The Powder River Basin in Wyoming, home on the range to such players as deer, antelope, mountain lions, bears, elk, wild turkeys and a herd of oil and gas producers, is now also the place where it is frequently possible to hear a discouraging word.
That word—cutbacks—derives from the global plunge in commodity prices that have sliced into the economic viability of numerous wells in this newly emerging unconventional play. Geological variances translate into economic variances in all basins, but Powder River is particularly vulnerable.
“It’s sensitive to price,” geologist Jimmy Goolsby told Hart Energy in late 2014, prior to the swoon. “The Powder River will remain strong if prices hold, but you’ve got to have $70 or $80 [West Texas Intermediate or WTI] to make this profitable.”

Crude oil’s price plunge from around $95 in mid-September to its struggle to touch $60 in May translated into a cascade of shutdowns. Last November, producers were operating 40 rigs in the basin. In early April, that total was down to 15, and only that many because of the reluctance of producers to lose their spots in a play that still boasts plenty of promise.
“The Powder River basin is a more-challenged basin in this lower commodity-price environment, but some of our producers are incentivized to drill to avoid losing their leases,” Terry Spencer, president and CEO of Tulsa-based ONEOK Inc., told analysts during a conference call to discuss fourth-quarter 2014 earnings. “While the Powder River Basin development is in the early stages and not currently providing significant natural gas or natural gas liquids volumes to our systems, we remain excited about the potential of this integrated opportunity.”
Rapid rise
Who isn’t?
Since 2009, some 600 wells have been drilled in six oil-rich formations of the basin—Turner, Parkman, Niobrara-Codell, Frontier, Sussex and Shannon—mostly in Wyoming’s Converse and Campbell counties in the eastern part of the state. Production growth in Turner, Parkman and Niobrara-Codell alone soared 573% between 2009 and 2014, from 4,700 barrels per day (bbl/d) to 36,300 bbl/d, as reported by the U.S. Energy Information Administration (EIA). The other three formations saw a less-dramatic rise (91%, from 8,900 bbl/d to 17,000 bbl/d) but still hold a 23% share of the play’s oil production.
The Powder River Basin, primarily in northeast Wyoming and southeast Montana, stretches about 120 miles from east to west and 200 miles from north to south, occupying around 43,000 square miles, or an area about the size of West Virginia. It is known mostly for its coal reserves that total about 119 billion tons, or almost one-quarter of all known reserves in the country, and as the site of Montana’s Little Bighorn, where Lt. Col. George Armstrong Custer and 262 others in the U.S. Army’s Seventh Cavalry were killed in a battle against Lakota and Cheyenne warriors in 1876.
Hydrocarbon production is not new to the basin. Since oil was first discovered in the Powder River Basin, some 68,000 wells have been drilled there, according to the U.S. Geological Survey (USGS), which gives mean estimates of 215 million barrels (MMbbl) of oil, 1.16 trillion cubic feet of natural gas and between 31.6 MMbbl and 105 MMbbl of NGL. The USGS expects gas discoveries to outperform oil discoveries.


Source rock
The basin’s reservoirs range in age from Mississippian (360 million to 320 million years ago) to Paleocene (66 million to 56 million years ago). Two Cretaceous source rocks—Mowry Shale and Niobrara Formation—are primarily responsible for hydrocarbon production. The USGS also notes that the Permian Phosphoria Formation has accounted for large amounts of oil, some of which migrated into Paleozoic reservoirs.
Historically, testing results of fractured shale and limy shale reservoirs have discouraged production because of insufficient fluid recovery.
Modern techniques like horizontal drilling and hydraulic fracturing have enabled producers to tap into the basin’s oil and gas riches, but construction of midstream infrastructure has been tripped up by the pricing situation, making it too risky to move forward on projects.

