Just finished going through an experience with the Rio Blanco County Informational service. They have begun to write a communication each week in the local paper, I guess to inform the folks of what is going on in the county, etc.  Actually what is happening is that they are exposing their mind set to the people of the county for the first time. We are now seeing their closed door environment issuing forth weekly and their “justification” for it.

The first article was entitled “Drill, Baby, Drill” – an interesting title for the first communication. So it was a must read. I couldn’t get past the fact they are very sincere even if their numbers or facts are no where near correct. There is the “state” line to follow. Anyway, below is the article itself and my response to this article, which was published in the same local paper this July 8, 2010.

The Herald Times

Rio Blanco County

Meeker, Colorado

Article Published 6/29/2010

The County Cubicle: Drill, baby, drill is county policy

Posted by Special to the Herald Times on 6/29/10 • Categorized as County

Editor’s note: In an effort to keep residents informed on happenings within county government, county employees will contribute biweekly articles for “The County Cubicle.”
These articles may include responses to reader questions or expression of interest. Readers are encouraged to submit questions or suggestions to County Administrator Pat Hooker at 878-9436 or phooker@co.rio-blanco.co.us

Want to know one of the least-known facts about the natural gas industry in Colorado? The state produced a record amount of natural gas in 2009. What? How can that be, what with the drop in gas prices, the national recession and the new state drilling rules?
“I thought the gas industry was gone,” you say. Actually, the natural gas companies in Colorado produced 61.8 trillion cubic feet of gas in 2009, compared to the previous high of 44.4 trillion cubic feet in 2008.
“Well, maybe, but the number of drilling rigs operating in the state was way down, so isn’t the number of new wells also way down?” For Colorado, permits for new wells numbered 5159 in 2009 compared to 8027 in 2008, which was the highest year ever. But how does this number compare to previous years? Again a surprise, 2009 was the fourth-highest year on record for Colorado. In Rio Blanco County, there was an even smaller change. Here, 141 wells were drilled in 2008 and 139 in 2009. This compares favorably to the rest of the state and nation, where well numbers were off 30 to 40 percent.
The rig count is down in Colorado and in the county, yet with the recent advances in drilling methods many of the companies can drill a well in 30 percent less time than was possible just a couple of years ago. The gas companies are also drilling multiple wells from one pad and so do not have the usual downtime associated frequent moving the drilling rig. So a reduced rig count does not mean a reduced number of new wells. Wells are now being drilled with a lot fewer rigs.
What is Rio Blanco County doing to support the gas companies in the extraction of gas locally? The county has always taken the position that we support the responsible extraction of natural resources. By working closely with all the operators, we are able to process and approve applications for new wells in a matter of days, not the months typical of other regulators. We have also permitted a number of large pipeline projects in the county, which have allowed prices for local gas to equalize with the rest of the nation. This is in part why we have not seen the same reduction in the level of drilling experienced elsewhere.
Granted, things are much quieter in town than they were two years ago. That is to be expected with the completion of the fourth major gas plant and two major pipelines in the last three years. Each of these projects required hundreds of workers during the construction phases. The day-to-day operation of each facility requires only a few people. Other gas plants and pipelines are in the planning stages, but they will probably not go forward until the price of natural gas rebounds. With that rebound, we may again see full motels, restaurants with waiting lists and long waits to turn onto Market Street.
If you have questions or comments, contact the Rio Blanco County Planning Office at 878-9580.

My Response was originally four pages filled with real facts and statistics – way to big to print; hence the condensed version.

Jeff:


Enjoy the paper as usual!  I especially enjoyed the fact that the county has begun an informational column entitled “The County Cubicle.”  I believe the dialogue will be very useful.  So in order to put the first article “Drill, baby, drill” into prospective with a solid footing, I would like to present information that is of record via the EIA, COGCC, Baker Hughes and other reference sources regarding the base statistics presented in the column and then introduce some public discussion points for the county.


First some basic definitions:

Tcf – means a trillion cubic feet of natural gas, predominately made up of methane, measured at a standard temperature and pressure.

Bcf – a billion cubic feet of gas.

MMBO – million barrels of oil

COGCC – Colorado Oil & Gas Conservation Commission


According to the EIA, the statistical arm of the DOE, the entire United States uses approximately 22 Tcf gas per year – this has been a fairly consistent number for more than a decade.  The gas producers produce from 19-21 Tcf/year.  Yes, the US has to import natural gas also – some 3.5 Tcf/year (source EIA).


According to the COGCC, the yearly production sales numbers for ALL the counties in Colorado are:

2010     First four months 0.546 Tcf + 7.94 MMBO

2009     1.839 Tcf + 28.57 MMBO

2008     1.792 Tcf + 28.78 MMBO

2007     1.669 Tcf + 24.51 MMBO


Current Production Numbers (Sales) for the county are (source COGCC):

Rio Blanco:

2009     61.94 Bcf + 4.94 MMBO

2008     42.30 Bcf + 5.46 MMBO

2007     40.05 Bcf + 5.68 MMBO

2006     42.33 Bcf + 5.68 MMBO

Note the oil falling off – is Rangely Field is going away?


So far in the first four months of 2010 Rio Blanco reports production (well at least the State says so) at 14.44 Bcf.  This would equate to a 43 Bcf yearly pace, clearly falling off as the Piceance Basin needs to be drilled heavily and consistently to keep the production numbers high.  So how does that affect the severance tax base to the state and county?  To address one of the points made in the article, yes 2009 saw a peak in the gas production, but that was mainly work coming on line which was budgeted, permitted and drilled by the crash.  The lead time to come online here in this state is measured in years not months as in most other states.


As to the permit discussion:

There has been much said about this permitting action at the state level as an indicator of interest in doing business in the State of Colorado.  The numbers in the article for a total of 5,159 new drilling applications are true as put out by the State of Colorado.  As far as I can tell, there is really no way to get an independent check on that number – all we have are COGCC staff reports to sort through.  In March 2009, the month before Ritter’s new environmental laws took effect, a record 1,476 applications were submitted.  In the first two months of 2009 a total of 930 new drill applications were submitted, making a total of 2,406 drill applications submitted in the first three months of the year.  The final note the State of Colorado released was that only 1, 274 new drill applications were approved during the last six months of the year. From the staff reports only 2,159 new drilling applications were received from April 1 through the end of the year, a nine month period.  So it appears more than half of the business was conducted in the first three months of the year before the new law went into effect.  I don’t see any joy in the permit fall off numbers.  In actual practice, however, the number of drilling applications does not necessarily portend actual drilling.


Maybe we should just look at the “show me the money” approach to see the potential effects of all this state regulation upon this county in the era of the “low gas price.”  Before the latest bust the Colorado rig count was clicking along at 120+ rigs drilling as the nation was clocking along at about 2,000.  As we rolled through the elections and the new regulations; the gas companies began leaving Colorado for places unknown.  Today the national drilling has recovered to the 1,500 rigs level (data is from the Baker Hughes).  Nationally then the rig count has bounced back an average of 69% since this time last year but Colorado rig count is up only 25% from last year.


Here’s how various other states have recovered:

Wyoming: up 43%

Utah: up 68%

New Mexico: up 71%

Pennsylvania: up 93%

Oklahoma: up 59%

Texas: up 98%


Hmmm…wonder why interest in drilling in Colorado didn’t come back even as close as some of the neighbors with same gas price of course?  Current rig count this week in Rio Blanco County according to Baker Hughes is a whopping 7 wells.  The entire state lost over 70% of the oil/gas business in the crash and it hasn’t come back and may not ever if we are to believe VP Biden.


Some of the article’s discussion details the lack of “gas prices” as being the prime driver that keeps business away.  As long as the free market can continue to hold on in this nation, prices are based on supply and demand.  Costs of doing business in equipment long hauls because there is no infrastructure here, the radical environmentalists, the permits, taxes, and manpower hours to get approvals from every federal, state, county, municipal and yes even the neighborhood agency doesn’t give this state much of a chance to compete for business.  In addition to all those front end load cost factors, there is an unknown amount of regulation and taxes associated with the construction of well pads and plant construction.  So when a businessman looks at a project based in Colorado that has the same amount of geological risk (the normal risk he is trained to evaluate rate of return on) as say a Barnett Shale well in Texas or even a gas well in Wyoming and sees this cloud of regulation settled over Colorado – he doesn’t think too long before the decision is made to go elsewhere.  This is basically what we are experiencing now – the remaining operators here are just drilling their current reserve base that they can make work for less than $4.00/Mcf – there is no new gas exploration going on.


As to the county’s motto “we support the responsible extraction of natural resources” misses the point of the energy industry completely.  That statement focuses on the energy industry means and methods to generate income.  What if we focused on competing for the support businesses for those gas companies that are left and develop our industrial areas that would support this community for this 100 year industry?  What if we spent time working with the state on these severance issues so we don’t have to “negotiate” with them for our fair share all the time?


So the conclusion is that even with a rebound in gas prices, drilling, gas plants, pipelines, etc the energy business will not return here unless there is a complete new spirit inserted in the definition of “responsible extraction of natural resources.”



Some fast fact resources:

http://tonto.eia.doe.gov/dnav/ng/hist/n9050co2a.htm

http://cogcc.state.co.us/


David Meece

Later:

While digging through the files I came upon the following chart that gives a visual of what has happened to Colorado:

Enjoy!

 

World Oil in their November publication has updated the rig utilization stats for both North American and the international segments.  Focusing on just the US rig fleet the following data jumps out:

The new construction represents more than 36% of the currently active rig fleet.

The operators are owning more of the drilling fleet now than they have had in the last 20 years – going vertical.

Rigs available for work are now 3,169 units.  Overall the rig utilization rate is 39-40% across the US.

Regions of high activity are Alaska, the Northeast and California (what is that?!?).

What is depressing; however, is that in the traditional oil regions of the US, the rig utilization is hovering in the low 30’s.  For the Southern Rockies (region also covers Eastern Colorado and Kansas) the utilization rate is 36%.  From the “full employment” figure of 96-98% of the 2006-2007 period this represents an industry that’s more that 2/3 laid down.  In our county, 80% of the tax revenue is generated via the energy business.  With 2/3rds of it laid down it represents jobs lost, people moving out, foreclosures and all that lovely personal stuff that attends to this, crime, divorce, etc.  How is that “hopey – changey” working out for you now?  How’s all that new permit environmental regulation working Ritter?  How many chickens have you saved on the Roan Plateau?  I’m sure your law firm enjoyed the extra work.

Cool GIS Rig Stats in Your Area



 

This first excerpt is from the official EIA review of 2008:

Overview

Following the general pattern of oil, natural gas prices spiked in the summer and fell in the winter in 2008. This pattern is in contrast to normal seasonal patterns of natural gas prices rising in the winter and falling in the summer. Most natural gas prices spiked in the summer of 2008 after about a year-long upward climb (Figure 1). Wellhead prices averaged $5.87 per thousand cubic feet (Mcf) in December 2008, a 46 percent drop from their June 2008 level of 10.8 per Mcf. In 2008, seasonal weather was not as strong an influence in driving natural gas prices as it has been in the past.

Weather played an important role in natural gas consumption and production in the Gulf of Mexico and Louisiana. Hurricanes Gustav and Ike hit the Gulf Coast in September, creating cumulative production shut-ins estimated at 413.6 Bcf through the end of 2008. Natural gas storage remained below record-setting 2007 levels, yet exceeded the 5-year (2003-2007) average during the latter half of 2008.

image001

Source: Energy Information Administration, Office of Oil and Gas.Figure Data

Prices

Natural gas prices rose to relatively high levels in the summer of 2008, and then declined more swiftly than they had risen after beginning a generally increasing pattern in the summer of 2007. The average wellhead price in U.S. dollars was $10.82 in June 2008, the highest nominal recorded level. Henry Hub prices spiked to $13.68 per thousand cubic feet on July 2, 2008.2

After slight upturns in the days around landfall of Hurricanes Gustav and Ike, daily spot prices resumed their downward slide. Natural gas prices showed little response to Hurricanes Gustav and Ike and continued to slide through the end of the year, in contrast to high spot price spikes in the aftermath of Hurricanes Katrina and Rita in 2005. Growth in onshore production and robust storage inventories, as well as a declining economy, likely outweighed offshore supply disruptions created by Gustav and Ike. Additionally, compared with 2005, the 2008 storms were less powerful and thus limited their shock to the market. (Figure 4)

image004

Source: Energy Information Administration, Office of Oil and Gas.Figure Data

The natural gas price increase and subsequent decline mirrored patterns in oil prices. Wellhead, city gate, commercial, industrial, and electric power prices displayed similar patterns when compared year-over-year with high increases in the summer changing to declines in the later months of 2008. For example, in July, year-over-year prices showed the highest increases across the board up 73 percent for industrial prices.

Wellhead prices moved within a wide range in 2008
As a result of wide swings, the range in average monthly wellhead prices for the year was the widest in history.3 Wellhead prices fell by $4.95 per Mcf from the June peak of $10.82 per Mcf to an average of $5.87 per Mcf in December. Within-year variation in monthly prices is expected to be less in 2009, remaining within a $1.13 range, according to EIA’s March Short-Term Energy Outlook.4 The projected average wellhead price for all of 2009 is $4.22 per Mcf, down 48 percent from the 2008 average of $8.08.

Despite a wide price range, price volatility moderated during the year
Daily price volatility moderated in 2008, despite the wide swings in price during the year. Volatility refers to the degree of daily relative price variation and is defined as the standard deviation of daily relative changes in price. Monthly volatility, measured using daily Henry Hub price movements, generally showed higher volatility during the heating season. However, monthly volatility overall appears to be less than in previous years. Annual volatility measured with daily Henry Hub price movements also dropped from 63 percent in 2007 to 49 percent in 2008, while average annual prices rose from $6.97 per million Btu (MMBtu) to $8.89 per MMBtu. The decline in volatility measures using daily price movements may be due to the pattern of price increases and decreases; prices did not oscillate, but moved up steadily and then fell steadily.

Monthly volatility generally continued to display seasonal patterns even as prices fell, with higher volatility in the fall and in winter months (Figure 5).

image005

Source: Volatility derived by EIA Office of Oil and Gas. Henry Hub prices from Natural Gas Intelligence’s Daily Gas Price Index.Figure Data

Rig count for gas drilling rose to record highs, then fell
The natural gas rig count reached 1,606 on August 29, 2008, and again on September 12, 2008, according to data provided by Baker Hughes, Incorporated. This count represents the highest number of natural gas rigs in the more than 21 years since July 1987, when publication of drilling rig data by fuel type began.

By the end of the year, the rig count fell about 16 percent, to 1,347 for the week ended December 26, 2008. The gas rig count continued to fall in early 2009 to 760 for the week ending April 17, 2009, which is the lowest level since March 14, 2003, when natural gas rigs totaled 754. Factors likely leading to the drop in rig count from the highs in August and September include the drop in natural gas and oil prices, which weakens the incentive to drill, and the difficulty obtaining financing in a weakened economy, which may lead producers to cancel plans for drilling projects. Changes in the rig count appear to lag movements in the Henry Hub price by several weeks or more in 2008 (Figure 6).

image006

Sources: Rig Count Data: Baker Hughes, Incorporated, Henry Hub data: Intelligence Press, NGI’s Daily Gas Price Index.Figure Data

