Niobrara Shale Investing

Brian Hicks

Written By Brian Hicks

Posted June 3, 2013

The Niobrara shale play north of Denver, Colorado is expected to become a major attraction in the near future. That, at least, is what Noble Energy Inc. (NYSE: NBL) stated at the recent Hart Energy conference. Noble is a major energy company operating in Colorado.

Last year, the state produced 49.3 million barrels of oil. That was a significant improvement on 2011’s 39.2 million barrels. The Niobrara is seen as a key factor in this production increase, and Noble is confident enough to project that production from the Niobrara shale alone will equal the entire present state-wide production in five years or so.

shale boomNoble is clearly undertaking serious investments in the Niobrara shale and in Colorado in general; the conference revealed that the company aims to invest $17 billion there over this year and even more next year. Altogether, it is anticipated that Noble will invest as much as $10 billion in Colorado over the next half-decade, as Bizjournals reports.

Presently, Noble commands 640,000 acres in the Denver-Julesburg (DJ) basin and is aiming to bring out 2.1 billion barrels of oil and natural gas liquids from that acreage. By 2016, Noble intends to have as many as 500 oils going.

Interestingly, the Niobrara shale wasn’t much of a big deal back in 2008 and 2009. Back then, in fact, it ranked just 153rd and 128th for those two years in a state gas production ranking. For oil, it was a middling 32nd.

Now, it has become 24th in state gas production volume and 10th for state oil production. Last year, the Niobrara produced in excess of 5.5 Mcf gas and 2.3 million barrels of oil, reports Wyoming newspaper Douglas Budget. Converse County has certainly benefited greatly from the Niobrara’s steady rise in profile.

Other major producers, like Samson Resources and Chesapeake Operating, have also returned high production volumes. Samson has already racked up more than 420,000 barrels this year, and Chesapeake is at 283,000 barrels. Last year, they produced 1.7 million and 1.5 million barrels respectively, and figures should be higher this year.

Indeed, Chesapeake produced as much as 4.8 million Mcf of gas over 2012. Samson trailed behind with 1.5 million Mcf, but those figures should increase over this year too. At present, Chesapeake has 1.13 million Mcf of gas to Samson’s 482,000 Mcf.

The Niobrara is so crucial to Converse County that there are as many as 290 horizontal drilling permit applications pending for it. Thus far, Chesapeake again leads in terms of how many permits it holds—189—but other producers aren’t that far behind. The Piceance Basin, which contains the Niobrara shale, has been nicknamed the “Gas Factory” due to just how much natural gas there appears to be.

The excitement over the Niobrara probably began late in 2012 when EnCana (NYSE: ECA) managed to use multi-well pad drilling to drill 51 wells from a single site. The fact that the Niobrara actually covers several states—parts of Kansas, Nebraska, and Wyoming—just adds to its potential.

Competition and Consolidation

There is, however, a tempering element to this tale of good cheer. Recently, Reuters reported that Ohio’s numbers for the Utica shale’s production over 2012 missed expectations rather badly; less than 700,000 barrels were produced.

And on the Niobrara front, NuStar Energy LP (NYSE: NS) decided to abandon plans to reroute two pipelines that would have shipped crude over to Texas. There just weren’t enough interested investors.

Now, of course, rail transport has recently gained favor. And oil and gas producers are always working to improve efficiencies, so the Utica may yet prove to be a goldmine.

Let’s take a look at the larger picture, though. The early days of shale riches may be plateauing. As long as it was basic fracking and horizontal drilling, oil and gas producers were striking it rich all over. Now we may be heading for diminishing returns—at the least, a slowing of the pace. Places like the Niobrara and parts of the Utica require more careful drilling due to challenging geology.

In short, the Niobrara is no Bakken or Eagle Ford. The NuStar project failed largely because of overwhelming odds. SemGroup Corp. (NYSE: SEMG), for example, is developing a 527-mile pipeline connecting Colorado to Oklahoma (due some time in 2014). And Plains All American Pipeline LP (NYSE: PAA) is developing new rail routes for crude transport.

As Reuters notes, together these would move almost 230,000 barrels per day. Compared to that, NuStar’s more modest ambitions may simply have appeared anemic. 


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