On the arid high plains of northeast Wyoming, the town of Gillette has become a bona fide boomtown. But it's not silver or gold or even black gold that's got folks in such a frenzy. It's coalbed methane.
That's right, coalbed methane.
In the last three years the Powder River Basin has become the site of the hottest natural gas play in the country, and is almost single handedly putting coalbed methane in the radar scopes of a growing number of oil and gas companies all over the United States.
All this from a region most so-called experts wrote off as a wasteland for coalbed methane.
Following Amoco's coalbed methane success in the Fruitland coals of the San Juan Basin in New Mexico and Colorado, scientists believed they had uncovered the Holy Grail of this unconventional resource.
Any play would have to be analogous to the San Juan coals to be productive -- and, unfortunately, the Powder River Basin didn't resemble the San Juan prototype in any way.
Sure, the basin was known as the Saudi Arabia of coal with widespread, extremely thick coals, but they were low rank, had very low gas content and were far too permeable to be prospective for coalbed methane.
But there are always a few mavericks in the crowd, unwilling to follow the herd. Thank goodness.
In the early to mid-1990s the ingenuity and tenacity of a pair of Casper independents, Bruce Martens and Chuck Peck, turned the Powder River Basin into the coalbed methane crown jewel. The two dismissed conventional wisdom and approached the basin with new ideas and techniques that ultimately unlocked the secrets of enormous coalbed methane reserves.
"The rap against this play early on was that as explorers looked around for coalbed methane plays they looked at, among other things, the coal rank, or gas content of the coals," said Paul Rady, chairman, chief executive officer and president of Denver-based Pennaco Energy Inc. "People saw the San Juan play as the analog for new coalbed methane targets and the Fruitland coals are high rank with gas contents of 350 standard cubic feet per ton of coal or more.
"The Powder River had massive coal deposits, but the coals were low rank with extremely low gas contents of 30 to 40 standard cubic feet per ton."
Plus, the completion practices perfected in the San Juan coals just weren't getting the job done in the Powder River.
"A traditional completion in the San Juan is to drill down through the coal and complete the well somewhat conventionally -- run pipe, cement, perforate, stimulate," he said. "There is plenty of bottom hole pressure. Initially people came to the Powder River and tried this same technique and it was a disaster. They found the coals here had very low reservoir pressure and very high permeability, resulting in the cement going back into the coals and plugging them off.
"Next," he continued, "people moved to the middle of the basin where they hoped the thicker, deeper coals would be higher rank and have enough gas to be prospective. However, they drilled pilots with wells at least a mile apart and all they got was 'the ocean' -- producing as much as 3,000 barrels of water a day and virtually no gas."
It wasn't until Martens and Peck decided to try going shallower in the basin, where there's not as much hydrostatic head above the coals and not as much water, and tried a whole new completion technique that this play began to work.
"The two opted to simplify the process and just set casing to the top of the coals and then do an open hole completion," Rady said.
There was enough bottom hole pressure to bring the well on -- and since the water from the Powder River coals is drinking water quality, the pair further simplified and eliminated costs by opting for surface disposal of the water in a variety of ways like building ranch stock ponds.
"This was the approach that revolutionized this play," Rady added. "Keeping it simple and inexpensive has been the key to the Powder River coalbed methane. What you lose in gas richness in the Powder River you make up for in coal thickness.
"The typical San Juan completion might have five to 20 feet of coal," he said. "We have 40 to 100 feet on our acreage in the Powder River."
How Big is Big?
So, how huge is the reserve potential of the Powder River coalbed methane play?
The Powder River Basin holds approximately 4.3 million acres where the coals are 20 feet or greater in thickness, or about 800 billion tons of coal, according to Lanny Outlaw, president and chief executive officer of Western Gas Resources, one of the biggest players in the coalbed methane.
"Based on our production history, we believe there is 30 to 40 standard cubic feet of gas per ton of coal, or 24 to 32 trillion cubic feet of gas in place," Outlaw said. "Industry resources estimate recoverable gas reserves to be six to nine trillion cubic feet."
