ShareThisBy GARGI CHAKRABARTY
Wednesday, November 01, 2006
The energy boom in the Rocky Mountains is showing the first signs of a cool-down.
With natural gas prices hitting a low of $2 per thousand cubic feet in some parts this summer, three major drilling companies temporarily shuttered wells in October, and a fourth announced plans to scale back investments.
That's a far cry from the unbridled growth in the past five years, during which prices hit double digits and companies were committing millions to explore fields and set up drilling rigs throughout the Rockies.
"Right now, we are on a four-year low," said Ken Wonstolen of the Colorado Oil & Gas Association, a Denver-based trade group that lobbies for the local energy industry. "It's a signal that the market has turned."
Low prices, the companies say, don't justify the higher drilling costs in some newer fields in the Rocky Mountains, where gas is trapped between layers of rock as hard as sidewalk cement.
Operators spend close to $1 million to drill a single well in Colorado's Piceance Basin, and gas prices would have to be more than $4 per thousand cubic feet to recover those costs. Since touching a low in October, national prices have gone up to about $6 for November.
But not all producers get the same price.
Areas with limited access to pipelines typically fetch less. The Rocky Mountain average is about $2 less than the nationwide average.
This winter will determine if the slowdown in drilling is a blip or has more staying power. For example, a warmer-than-normal winter will put a dent in heating demand and further reduce prices.
"Natural gas has a seasonal swing this time of the year," said Bill Croyle, a partner in Denver-based Western Energy Advisors. "Buyers are typically public utilities that use gas to fuel power plants and provide heating to customers, and they aren't sure how much gas they will need this winter.
"And sellers are looking at what price to sell for. At $3, they get real nervous, and at $2 they will stop (selling)," Croyle said.
EnCana Corp., among Colorado's top gas producers, said it's looking to cut back on drilling rigs in the Piceance Basin, which straddles Garfield and Rio Blanco counties. The company currently has 12 rigs operating in the basin. EnCana has pulled four of the 12 rigs operating in North Texas because of rising expenses.
"We are definitely looking at cutting rigs in the Piceance Basin," said EnCana spokesman Doug Hock.
Three major producers _ Questar Corp., Cabot Oil and Chesapeake Energy _ temporarily shuttered wells in October.
Martin Craven, spokesman for Salt Lake City-based Questar, said the decision was made by senior management when natural gas prices for October hit $4.50 per thousand cubic feet. The company shut-in production of 70 million cubic feet a day, about 9 percent of its total production.
The wells are scheduled to be turned on today, thanks to a price rise for November to $6.15 per thousand cubic feet.
Similarly, last month Oklahoma-based Chesapeake Energy shut-in 100 million cubic feet of daily production, while Houston-based Cabot Oil and Gas shuttered 6 million cubic feet per day of production. The companies declined to specify the exact locations of those shuttered wells.
It's too early to tell if the slowdown will lead to a bust, Wonstolen said.
Even if prices fall further, Wonstolen doubts that would trigger a depression similar to the one in the 1980s caused by crashing oil prices.
"I don't think anybody is predicting that," Wonstolen said. "We didn't use natural gas for electricity then, and the oil markets were nowhere near as tight as they are today.
"We also have bigger, more substantial players with greater staying power and more resources," Wonstolen added. "Companies have more hedging strategies in place. There was so such thing back then."
Hedging is buying and selling in long-term contracts at fixed prices that protect companies from short- term price swings.
The Colorado Oil and Gas Conservation Commission does not have information on the well shut-downs, but operators have 45 days after the end of the month to send reports, said commission director Brian Macke.
"If a well is marginal and is not capable of making positive revenue, that's one reason that operators will shut-in a well," Macke said.
Macke said despite the recent downturn in oil and gas prices, the forecast for this year's gas production in Colorado remains a healthy 3.3 billion cubic feet per day, compared with 3 billion cubic feet per day in 2004.
"New wells are being drilled, and increased production from those will make up for the declining production from the older and marginal wells," Macke said.
