The Noble Niobrara

The current multi-regional scale and successes in North American shale-resource development, and the potential for large-scale development in the Bakken play in North Dakota, appear to have captured the media’s primary focus.

Yet, in Wyoming, just to the south, development in the Niobrara shale is quietly and effectively progressing. Several companies have begun initial area evaluations and well developments. To date, large land positions have been acquired by operators such as Noble Energy Inc., EOG Resources Inc., Chesapeake Energy Corp., China National Offshore Corp., Anadarko Petroleum Corp., East Resources Inc., Fidelity Exploration and Production Co., and Petroleum Development Corp.

The deep Niobrara shale play is primarily an oil play, and underlies portions of the lower Powder River Basin in southeastern Wyoming, the North Park Basin in northeastern Colorado, and the Denver-Julesburg (D-J) Basin in northeastern Colorado and southwestern Nebraska.

With numerous shale operators seeking more involvement in liquids-related plays, the Niobrara—much like the larger Bakken shale to the north—is experiencing an increase in interest and activity. Early Niobrara development evolved near the growing Wattenberg oil and natural gas developments in northeastern Colorado and has slowly migrated outward from there as operators have methodically attempted to scope the Niobrara’s overall potential.

Though much of the recent development is focused to oil and liquids development, the acreage does have areas of both gas and liquids potential. To date, the completed portions of the play in the D-J basin near the Wattenberg field have been shallow (about 7,000 feet) and have been more weighted to gas than oil. However, the gas stream contains associated hydrocarbons, and a liquids revenue stream is obtainable by processing the gas. With lower well costs, operators are expected to achieve desired returns.

In contrast, the initial development in southeastern Wyoming, near the Silo field, appears to be deeper (about 12,000 feet) and can cost more, but operators are rewarded with oil and thus higher revenue.

As always, the operators’ objective is to capture the maximum value available. To achieve that, the appropriate midstream infrastructure must be available to support and optimize all commodities: oil, gas and the natural gas liquids (NGLs).

Currently, developers in the area remain in an exploration mode. Their efforts are focused on understanding the play and determining the development potential for their own acreage or the acreage they wish to acquire. Several operators have positions in the Bakken shale and hope that the techniques and learnings from those early developments will be repeatable in the Niobrara.

Meanwhile, recent federal and state lease sales in far southeastern Wyoming counties have captured all-time high prices, validating such industry interest and competition for future Niobrara opportunities.

Oil trucks, rails and pipes

Crude-oil transportation in the Rockies remains a combined import-export story. For years, Canadian crude entered the region via pipelines that were combined en-route with pipelines carrying local production from Montana and Wyoming to Rockies’ refineries. Some transportation lines continue through the region to facilities in the U.S. Midwest. Recently, some Bakken production from North Dakota has also begun to enter the Rockies’ regional crude supply mix and may be competing for those same historical crude oil markets. With Rockies-area demand for refined products forecast to remain essentially flat, any additional crude entering the local supply mix will require a take-away solution.

Recent Niobrara crude developments have centered in the Wattenberg area of the D-J basin, and some operators are beginning to seek the trend’s northward and eastward potential. Primarily, crude production has been routed within and from the region by truck and rail, but new Niobrara supply has quickly outpaced the limited regional demand and available transportation capacity. As a result, light crude production from the Niobrara is forcing producers to seek new infrastructure to provide access to markets elsewhere.

In response, a regional crude-oil pipeline to exit Colorado, the first built in many years, was completed in 2009 by SemCrude LP, a subsidiary of Tulsa-based SemGroup Corp. The company gathers, transports, stores, markets and distributes Rockies-area crude through its White Cliffs Pipeline and its Cushing, Oklahoma, storage facility. Today, the 526-mile, 12-inch-diameter system is the only pipeline to move oil out of the Denver-Julesburg Basin and directly into Cushing, which is the largest crude-oil market in the world. SemGroup has more than 5 million barrels of oil storage there and is building additional capacity of some 1.95 million barrels, which should be completed by early 2012. The 30,000-barrels-per-day White Cliffs Pipeline is co-owned by SemCrude (51%), Plains All American Pipeline LP(34%), Western Gas Partners LP (WGP) (10%), and Noble Energy (5%).

Generally, operators in the Niobrara and other D-J basins still rely on trucks to provide the initial leg of crude transportation. To compliment those gathering activities, SemCrude operates a truck offloading facility that can accommodate 150 trucks per day (equal to 29,700 barrels per day) with an integrated storage facility with 20,000 barrels of capacity. Separately, White Cliffs Pipeline can store up to 100,000 barrels at facilities at its origin and connected directly to the pipeline. The pipeline has a single pump station in Platteville, Colorado, but will be expanded sometime in 2011 with additional pump capacity to accommodate 50,000 barrels per day.

Future expansion to a maximum of 70,000 barrels per day is possible. Downstream transportation and marketing activities can be facilitated by SemCrude at the Cushing market for its shippers via storage and interface to other storage and transmission systems.

To further enhance White Cliffs Pipeline’s overall capability and near-term utilization, co-owner Plains All American connected portions of its Colorado and Kansas oil-gathering pipelines to the system, and provides connections to other crude-supply gathering assets Plains operates downstream in Kansas and Oklahoma. Plains will also connect its Cushing, Oklahoma, storage facilities to the pipeline and has leased transportation capacity on the system.

Separately, Plains is expanding portions of its Midcontinent crude-gathering system to provide an additional 38,000 barrels per day of crude-receipt capacity into White Cliffs Pipeline from the Cleveland Sand, Granite Wash, and Colony Sand development areas. This work should complete in late 2011.

In its first partial year of operations in 2009, SemCrude reported crude oil deliveries of about 4.5 million barrels. For 2010, SemCrude reports that throughput averaged 25,800 barrels per day, an annual total of over 9.4 million barrels. Fourth quarter 2010 averaged 28,000 barrels per day, representing a 94%-utilization rate. The 2011 expansion of the White Cliffs Pipeline appears to be timely, indeed.

Gas infrastructure

The Niobrara’s footprint and nearby area is surrounded by existing gas midstream infrastructure. For initial development activity and vertical wells, existing infrastructure provides prompt, if not optimum, access to services and markets. However, with much of the infrastructure already sourcing other historical supply areas, these arrangements are generally temporary until gas or NGLs from the Niobrara has reached a scale where long-term commitments for new facilities are favorable.

Nonetheless, existing gas-gathering systems, integrated with numerous gas processing plants and liquids –handling facilities, are key to the Niobrara gas developments near the Wattenberg, Colorado, field. Where possible, the area’s existing gas-gathering, -processing and related NGL facilities will be considered for initial Niobrara gas supply additions.

However, if these existing facilities are not available, either due to location or limited capacity, operators will commit to new gathering and processing infrastructure. Having the liquids-side thus optimized, connections to nearby existing pipelines will be aggressively sought. Even if gas price is not optimal at the processing plant’s tailgate, liquids optimization should provide a reasonable return.

Although gas is routed to various pipelines, the NGLs are trucked to local markets for consumption or exported via the D-J Basin lateral into the Overland Pass pipeline system. Some such Wattenberg facilities are operated by Anadarko, Western Gas Partners, BP Plc, and DCP Midstream Partners LP.

Recently, DCP added new gathering facilities in Weld County, Colorado and will add a processing plant with capacity of 110 million cubic feet of gas per day by mid-2013.

The Hub

The Cheyenne Hub, in southeastern Wyoming where several interstate gas pipelines converge, has a role to play in the Niobrara story. The hub is sited at the southern edge of the state’s expanding coal-bed methane production area.