Recent projects
Among the basin’s recent projects is the Jackalope gas gathering system, a 50:50 joint venture (JV) between Crestwood Midstream Partners LP and Williams Partners LP that is primed to let the partners exploit the Niobrara side.
Jackalope is intended to gather and process rich natural gas produced by Chesapeake Energy Corp. and Oklahoma City-based RKI Exploration & Production LLC. The two producers have combined to accrue 750,000 total acres, the largest block in the play.
The system consists of about 184 miles of low-pressure gas gathering pipeline and 15,600 horsepower of gas compression. Crestwood is engaged in a 20-year gathering and processing agreement with Chesapeake and RKI Williams provides field operations and construction management.
“In the Powder River Basin Niobrara we meet a substantial investment and created another long-term value chain opportunity with our rich gas gathering and processing system and our crude by rail loading facility,” Bob Phillips, Crestwood’s chairman, CEO and president, told analysts during a recent conference call.
“Chesapeake, our main producer, continues to aggressively develop this 330,000-acre Niobrara dedication, which has significant shallow production options for the producers that are even more economic in this market as drilling and completion costs are be- ginning to decline. Williams is our 50:50 partner, and in 2014 we built out the first phase of the gathering system and our first 120 million cubic feet per day processing plant, both of which will make big contributions to the joint venture in 2015,” he added.
The JV partners’ newly commissioned $100 million Bucking Horse gas processing facility in Converse County, Wyo., began commercial operations in February, one quarter later than originally expected.
Crestwood expects its EBITDA for 2015 to rise 12% over 2014 to the range of $480 million to $510 million. Robert Halpin, the company’s vice president for finance, told analysts that operations in the Bakken and Powder River will drive EBITDA, along with cost-cutting initiatives. In particular, the Bucking Horse plant will drive a significant increase if partner Chesapeake can fill available capacity over the course of the year.

Thunder Creek
The proposed Thunder Creek NGL Pipeline, a Denver-based Meritage Midstream Services II LLC project, originates at the 50 Buttes natural gas processing complex near Gillette, Wyo., and is designed to supply a Y-grade NGL mix to interconnections of the Overland Pass Pipeline near the Colorado-Wyoming border, a JV between Williams and ONEOK, and Front Range Express Pipeline near Lucerne, Colo., a JV among DCP Midstream Partners, Anadarko Petroleum Corp. and Enterprise Products Partners, the pipe’s operator. Ultimately, the NGL will arrive at the Conway, Kan., and possibly the Mont Belvieu, Texas, NGL hub.
Meritage lowered its original pipeline capacity estimate from 40,000 bbl/d to 30,000 bbl/d, an action interpreted by Stratas Advisors, a Hart Energy company, as the result of lower-than-expected shipper demand. It launched operations in January with a capacity of 15,000 bbl/d on a 108-mile leg consisting of 22 miles of newly constructed line and 86 miles of pipe leased long term from Phillips 66. The company also announced plans for a 140-mile extension to interconnect with Overland Pass. Both the main Thunder Creek line and the extension are pegged to start service in first-quarter 2016.
Last June, the first crude oil unit train, loaded with 70,000 bbl in its 99 cars, pulled out of the Black Thunder Terminal in Campbell County, Wyo., on its way to an East Coast refinery. It was a celebratory day, offering optionality to the emerging Powder River Basin as it waited for pipelines to be built. In June 2014, traders expressed mild concern that WTI had not yet blasted through the $105 per bbl barrier.
Planned upgrades to the loading facility would lift capacity to 25,000 bbl/d with visions of bringing it as high as 120,000 bbl/d. Meritage President Nick Brown told Hart Energy that “by next April, we’ll be able to move a unit train through there about every 48 hours.
"It hasn’t worked out that way. The steep drop in oil prices has reined in producers in the basin and there just hasn’t been enough crude to move to make it worthwhile. For the moment, the Black Thunder Terminal is dead in its tracks.
Curtailing capital growth
Black Thunder Terminal’s situation is not unique. The Powder River Basin emerged just as “capital discipline” became the new industry catch phrase.
In its fourth-quarter conference call with analysts, ONEOK executives listed several projects that had been suspended, including those in the Powder River Basin, Williston Basin and Midcontinent, owing to producers’ shrunken budgets and reduced volume growth expectations.
“We expect no more spending on these capital growth projects until market conditions improve and when they do, we will quickly re-establish completion dates,” Derek Reiners, ONEOK’s senior vice president, CFO and treasurer, told analysts.
For the state of Wyoming, price-induced rollbacks in production and projects mean that government revenues from energy will be $217 million less over its two-year budget period than originally forecast, according to the state’s Consensus Revenue Estimating Group. It puts a crimp on Wyoming’s renewed relationship with oil and gas after oil production reached 20-year highs with the implementation of hydraulic fracturing and horizontal drilling. Meanwhile, the state is already experiencing a decline in revenue from coal leasing.