Today the Powder River Basin coalbed methane play is literally making the fortunes of companies lucky enough or astute enough to stake a claim in the play when there was acreage still to be had. The leasing frenzy over the last couple of years has all but tied up most of the coal fairway -- and newcomers will pay a premium to get into the game.
Western Gas is not a newcomer. The firm has owned and operated natural gas assets in the Powder River Basin since 1977.
"Initially, the driving force behind our pursuit of coalbed methane was to more fully utilize our existing infrastructure and add new gas volumes to our gathering and transportation systems in the basin," Outlaw said. "We became involved in 1989 by offering gathering, compression and transportation services to the few coalbed methane producers. The volumes were very small at that time."
As drilling and completion techniques were refined, however, results improved and more people began to take notice of the fledgling coalbed methane production.
"It soon became apparent that development of the coalbed methane play could provide a tremendous opportunity for Western," Outlaw continued. "Not only was it well-suited to our existing infrastructure, it involved many aspects of our core expertise -- gathering, compression, treating and transportation.
"The profitability of developing our own reserves became more appealing."
In 1993 the firm began acquiring acreage for evaluation purposes, and by mid-1997 Western's coalbed methane acreage position had grown to 230,000 acres.
An Attractive Play
At about that same time Denver-based Barrett Resources was studying the play and making plans to stake its claim.
"I personally liked the Powder River play because it seemed to have the benefits of relatively low costs, potable water disposal, a lot of running room, and tremendous upside potential," said Peter Dea, chairman and chief executive officer of Barrett.
By late 1997 Western's subsidiary Lance Oil and Gas formed a joint venture with Barrett covering a 2.1 million-acre area of mutual interest that made up a significant portion of the entire coalbed methane fairway.
The two of them bought out Martens and Peck as they built their position.
In less than three years the two companies have enjoyed phenomenal growth, and the play continues to expand.
"The joint venture has the dominant lease position in the play," Dea said. "We have drilled and set pipe on 1,213 wells, and we are producing from about 818 wells with another 347 wells waiting to go on line. We are currently producing 135 million cubic feet of gas a day gross with 50 million cubic feet daily net to Barrett.
"We drilled 580 wells in 1999," he added, "and are on a pace to drill about 800 wells this year."
And the future looks bright. Based on the joint venture's lease position there are potentially about 9,000 additional well locations.
"We anticipate actively drilling for 10 to 15 years in this play," said Jeff Jones, Western's vice president of production.
The Doors Are Thrown Open
Western and Barrett are certainly not alone in the play. Last year was an exciting time as it was the first full year, where every entrepreneur with a few acres and some funding went out and drilled wells.
Drilling has pushed the limits of the play three townships north of Gillette and about six townships south of Gillette, so today the play covers close to 10 townships -- or about 75 miles north to south in Campbell, Johnson and Sheridan counties -- which encompasses virtually all of the basin's Wyoming portion.
Pennaco Energy was formed in January 1998 exclusively to take advantage of the Powder River coalbed methane play. By August 1998 the firm had almost 500,000 net acres under lease but didn't have a great deal of capital to take the project forward, said Glen Warren, executive vice president and chief financial officer of Pennaco.
The oil industry was in the throes of its major downturn in late 1998 and the capital markets were in shambles because of the Asian financial crisis, making it extremely difficult to raise capital for any oil and gas program.
"At that point we had to look at selling down acreage, and we looked at a lot of potential partners," Warren said. "At the end of the day CMS Oil and Gas won out, and they have been our partner ever since in an area of mutual interest in the northern fairway where we have drilled about 180 wells to date.
"Both parties, however, wanted freedom to do their own thing outside the joint venture area," he said. "Penna immediately dug in and began accumulating acreage as close to development that they could drill right away.
"We've since grown that lease position outside the AMI to about 45,000 acres in three different areas," he continued.
