Wells Fargo: Powder River Becoming Powder Keg

First-quarter enthusiasm surrounding the stacked-pay potential of the Powder River Basin, historically a coal- and coalbed-methane-producing reservoir, is entirely justified, according to a recent report by Wells Fargo Securities. The report, “E&P: Powder Keg in the Rockies Redux,” revisits a March 2012 Wells Fargo report on the Basin.

“With its history of vertical oil production, it was only a matter of time before operators got more aggressive,” according to the report. With companies such as Chesapeake, Devon and Samson Oil and Gas leading the way over the past few years, “that is exactly what has happened.”

Despite some disappointing well results in the Niobrara, the oil-bearing shale formation in the basin, the Shannon and Sussex formations, which lie above the Niobrara, and the Frontier/Turner, which lies below it, have provided “encouraging well results from numerous operators throughout the stacked-pay column,” according to the report. The Frontier formation’s initial production (IP) rate, 1,424 barrels of oil equivalent per day (Boepd), was nearly three times that of the Niobrara, 500 Boepd. The Sussex and Shannon each had an IP rate of 725, also greater than the Niobrara’s. Add in the fact that the Shannon and Sussex each have lower well costs than the Niobrara, and the formations look even more attractive.

Source: QEP Resources, SM Energy and Wells Fargo Securities LLC. ROR and PV10 reflect $4.5/Mcf and

$85/bbl

Furthermore, operators in the Basin have shifted their emphasis from gas-focused drilling for coalbed methane to deeper oil plays during the past few years. The shift could account for the production increases EOG and Chesapeake have seen over the past few years, according to the report. The report lists 16 companies that operate in the Powder River Basin; of those operators, only EOG, Chesapeake and Bill Barrett have increased production, with Barrett “likely inflated by divested coalbed methane production.”

Still, the production numbers are not “predictive of a company’s acreage position or anything else for that matter,” according to the report. “The more important metrics will obviously be well results, core tests, geology, if current wells hold up, etc.”

The report cites permitting as one of the major challenges facing operators in the Powder River Basin, “with scattered portions of federal and state acreage dotting the most prospective acreage. Operators have said the landowners are generally cooperative, but with the slow process of federal permitting, operators have emphasized the heightened need for forethought and planning.”

The federal permitting process is expected to slow even more as a result of sequestration cuts to Bureau of Land Management funding. Cuts could result in 300 fewer drilling permits in Wyoming, Utah, Colorado and New Mexico, and “for the Rockies in general, we have heard permitting time is now 400 days in the Bakken.”

Another challenge is a lack of midstream infrastructure. Crude could be limited by gas processing capacity, but “there is clearer line of sight into the crude infrastructure due to PRB’s coal heritage and thus its rail infrastructure,” according to the report. “However, crude loading terminals are likely to be the choke point and permitting for these facilities could pose a challenge.”

Despite these setbacks, the report still asserts that the Powder River Basin “was one of the overlooked highlights of [the] 1Q13 earnings season.”