar Taib, chair of company’s board, wrote that ‘prolonged depressed prices and shifts in the energy industry have led us to this decision’.”

That cancellation caused a significant tremor throughout the LNG export world. Last month, Platts reported that with persistent sluggish demand for LNG in the global markets, and with so many plans for new LNG processing facilities out there, the expectation is only those projects that are part of the expansion of an existing facility, or are backed by top producers like BP or ExxonMobil, will be approved.

Therefore, based on the current conditions in the global LNG market, the chances of the Jordan Cove processing facility and pipeline project ever happening appear mighty slim.

Here at home producers in the Piceance are still contending with a weak demand and over supply problem on the domestic front. As the article concludes:

And here’s another twist: oil producers on the Front Range, and in Texas, are also finding a lot natural gas, almost as a byproduct. New, unconventional techniques like horizontal drilling are adding new supply to the market. A greater supply pushes prices down. That’s just another natural gas source competing with the Piceance Basin.

But that’s not even the half of it. In August the SRSrocco Report, an independent team that analyzes how energy will impact the overall economy, dropped this bombshell:

Trouble Financing Its Debt: Massive Decline Rates Push U.S. Shale Oil Industry Closer Towards Bankruptcy

The U.S. Shale Oil Industry is in serious trouble as its debt spirals higher due to its massive production decline rates. While the Mainstream media continues to put out hype that the shale oil industry can produce oil at $30 or $40 a barrel, the reality shows that it’s becoming difficult just to finance its debt …

… Once the U.S. Shale Oil Industry finally peaks and declines, it could get really ugly. Also, when investors realize they will not be getting back their initial investment, we are going to hear a great big SUCKING SOUND of money leaving the Shale Oil Industry. Thus, rapidly falling investment means a massive reduction in drilling activity … and then a significant drop in shale oil production.

As the world realizes shale oil production wasn’t even profitable at $100, few will be stupid enough to copy the “U.S PAY ME NOW, AND I WON’T PAY YOU BACK LATER” business model. It was a Ponzi scheme from day one.

Of course none of the market analysis factors in the rapid growth of alternative energy sources like wind and solar. What it does expose is overwhelming evidence of a dying industry. Though it may seem like a long, slow death, remember it took a hundred years for the fossil fuel industry to reach that $100/barrel pinnacle.

It doesn’t take a crystal ball to show us that all signs point to a long, slow gradual extinction of oil & gas producers on the West Slope. Not only will there be no more booms, one day in the not-too-distant future there will be no more new drilling on Colorado’s West Slope.

As if we need any more proof that the CPR article was industry propaganda, today COGA “drew a line in the sand” at their annual meeting in Denver: ‘We are under attack,’ says head of Colorado Oil & Gas Association.

That, my friends, is the sound of sheer panic.

For more information:

Why do gas companies drill in residential communities?

Energy Pipeline: A tale of two prolific Colorado basins

, , , , , , , , , , , , , , , , , , , , , , , ,

Get From the Styx delivered

Subscribe to our RSS feed and social profiles to receive updates.

3 Comments on “West Slope oil and gas producers facing extinction”

  1. LMN Says:

    146 wells were approved by BLM last month in Paonia’s watershed. Democrat and Repub reps alike are touting Jordan Cove. While I hope industry finds it non profitable, our valley is prepared to fight, because we realize our reps will not defend the land, water and air. Thank you for your thorogh work! It’s encouraging to see a glimmer of hope.

  2. Leslie Robinson Says:

    Piceance Creek gas is “dry,” meaning there is very little oil and other resources to profit from. Front Range oil drilling also produces abundant natural gas and some companies are capturing that “wet” gas to sell instead of burning it off (thanks to better air quality rules and pressure from mineral right owners.) So, as always, little-bitty gas producers on the Western Slope are behind the 8-ball because of competition from their Big Oil company counterparts.

  3. Mark Robinowitz Says:

    We are all facing “extinction.”

    The reason for fracking is the easier to extract, higher density supplies are winding down. Sure, fracking is toxic but it delayed rationing. I’ve used solar PV since 1990, it’s great but it’s not going to power the just-in-time global growth economy. Sorry.

    What the Frack? Scraping the bottom of the barrel is not good to the last drop

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: