Niobrara Shale The New Hot Topic

Jim Brown
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Wyoming held a lease auction last Tuesday that pulled in $32.3 million in federal oil and gas leases. That broke the previous record of $30 million set in April 2008 and it was three times the total received by Wyoming for all the leases sold in 2009.

You are going to be hearing a lot more about the Niobrara Shale play in the coming years. However, it won't happen until Wyoming actually issues leases to drill on this acreage. Wyoming has only issued 51 leases out of the more than 1,200 auctioned off over the past two years. The holdup according to Wyoming is a monster backlog caused by protests filed by environmental groups and policy changes caused by the change in the presidential administration and petitions to protect certain species as endangered.

The Niobrara Shale is in eastern and southeastern Wyoming and some parcels have been drawing record lease bids. The highest single bid at the BLM auction was for $5.4 million for the rights to a 1,724 acre plot northeast of Casper. That broke the previous high bid of $4.5 million set in 1999.

The state has granted EOG Resources (EOG) and others more than two dozen permits to drill in recent months. These are deep horizontal oil wells into the shale formation north of Cheyenne. The technology being used is the same methods being used to drill in the Bakken formation. This has led to a land rush boom in Wyoming similar to the one seen in the Bakken several years ago.

This shale formation extends into Nebraska and northeastern Colorado. The shale in these areas is 500-800 feet thick. If these test wells produce a reasonable amount of oil the lease administrators in Wyoming are going to need to hire a bunch of clerks to work the explosion of new leases currently being scouted by land men from the major companies.

EOG has already disclosed ownership of more than 400,000 acres in the Niobrara shale and the North Park Basin in Colorado. EOG reported a 550 boe test well and estimates it could have 10-80 million barrels of reserves in the North Park Basin. After the first 90 days it averaged 320 bpd of 38 degree crude. They are planning seven more wells with 4,000 foot laterals and multiple frac stages. The holdup is the cost of the wells at $6 million and the expected yield per well of 250,000 boe.

Quicksilver Resources (KWK) has also assembled over 100,000 acres in the Green River Basin in Western Wyoming and Colorado. They have two wells undergoing completion there.

Other companies with holdings and drilling activity in the area include Bill Barrett Corp (BBG) and Gasco Energy (GSX).

Gulf Update

(BP) claims the riser insertion tube is collecting oil from the leaking riser but not 100%. They have had several problems with the tube and the hose that links the tube to the surface.

They are now directing their efforts towards clogging up the blow out preventer later this week with the junk shot of mud and debris. The manifold needed to attach to the BOP and allow the injection of the junk was lowered to the sea floor this weekend.

BP halted drilling of the relief well at 9,000 feet total as measured from the surface of the water. Because of the problems with the Horizon's BOP they were required to test the BOP on the Transocean Development Driller III (RIG) until they were 100% sure it would function properly in the event of an accident. This cost BP a week out of the drilling process in order to run the tests. You can bet it had to be perfect before the MMS would let the drilling proceed.

BP sent a letter to all rig owners of equipment they are leasing demanding certifications on all BOPs.

"Since blowout preventers are an intergral part of a safe and successful drilling and completion operation, we request that you specifically confirm that the subsea BOP and associated equipment used on your deep-water drilling rigs currently under contract to BP have been inspected and are routinely inspected, tested and maintained to industry standards and in compliance with applicable regulations," states a copy of the letter obtained by UpstreamOnline.

"Additionally, if the BOP or associated equipment had been modified from the original design in any way, please confirm: (1) that such modifications were made in consultation with the original manufacturer; (2) used OEM parts; (3) pursuant to a formal management of change process; (4) and in compliance with applicable regulatory requirements."

The letter sets a deadline to respond to BP of June 1st.

I suspect this well leak will be contained by next weekend and hopefully the news flow will go back to normal. The moratorium on new drilling permits runs through month end when the investigation into the accident is concluded. However, a resumption of permitting may depend on how long it takes for the politicians in Washington to milk the disaster for all its worth.

Jim Brown

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