Denver — In light of Colorado's Proposition 112, which if passed will increase setback requirements for new oil and gas development from 500 feet to 2,500 feet and effectively halt local industry growth, the nearby Powder River Basin will serve as a failsafe for operators in the Denver-Julesburg Basin. The Powder River Basin is Wyoming's most prolific oil play.
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Associated gas production looks poised to grow in Wyoming's Powder River Basin as internal rates of return push higher and drilling activity expands.
However, the ability to grow production significantly above current levels will likely be limited by processing and infrastructure constraints, some of which are expected to be alleviated by projects considered for in-service dates at the end of 2018 and 2019.
Powder River production has built to an average of 518 MMcf/d this year to date, which marks a modest increase of 20 MMcf/d from 2017. But it is on pace for the first year-on-year growth since before 2010, according to S&P Global Platts Analytics. This comes as the active rig count in the basin has registered an eight-rig build compared to 2017.
The average barrel in the Powder River is composed of 67% oil, 22% gas and 11% NGLs. As such, the increase in crude prices has driven internal rates of return up significantly from even last year, reaching 22.2% for the month of September. IRRs are based on half-cycle analysis, which excludes the expenses associated with land acquisition, exploration, development (sunk costs) and federal income tax.
Associated gas from oil-based drilling has been a developing characteristic in the Powder River over the past few years. Historically, Powder River production was propped up by coal bed methane, which was a drier gas and required little processing. Naturally, an uptick in associated gas production drives an increased need for processing capacity in the basin. Currently, gross gas production exceeds processing capacity of 470 MMcf/d, which puts a cap on near-term growth. Additionally, takeaway capacity for dry gas out of the Powder River relies on CIG, TIGT and WIC south to Cheyenne Hub and Williston Basin Interstate Pipeline to the north, ultimately delivering onto Northern Border Pipeline.
Eastbound flows out of the Cheyenne area have already hit near capacity limits. This has been driven by increased Denver-Julesburg production as well as regional swing volumes as Rockies gas is squeezed from western markets. This leaves little room for a significant build in volumes heading out of Cheyenne. Still, there has been an increase in northeast bound flows on WBI as the Cheyenne pipelines pushed higher.
On the processing side, Evolution Midstream recently said it has broken ground on its Jewell natural gas processing plant in Converse County, Wyoming, in the Powder River Basin. The plant will initially provide 40 MMcf/d of processing capacity and is expected to come online in late 2018. The plant will be subsequently expanded to 100 MMcf/d in 2019 and will provide a gas interconnect with WIC for takeaway to Cheyenne Hub.
Additionally, Williams and Crestwood Equity Partners announced an expansion of a gathering system and associated processing plant in the basin. The expansion calls for the current capacity of the Bucking Horse gas processing plant to be increased from 120 MMcf/d to 145 MMcf/d by the end of the fourth quarter of this year. Plans also include building a second plant on the current Bucking Horse footprint by the end of next year, which would add 200 MMcf/d to the companies' Jackalope Gas Gathering System.
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