Oil Production Growth in Colorado: How Far and How Fast?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil production from the Niobrara Shale formation is expected to continue growing, aided by promising geology, an existing infrastructure and low drilling costs that combine to produce high rates of return, analysts told the 4th Annual Niobrara Infrastructure Development Summit last week in Denver. Indeed, one of the main questions speakers and attendees tried to answer was, how fast would production rise over the next few years?

When oil is priced at an average of $100 per barrel, producers in the Niobrara formation and the Denver-Julesburg (D-J) Basin earn internal rates of return (IRRs) of about 70%, according to Erika Coombs, an energy analyst at BENTEK Energy (Denver, Colorado), a unit of McGraw Hill Financial Incorporated (NYSE:MHFI) (New York, New York). When crude-oil prices fall to $80 per barrel, producers earn IRRs of about 40%, she told about 100 attendees at the conference, which was sponsored by Information Forecast Incorporated (Infocast) (Woodland Hills, California). If prices fall to $60 per barrel, Niobrara and D-J producers would still earn an IRR of about 25%, she estimated.

Relatively low costs, coupled with an existing economic and outbound transportation infrastructure, make producers in the D-J Basin and the Niobrara better able to withstand potential price declines when compared with producers operating in other regions, Coombs told about 100 attendees at the conference.

"We don't see drilling activity in the Niobrara and D-J declining until crude-oil prices fall to $60 per barrel," she added.

Anadarko Petroleum Corporation (NYSE:APC) (Houston, Texas) and Noble Energy Incorporated (NYSE:NBL) (Houston, Texas) are the two leading producers in the Niobrara and D-J Basins, although Whiting Petroleum Corporation (NYSE:WLL) (Denver, Colorado) is rapidly expanding its presence in the area.

Brad Holly, Anadarko's vice president for operations, told conference attendees his company plans to bring one well online every day in 2014. He said that some analysts have estimated the Niobrara and D-J Basin could contain more than 6 billion barrels of oil equivalent (BOE). "We're in an early stage of full development mode, but we could have up to 4,000 wells in the Niobrara," he said.

Holly added, "It costs $4 million to $5 million to drill a well in the Niobrara--significantly less than in other plays. We're still finding ways to lower costs and increase production. Little things can make a big difference when you multiply the effect by hundreds or thousands of wells."

Several speakers referred to comments from a Whiting executive that the D-J Basin could be larger than the Bakken Shale in North Dakota. Crude-oil production in the Bakken is now at about 1 million barrels per day (BBL/d). Coombs and other analysts say current production from the Niobrara and D-J Basin is about 200,000 BBL/d, but the U.S. Energy Information Administration (EIA) (Washington) recently said production there was about 340,000 BBL/d.

Coombs predicted crude oil production from the Niobrara and D-J would double to about 400,000 BBL/d by 2019. Another speaker at the conference thought that level could be attained in mid- to late 2017. Contacted by Industrial Info, EIA analysts were unable to provide a projection of future Niobrara and D-J production that far into the future.

Looking at other oil-producing areas across North America during the 2013-19 period, Coombs projected the following production gains:

• Canadian oil sands production will surge 1.3 million BBL/d
• Eagle Ford production will expand 759,000 BBL/d
• Bakken production will rise 754,000 BBL/d
• Production from the Midland, Texas, area will increase about 425,000 BBL/d
• Production from the Marcellus & Utica shales will grow about 200,000 BBL/d

Several speakers echoed the views of energy banker Caroline McClurg: "There's still a lot of running room there." The Niobrara Shale produces mainly crude oil and "wet" gas, which makes operating there more profitable and more attractive than operating in some other formations, like the Marcellus and the Haynesville, which contain mostly dry gas.

"I knew the Niobrara had arrived when I heard Jim Cramer pronounce it correctly on 'Mad Money'," his financial program on CNBC, joked another conference speaker, former Colorado Governor Bill Owens.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.