According to a Bernstein E&P Resource of the Month report, the low liquids content of operators drilling western Colorado Piceance Basin wells “will not generate much value for investors”.

“The low estimated ultimate recoveries (EURs) combined with lower liquids content and average levels of Opex and Capex lead us to estimate that only the best quality wells (first quintile) can generate positive returns to capital. Recent interest in drilling horizontal wells in the Mancos shale is intriguing, but public data from horizontal wells (mostly Encana's) suggest that much higher rates will be necessary to justify the additional Capex requirements.”

In addition, the well locations are far from high-price markets and there is a lack of natural gas liquids.

The report also indicates that “Piceance economics are negative, estimated at $(3) B per 100,000 acres for average acreage (if it were to be drilled). Average EURs are expected to be low compared to other plays (we find an average of 950 million cubic feet equivalent based on public well data), and liquids percentages are low (about 3.5% oil and up to 23% natural gas liquids) except along the western border of the basin. Higher EURs and gas prices would be most important in moving Piceance acreage to having positive net present value (NPV 10).”

The core acreage (1.8 million acres) of the western Colorado portion of the Piceance Basin lies in Garfield, Mesa and Rio Blanco counties. The primary zones of interest are the established Cretaceous age reservoirs, the potential Permian (Phosphoria), and the extremely abundant (tight) oil shale of Green River. Green River contains an in-place volume of 1.52 trillion barrels, sufficient to meet 50 years of global demand. In addition, the report said that “We expect that production in the Piceance from vertical and directional wells has reached a maximum production level of 2.1 billion cubic feet equivalent, and will decline slowly (about 0.7% annually) for the foreseeable future if a constant rig count is held. We could see production continuing for decades to come if gas prices warrant further infilling.”

The Bernstein Research report’s conclusion was “In our coverage, Encana Oil & Gas Inc. has the most acreage and the best initial production rates for vertical and directional wells, which suggests that their acreage position includes some potentially net present value-positive areas if gas prices were to increase--however, given Encana's lack of top quartile liquids opportunities and absence from lowest cost dry gas basins (e.g. Marcellus), we remain Market-Perform. Outside of our coverage, Bill Barrett Corp. has wells that are comparable in quality to Encana's, while WPX Energy’s wells are closer to the overall average. Notably, many companies have de-emphasized the Piceance since gas prices fell, with several having sold their positions in the past few years (sellers include Plains, Devon, and Pioneer).”

Historically, the region was explored with conventionally vertical and directional wells. The area saw a spike in exploration during the late 1960s and early 1970s and preceded the shale gas revolution. An experimental 1969 underground atomic bomb blast (Project Rulison in Garfield County by the U.S. Department of Energy) was used to stimulate gas production and was later doomed because of radiation levels in the gas.

Due to low gas prices, operators are going after regional higher natural gas liquids prospects and shale gas resources that include Niobrara and Mancos.

Encana was a company noted in the report with “leverage to the Piceance”. According to a September 2011 report by IHS Inc., “Encana has some of the lowest controllable cost structures in every region it operates. This is a continued focus of the corporation. Within its capital program, shareholders should expect that Encana will further refine and optimize its resource play hub developments as the company targets continued reductions in supply costs towards a goal of $3 per million cubic feet equivalent for all of its drier natural gas plays. Within the 2012 budget, it is expected that many of Encana's drier natural gas plays will see a somewhat reduced capital program, while a growing portion of next year’s capital investment will be directed towards the company’s extensive oil and liquids-rich development and exploration opportunities.”

A January 2012 article by IHS Inc. reported that “Encana’s Piceance Basin holdings comprise approximately 840,000 acres. The Piceance Basin is one of the company’s key resource plays. In 2010, Encana produced 458 million cubic feet of natural gas equivalent per day from the basin and drilled approximately 125 net wells in the area. Most of North Piceance production is natural gas from the Williams Fork, a tight gas sand formation.”

Encana has been having substantial Piceance Basin success with commingled completions in Niobrara and Mancos.

In June 2011, Encana’s #16-16H2 (P16OU) Orchard Unit flowed 6.98 million cubic feet per day from a commingled Mancos B interval (7,860-8,469 ft.) and Niobrara (9,189-14,742 ft.) in Mesa County. From the same drill pad, #16-16H (P16OU) Orchard Unit initially flowed 3.8 million cubic feet of gas daily from a vertical Mancos B interval at 7,810-8,400 ft and a horizontal Niobrara interval at 8,856-14,378 ft. A March 2012 discovery, #10-10H (C16OU) Keinath-Federal in Mesa County, initially flowed 6.53 million cubic feet of gas per day from Niobrara and Mancos B. The #36-11H (ON1) Federal produced 12.72 million cubic feet of gas per day after completion in June 2012: the Garfield County venture produced from Mancos (6,970-8,181 ft.) and horizontal Niobrara (8,380-16,520 ft.).