GECI Discussion of this data:

The data for oil wells drilling is much sparser because in the past it had only accounted for 15% of the total land well drilling.  From these charts this would indicate that the oil drilling rig count only reach 220 rigs last year, but this year though that gas/oil ratio is changing.  Last year and going into this year, the gas glut has caused the oil well drilling to jump up to 25% of the current wells drilling.  This effect is very noticably for North Dakota.  Their shale play, the Bakken, is an oil prone shale generator, hence the oil drilling percentage is going up.  This is only glimmer of hope in the west.  Wonder where there is a refinery to process this new crude?

The other shale play starting to make the news is the Marcellus shale of the Appalachia Basin, specifically in the States of Pennsylvania and W. Virginia.  Although discovered in 2004, this shale has thrown off mixed results.  It was not until Range Resources got in there with some the newer shale completion techniques that this shale play took off.  Today these wells do not complete anything like the Haynesville wells, in fact for the most part they are not as good as Barnett wells.  What the Marcellus has going for it the proximity to the eastern markets.  The big “if” is getting the infrastructure build to handle higher volume wells.  The other hurdle here is the development of specialized drilling rigs for the east.  The western rigs just don’t fit in the east – all has to be built up.

The rig counts and the current completion activity indicates the just the oil play in N. Dakota, the Haynesville of NE Texas/Northern Louisiana and the Marcellus are showing increasing signs of life.  The Woodford of Oklahoma and the Fayetteville of Arkansas are just maintaining.  The rest of the land oil patch is still shut down.

The rest of the EIA Crude Summary:

U.S. Crude Oil and Liquid Fuels
U.S. Petroleum Consumption EIA projects total U.S. consumption of liquid fuels and other petroleum products to decrease by 790,000 bbl/d (4.1 percent) in 2009. This includes projected declines of 320,000 bbl/d (8.2 percent) in distillate fuel consumption and 150,000 bbl/d (9.8 percent) in jet fuel consumption. Motor gasoline consumption is projected to decline slightly in 2009 as the positive impact of the significant price decline compared with last summer offsets some of the negative impact of the economic downturn. The modest economic recovery projected for 2010 is expected to contribute to a 280,000-bbl/d (1.5 percent) increase in total liquid fuels consumption, led by increases of 110,000 bbl/d (3.2 percent) in distillate consumption, 50,000 bbl/d (0.6 percent) in motor gasoline consumption, and 60,000 bbl/d (2.6 percent) in other oils consumption.

U.S. Petroleum Supply Total U.S. crude oil production averaged 4.95 million bbl/d in 2008, down from 5.06 million bbl/d in 2007 (U.S. Crude Oil Production Chart). U.S. production is expected to increase to an average of 5.22 million bbl/d in 2009 and 5.25 million bbl/d in 2010. Oil production from the Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields is expected to account for about 14 percent of lower-48 crude oil production by the fourth quarter of 2010.

Last week the National Oceanic and Atmospheric Administration (NOAA) lowered its outlook for an above-average hurricane season from a 25-percent chance in their May outlook to a 10-percent chance in their 2009 Atlantic Hurricane Season Outlook Update. This revision, combined with no reported shut-in production during June and July, reduces EIA’s original seasonal estimates of crude oil and natural gas production outages by about one-half. However, significant uncertainty always remains as any one storm can cause widespread disruptions and damage.

U.S. Petroleum Product Prices Regular-grade motor gasoline retail prices, which averaged $3.26 per gallon in 2008, are expected to average $2.34 per gallon this year. Higher projected crude oil prices in 2010 (about 30 cents per gallon on average), along with slightly higher refining margins, are expected to boost average motor gasoline prices to $2.66 per gallon next year. Diesel fuel retail prices, which averaged $3.80 per gallon in 2008, are projected to average $2.46 per gallon in 2009 and $2.84 in 2010.


To Be Continued:

Having Fun,
David Meece GECI Inc.

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