Published September 28, 2011
The rolling high plains east of Colorado Springs (map) saw plenty of change before the “landmen” came. Ranchland that once stretched three or four miles between homes filled in with residential developments on multi-acre lots, bringing more people and paved roads.
Then, about two years ago, came a rush of real estate negotiators, snapping up leases for potential shale oil drilling. “I’ve never seen anything like it,” says Rick Davis, 53, whose grandfather started buying ranchland in the early 1900s in Colorado’s eastern El Paso County. ”Turns out that land was right in the center of all the activity.”
And it has thrust the Davis family into the middle of a boom in U.S. oil production. Oil exploration is moving to new corners of the country as drillers use a combination of technologies to tap crude that was always known to be there, but only now can be produced economically.
El Paso County, which had plenty of cattle but never a producing well, sits on the Niobrara shale. The geologic formation stretches from Colorado into Wyoming, while also touching parts of Nebraska and Kansas. The Niobrara is one of about a score of new and renewed oil plays (pdf) made possible through a combination of horizontal drilling and hydraulic fracturing.
Also called fracking, the sometimes controversial fracturing process mixes water with sand and chemicals to break up underground shale and release hydrocarbons. Gas producers early last decade combined fracking and horizontal drilling with outstanding results, significantly altering the U.S. energy picture and touching off major gas drilling booms in Texas, Louisiana, Colorado, Pennsylvania, and elsewhere.
But the U.S. natural gas industry has been bedeviled by an economic quandary partially of its own making. All of the new supply at a time when demand is sagging due to the weak economy has dropped the price of natural gas in the United States. The price is low enough, in fact, to undercut the profitability of shale gas production.
Oil prices, however, have stayed high, tied to global factors such as Asia’s expanding economy and unrest in the Middle East. So when oilmen in the U.S. Great Plains adopted the same fracking technique used to unlock natural gas, it proved a winning combination. It was a repeatable, reliable technology, matched to a commodity that could be sold at a high price.
Shale oil is not to be confused with another potential resource, usually called “oil shale,” which is found in huge volume in the Green River Formation of western Colorado, Utah, and Wyoming. That is actually a crude oil precursor known as kerogen, which would require major heating and processing to be turned into usable fuel. Its development is seen as far off in the future.
But the shale oil now being produced through fracking is conventional crude oil, produced using unconventional means.
Roaring early success has led to outsize projections that shale oil, also known as “tight oil,” that could boost U.S. production significantly over the coming decades. “There’s potential for it to be a game changer,” says Hill Vaden, an energy analyst at the consulting firm Wood Mackenzie.
But he cautions, “It’s still in its early days, and there are a lot of questions.”
Enthusiasm is spurred by production in another shale formation, the Bakken, which lies under North Dakota and Montana and stretches into Canada. Oil production in the U.S. portion of the Bakken went from 3,000 barrels a day in 2005 to about 400,000 now. The Bakken contains about 3.6 billion barrels of recoverable oil, making it the largest U.S. oil play since Prudhoe Bay in Alaska was identified in the 1960s, according to U.S. Energy Information Administration estimates.
North America’s oil resources are “proving to be much larger than previously thought,” thanks in part to shale oil, said a report this month from the U.S. National Petroleum Council (NPC), a federally chartered, privately funded government advisory board. It predicted that what it called “tight oil” production would grow to between 2 million and 3 million barrels per day, “depending on access to new plays and continued technology development.”
At that rate, the new shale oil would not be enough to wean the U.S. from its foreign oil dependence, with the nation’s current consumption habit of about 19 million barrels per day of petroleum products. But it could significantly bolster domestic supply.
In any event, the surge has transformed western North Dakota. Amid the activity, the city of Williston (map), about 50 miles (80 kilometers) south of the Canadian border near the confluence of the Yellowstone and Missouri rivers, has run out of housing for oilfield workers as decades of declining population have been reversed. Recent issues have included the need for added pipelines and gas flaring on the prairie.
(Related: “A Move to Capture ‘Fugitive’ Natural Gas Emissions“)
But the boom has allowed the state to boost spending while enacting a $500 million tax cut for North Dakota residents, and officials predict another 20,000 wells over the next 20 years.
Similar success descended on the Eagle Ford shale in southern Texas, along a basin that stretches more than 300 miles (480 kilometers) from the Mexico border south of San Antonio to northeast of Austin. Companies there are drilling some 3,000 wells, and analysts forecast production could reach 400,000 barrels per day in a few years. Double-digit unemployment is history in the region, and county governments find themselves flush with new revenue.
The rush is on to snap up mineral leases and pump oil from other shales. “It’s revolutionized our domestic oil industry, and allowed companies like ours to reinvent themselves,” says Mike O’Shaughnessy, chief executive of Lario Oil & Gas, a privately held independent producer. Based in Wichita, Kansas. Lario also has an office in Denver, and the company moved quickly on the Niobrara shale south and east of the Colorado capital.
The quick work recently enabled Lario to sell a large block of mining leases to ConocoPhillips, which is taking over a dozen wells that Lario was drilling in Arapahoe County to the east of Denver. The new techniques have altered the exploration business, O’Shaughnessy says. “We aren’t drilling a lot of dry holes anymore. It’s just a question of getting there early and assembling the right leaseholds.”
Bracing for Change
About 60 miles (96 kilometers) south of Denver along the front range of the Rocky Mountains, Colorado Springs sits at the foot of Pikes Peak. The ranchland that stretches east of the city holds more uncertainty about its oil, but that hasn’t stopped land leases from tripling, or quadrupling, in value over the past year or so. Where El Paso County hadn’t had an active oil lease since the mid-1980s, much less a producing well, the independent landmen who work for oil companies have booked more than 2,200 since 2009, says Mark Lowderman, the county assessor.
At least three companies have drilled exploratory wells, he says. “We’re sort of bracing ourselves for what might follow,” the assessor says. “Up until this, we around here have been blissfully ignorant of the oil and gas industry.”
Lowderman says the anticipation of oil riches is tempered by environmental concerns. Reports elsewhere have suggested that fracking might spoil underground aquifers, and El Paso County’s ranchers get their water from private wells. Among their preparations for a potential boom, county lawmakers are considering regulations to ensure that the industry will responsibly develop any oil and gas finds.
A year of exploration has also cooled the white-hot enthusiasm for Niobrara shale, says Vaden, the energy analyst. “We’ve come to realize that there are challenges unique to the Niobrara,” he says. According to oil service companies active in the region, those include the rugged terrain, the environmental sensitivity of some areas and the complex geology.
Still, Davis is glad his family kept mineral rights as it began selling off ranchland more than a decade ago. His late father talked about a geologist who came through in the 1930s and told the family they had oil under the land.
So Davis helped his 88-year-old mother negotiate her mineral leases a year ago. “With the prices people are getting now, I wish we had held out longer.”
Some neighbors are still holding out, worrying, too, that oil exploration could spoil the natural beauty of the High Plains. Davis, though, says a landman told him a decent producing well could mean several thousand dollars a day for the family.
“From my perspective,” he says, “I really wouldn’t mind having a couple of wells on my mom’s land.”