Niobrara’s Surge In Activity Leads To Environmental Concerns, Solutions

The realm of the Niobrara Shale has significantly expanded during the past year, bringing with it increased environmental worries and a new world of A&D opportunities.

During fourth-quarter 2013, operators opted to target various formations in the Niobrara, making the Rockies shale play one of the largest multi-stacked plays in the U.S., according to a report by Hart Energy Research & Consulting.

According to state officials, there were 51,595 active wells in Colorado as of November, twice the number that could be found nearly a decade ago, the report said.

This increase has spurred mounting concerns from Colorado citizens about the environmental effects of unconventional drilling. Hydraulic fracturing has been the target of many, with several communities in the state already voting to restrict fracking within their jurisdictions.

Operators have begun to worry where these anti-fracking movements might lead the industry in the state though some companies have already been active in finding solutions.

A potential ban on the unconventional drilling technique in the state was obviously on Colorado operators’ minds during a recent Wells Fargo Securities LLC visit in Denver, said David Tameron, senior analyst.

“There are several different measures being proposed at this time, which range from a statewide ban to providing municipalities with additional control over business operations within their borders,” Tameron said in a March 12 report.

Fracking ban

The threshold to place a measure on Colorado’s ballot is only 86,000 signatures, meaning it would be relatively easy for a statewide vote on fracking. This could turn out not-so-well for oil and gas companies in a state that tends to lean liberal and with the mounting out-of-state support for “fractivists,” Tameron said.

Analysts are still on the fence about the ultimate outcome, he said. However, a municipality measure could pass leaving it up to individual communities to decide on the matter for themselves.

If the municipality measure passes instead of the statewide ban, the majority of the industry should remain relatively unharmed. Tameron noted he doubts residents of industry centric areas, like Weld County located in the heart of the Denver-Julesburg (D-J) Basin, would push oil and gas out of their territory.

“Management teams were skeptical that a statewide ban would pass, but the bottom line is no one knows what could happen,” he said.

Methane emissions

As a result of the looming potential statewide ban, some of Colorado’s largest oil and gas producers in the Niobrara Shale play decided to get involved.

Top executives from Anadarko Petroleum Corp. (NYSE: APA), Noble Energy Inc. (NYSE: NBL) and Encana Corp. (NYSE, TO: ECA) were encouraged by Gov. John Hickenlooper to work with the Environmental Defense Fund on regulations on methane emissions.

The company executives from some of the largest producers in the state and the environmental advocacy group proposed stringent rules to help eliminate “fugitive” methane emissions from leaks from tanks and pipes. The regulations were approved 8-to-1 in February by the Colorado Air Quality Control Commission.

As a result of the new laws, operators now have to perform frequent checks for leaks, using infrared cameras and other technologies.

Methane has become a significant factor in the debate about natural gas’ role in energy supply. Natural gas is touted by the U.S. Environmental Protection Agency (EPA) as a clean energy alternative compared to coal and oil. According to the EPA, natural gas is twice as clean as coal.

Conversely, the benefits can be undermined by methane leaks that can occur throughout the gas supply chain, including during production. Methane, the main component of natural gas, is 20 times more potent at trapping heat in the atmosphere than carbon dioxide, according to the EPA.

During the third annual Vail Global Energy Forum in early March, Noble’s CEO, Chuck Davidson, said he didn’t see the use in members of the industry lauding natural gas as a cleaner burner unless everyone was convinced the entire lifecycle of the fuel was clean. “We had to address methane emissions,” he said at the conference.

M&A activity

Amid the debate over fracking, oil and gas companies are looking for A&D deals to clean up their portfolios. Independents in some of the largest basins within the Niobrara are considering consolidation as an option after the slow of M&A activity from the fever pitch in 2010 to 2012.

In a recent effort to concentrate operations, Anadarko Petroleum and Noble exchanged about 50,000 net acres of land in the Wattenberg, the largest field in the D-J Basin. The swap in fourth-quarter 2013 is expected to increase operational efficiencies and save costs.

Wattenberg Field is already largely consolidated—Anadarko Petroleum and Noble both control about 80% of the acreage.

Bill Barrett Corp. (NYSE: BBG) noted that basin consolidation is still possible as some small operators in the D-J could be potential targets on a corporate level, Tameron said in the March 12 report.

“Most management teams were fairly open about the topic, saying they foresee (or would like to participate in) additional consolidation within the D-J,” he said.

While companies consolidate their portfolio in some of Niobrara’s larger basins, a Houston-based company still found a way to enter the shale through a $180 million deal.

Southwestern Energy Co. (NYSE: SWN) announced March 5 that its wholly owned subsidiary signed a purchase agreement for 312,000 net acres targeting the Niobrara formation in northwest Colorado from Quicksilver Resources Inc. (NYSE: KWK) and a subsidiary of Royal Dutch Shell Plc (NYSE: RDS-A, RDS-B). This marks the company's entry into the Niobrara play.

"This acreage position covers a substantial area in the Sand Wash Basin–over 50 miles across and over 20 miles wide–and provides the opportunity for us to leverage our operational strengths into a new large, scalable project," Steve Mueller, Southwestern Energy president and CEO, said in a release.