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Drillers driven from Permian look to Powder River Basin, where pipelines await

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Drillers driven from Permian look to Powder River Basin, where pipelines await

As the Permian Basin produces more than 3 million barrels per day and runs into a lack of pipeline capacity, causing price discounts, some larger independent drillers are heading north to the Powder River Basin, where there are pipelines in place to help market the production.

The basin in Wyoming, known more for coal, is experiencing the beginning of a gas and oil boom as producers seek to exploit what EOG Resources Inc. described as "a mile-deep column of pay and multiple targets," including the Mowry and Niobrara shales. With improved drilling techniques, drillers are now able to exploit the high-pressure rock, which holds many similarities to the Eagle Ford Shale in south Texas.

"New technology and lower well costs have resulted in economic wells," Williams Capital Group upstream oil and gas analyst Gabriele Sorbara said in an interview. "The area is appealing due to its stacked-pay potential, resulting in lots of running room from a resource-in-place and inventory perspective." Production in the basin is about 140,000 barrels per day, according to an August note by BTU Analytics, with 175,000 bbl/d possible in 2019.

SNL Image

Sights like these are becoming increasingly common as major producers descend on Wyoming's Powder River Basin.
Source: Associated Press

One company that Sorbara said is "banging the drum" for the Powder River Basin is Chesapeake Energy Corp., which has increased its oil production in the basin by 90% in 2018, reaching 32,000 barrels of oil equivalent per day at the end of July. CEO Doug Lawler said during a second-quarter earnings call that the company expects production there to double in 2019.

EOG, meanwhile, believes its position in the Mowry Shale is prospective for 1.2 billion boe, with oil cuts varying from 20% to 60% depending on location. In the Niobrara, the company estimates that it holds 640 million boe on its acreage, with about half being crude oil.

"Low finding and development costs drive higher corporate-level returns," EOG CEO William Thomas said during the company's second-quarter earnings call.

Anadarko Petroleum Corp. said during its most recent earnings call that it has established a position of 300,000 acres in the Powder River Basin at less than $2,500 per acre. The driller is focused on the Turner formation and reported initial production totals of more than 2,000 boe/d, with more than 80% oil. Even though the company has a presence in a number of other major plays, including the Permian, Anadarko could start diverting large amounts of capital to the Powder River Basin as soon as 2019.

Takeaway options

The appeal of the Powder River Basin goes beyond the multiple layers of oil-heavy rock. There are also pipelines waiting to carry the oil away once it is produced, something that can draw rigs and money originally intended to go elsewhere.

One midstream partnership has developed a clear advantage in the region. Tallgrass Energy LP's significant regional presence and multiple pipeline systems, including Pony Express, could squeeze out midstream companies looking to establish new positions in the basin.

"The problem for the midstream companies is ... they've got to find a bunch of customers that are in dire need of takeaway capacity, and a lot of those guys have already signed up on Pony Express," John Zanner, an analyst at the consulting firm RBN Energy, said in an interview. "They've got to cobble together a lot of volumes in order to figure out how they're going to build the next big pipeline out of the Powder River."

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The only new crude oil Powder River Basin pipeline that has been announced is Tallgrass and Silver Creek Midstream LLC's 100,000-bbl/d Iron Horse project, which will connect producers to refineries on Tallgrass' Pony Express pipeline system and the Cushing oil hub.

With more volumes entering Cushing, however, there is also an opportunity for pipeline companies to accommodate growing Powder River Basin production by building further downstream. Tallgrass has proposed the Seahorse pipeline from Cushing to the St. James, La., refining complex and a separate new export-capable liquids terminal near the mouth of the Mississippi River. The pipeline is expected to transport up to 800,000 bbl/d.

Private equity

With upstream interest picking up and the prospect of midstream opportunities coming with it, the Powder River Basin is starting to attract an increasing amount of private capital.

"From 2013 to 2016, we had a pretty stable base of producers … and I think we're starting to see some turnover there, some private equity coming in that has a bigger checkbook and is buying some of these smaller guys out," Meritage Midstream Services II Chairman and CEO Steve Huckaby said in an interview. "It would not surprise me if we had 10 to 12 new [producers] here in the last 12 months."

Silver Creek founder and CEO Patrick Barley agreed that a "whole host of [upstream and midstream] private equity players" have expressed interest in the region. "You've got several billion dollars of commitments collectively that have been made there," he said in an interview.

Optimism about the Powder River Basin is also spurring private firms like Silver Creek to expand their holdings. Genesis Energy LP on Aug. 29 announced that it had agreed to sell its Powder River Basin Pipeline and an associated crude oil gathering system and rail facility to the Tailwater Capital LLC-backed company for about $300 million.

The chances of the basin seeing a production boom that causes a corresponding pipeline capacity deficit to the one in the Permian is unlikely, according to analysts who cover the region closely. RBN's Zanner noted that Wyoming rig counts "pale in comparison" to those in West Texas. So does interest in new pipelines, according to Mornigstar director of oil and products research Sandy Fielden.

"It's not the same frothy investment in new opportunities to build pipelines," he said in an interview.