Colorado emerges as next oil frontier

The Davis family has owned ranchland on the high-desert prairie of El Paso County in Colorado for the past century. Family lore recalls a prophecy of wealth from the Depression years. A geologist came through the desolate region, nestled on the Front Range of the Rocky Mountains, and told the family there might be oil (CL-FT101.15-0.66-0.65%) under their land.

In the seven decades since the 1930s, there hasn’t been a single successful oil well on the Davis land – or anywhere else in all of El Paso County, a mostly rural region located south of Denver.

Now, however, subsurface fracturing – or fracking – technology so widely used in natural gas drilling is beginning to unlock oil reserves long considered impossible to tap successfully, like the suddenly prolific Bakken play in North Dakota.

In Colorado, the target is the tight oil of the Niobrara formation. Houston-based Ultra Petroleum Corp. is on the fringe of the formation in El Paso County and believes it can unearth 150 million barrels of oil. North of Denver, where oil and gas drilling are common, Anadarko Petroleum Corp. recently said fracking is the key to tapping as many as 1.5 billion barrels of crude the company thinks it is sitting on.

Rick Davis, whose grandfather was long ago told of the oil by the geologist, works in the county assessor’s office. Like others in the region, he has been pushed to answer a difficult question – the same faced by people in other new energy epicentres such as the Marcellus gas field in Pennsylvania. The possibility that fracking might imperil water is a huge concern in dry Colorado. But the economic bonanza, especially in an era of recession, is too appealing to many to ignore.

Mr. Davis decided his family should make a deal, advising his 88-year-old mother to sign a contract in late 2010 with an oil land broker, who then sold a package of mineral rights to Ultra. Ms. Davis inked a contract for mineral rights beneath about 400 acres of land, receiving cash for five years of leasing rights up front, some $12,000 (U.S.). The big money will come if a successful oil well is drilled. Her 12.5-per-cent royalty could generate several thousand dollars a day – which could add up to $1-million a year.

“It was a difficult decision to make,” Mr. Davis says. “Do we really want to see oil wells all over the place in eastern El Paso County? We’re a rural ranching community. It came down to a matter of economics. My mom lives on my dad’s pension. It was a bonus to get some extra money in her bank.”

El Paso County is one of the new frontiers of the American shale oil revolution, one that has the potential to radically redraw the supply of oil to still-hungry United States consumers.

Driven by high oil prices, and new technology, domestic oil production has jumped more than 40 per cent to 5.6 million barrels a day in September from 3.9 million barrels in the same month in 2008 – the lowest level since 1943, according to figures compiled by the U.S. Energy Information Agency.

The increase has happened after U.S. oil demand peaked in the summer of 2005 at nearly 22 million barrels a day, with current demand down 10 per cent from there.

All this has squeezed imports, particularly from OPEC countries, whose supply to the U.S. peaked in January, 2008, and has plummeted by one-third to less than five million barrels a day. Canada, which eclipsed Saudi Arabia as the No. 1 U.S. supplier in 2004, has gained steadily.

In September, Canada sent a record 69,722,000 barrels of oil to the U.S., 2.3 million a day, up 20 per cent from a year earlier The trends – increased U.S. supply, reduced demand because of laws and technology – will continue to squeeze OPEC, so much so analysts believe imports from such countries will eventually not be necessary. Some forecasts even predict the U.S. could become self-sufficient. Even if it’s not the case, Canadian oil producers face a big challenge, as the market gets tougher and high-cost oil sands output, far from the market, competes in the shifting milieu.

Companies are piling in. Oil lease permits have doubled in the past two years and just this week Chinese giant Sinopec entered a $2.2-billion joint venture with Devon Energy of Oklahoma City, whose holdings include the Niobrara.

However, as in places such as the Marcellus in Pennsylvania, the predicted motherlode of energy below the ground in Colorado’s Niobrara battles raises fears of the environmental catastrophe of destroyed aquifers and poisoned drinking water. El Paso County is so new to drilling that local officials did not even know how to pronounce Niobrara (ny-o-brair-ra). County commissioners – all five of them Republican – worried about how they would pay to maintain rural roads torn up by the heavy traffic of trucks, drilling rigs and fracking equipment, and imposed a brief moratorium on drilling last fall.

Such episodes are indicative of the challenges the United States faces on the local level in its quest to wean itself from foreign oil. The El Paso moratorium was quickly eased to allow Ultra to drill three test wells.

There is palpable “fear” about water, says Mr. Davis’s boss, county assessor Mark Lowderman, who explains that there are four overlapping aquifers that oil wells would need to drill through. But money is a bigger and bigger lure, especially as some people sign seemingly lucrative deals.

“Our economy is in the dumper here, here’s an industry that’s ready to go, and we can bring in some jobs and some money,” says Mr. Lowderman in his office in Colorado Springs, the county seat. “If you look up at North Dakota it can bring a lot of money quickly.”

With oil around $100 a barrel, the conversation is evolving: “‘You know, how much money are we talking here?’”

In El Paso County, the issue will play out through the election year of 2012, where three of the five commissioners face voters, as well as Mr. Lowderman’s friend, State Rep. Marsha Looper, who comes from a ranching family, resolutely worries about water, and whose district east of Colorado Springs covers some of the newly prospective oil territory. It is parched land, a high-mountain desert, and every drop of water is gold to ranchers and people outside Colorado Springs, who depend on well water.

The eastern edge of Colorado Springs had long been seen by developers as a future suburb. Ultra sees certain wealth below ground.

“If we have what we think we have in the Niobrara, we’ll do really well in terms of making money, even at more modest oil prices,” Ultra chairman and chief executive officer Michael Watford told investors in November.

While El Paso County is an extreme frontier of oil development in the U.S., Weld County north of Denver is a traditional home for energy exploration in the state. Anadarko, a large Houston company that produces more oil and gas, by comparison, than Suncor Energy, had been active in the Wattenberg field for a decade when it cracked the Niobrara. Unlike other shale plays in Texas and Pennsylvania, Anadarko hit on the right formula quickly. Its production from the area could be doubled to 140,000 barrels a day, drilling as many as 2,700 wells, with 160 planned in 2012.

“This thing is off to a roaring start,” Chuck Meloy, senior vice-president of worldwide operations at Anadarko, told investors at a conference in early December, and invoked the success of the Bakken in North Dakota
The Niobrara “is going to be a Bakken-ish type resource,” Mr. Melroy declares.


Shale oil and oil shale

The vernacular of the frontier of oil exploration becomes somewhat confusing in Colorado.

“Shale oil” has been used, being the oily equivalent of the now well-known phrase “shale gas.”

The better term is “tight oil,” where the oil is trapped in tiny – tight – cracks in subsurface rock, the limestone shale of the Niobrara formation, in Colorado’s case.

In Colorado, the term “oil shale” will be remembered by some. Pursued in the early 1980s by the likes of Exxon, oil shale contains kerogen, an organic material from which oil can be produced when burned, vaguely similar to oil sands bitumen.

The effort went nowhere, though some companies’ work continues. Royal Dutch Shell has the oil shale Mahogany Research Project in Colorado.

Last November, when Anadarko Petroleum issued its prediction of as many as 1.5 billion barrels to be pulled from the tight rock of the Niobrara, it was front-page news in Colorado, whose regional economy is suffering.

In the six counties on the Front Range of the Colorado Rockies, oil leases have doubled to more than 9,000 in the 12 months ended August, 2011, compared with two years earlier. But most of that activity is in Weld County, the traditional home of energy drilling in the state.

Leases in the other five Front Range counties totalled 2,700 in the year ended in August, up from just 177 in 2008-09.

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