"We are currently producing about 48 million cubic feet of gas a day from 260 wells outside the AMI and another 3.5 million cubic feet daily from 30 wells in the AMI. The bulk of the wells in the AMI are in the dewatering stage or awaiting hook up. The acreage we hold jointly with CMS Energy is further away from existing production, so the lead time is a little longer."
Pennaco plans to drill over 500 net wells this year with a capital budget of $55 million, including $20 million for additional lease acquisition.
Virtually all of the activity to date has focused on the Tertiary-age Fort Union Wyodak coals, which range in thickness from 60 to 120 feet and are found from 250 feet to 1,300 feet deep. Future activity will likely push the limits of the play even further.
Early drilling centered on the basin's eastern side, close to where the coals outcrop. Several companies, however, are now testing the potential of the Fort Union Big George coals, which are found west of the current activity and are deeper and thicker than the Wyodak.
"A year from now, we will be able to make better estimates of the coalbed methane potential, because several very important pilots should be completed," Outlaw added. "Some of those pilots are in the Big George coal -- and if successful, should have significantly higher per well reserves."
Unfortunately, much of the Big George play area is on federal lands, which is currently shut down awaiting the results of a new environmental impact statement.
"We do plan to drill several Big George wells in 2000 on fee and state lands, and should have some bona fide pilots this year," Dea said.
The Big George is found between 900 to 1,500 feet and averages about 125 feet thick.
The Economics Look Good
So what is it that makes the Powder River coalbed methane play so lucrative?
Big reserves + very low well costs = an economic gas play by anybody's definition.
"Our average well costs over the last two years has been about $68,000 to drill and complete, with payout in about one and a half years," Dea said.
"Based on our model, which we acknowledge is conservative, after a six- to nine-month dewatering phase the average well will reach a peak of around 210,000 cubic feet of gas a day," he added, "and after a couple of years begin to decline with total reserves from an average well of about 400 million cubic feet.
"Even under what we know is a conservative model, those are very strong economics."
The economic life of a well is expected to be about seven years, according to Western's Outlaw.
"Plus, per well reserves and maximum production rates have increased as we have moved downdip to where the coal is deeper," he added. "We have had as many as 10 wells hit peak rates of one million cubic feet of gas a day each."
Pipeline Demand
Because production from the Powder River coalbed methane play shot almost straight up for the last two years, pipeline capacity became a problem very quickly. At the time the play took off, Western's MIGC pipeline was the only line out of the basin and its capacity was maxed out in a hurry.
"It became apparent in mid-1998 that capacity out of the basin, which at that time was approximately 215 million cubic feet per day, would not be sufficient to accommodate the anticipated coalbed methane volume growth," Outlaw said.
But last year Western and KN/Devon completed two additional lines to carry production from the Powder River Basin. Western brought together several industry partners to develop the Fort Union Gas Gathering header.
The 24-inch, 106-mile pipeline, which runs parallel to the MIGC and delivers gas south to Glenrock, was completed in August. The new line has an initial capacity of 450 million cubic feet of gas a day and can be expanded to 700 million cubic feet daily.
Kinder Morgan/Devon completed its 24-inch Thunder Creek pipeline in the second half of 1999 as well, adding another 450 million cubic feet a day of transportation capacity from the basin to Glenrock. Both pipelines connect with the Colorado Interstate Gas Medicine Bow lateral, which was completed last November and delivers the gas to major interstate pipelines.
CIG's Medicine Bow lateral added 260 million cubic feet per day of new capacity, and expansions of Medicine Bow are planned at the end of 2000 and 2001, according to Outlaw. These expansions will bring the total downstream capacity from Glenrock to various markets to 780 million cubic feet per day, of which approximately 550 million cubic feet daily will be available for coalbed methane.
"It is highly likely, given the long-term volume expectations of the coalbed methane development, that additional take-away capacity at Glenrock will be necessary in 2002," Outlaw added.
Global Impact
The phenomenal success of the Powder River Basin coalbed methane play is sending reverberations all around the world.
"This play broke the coalbed methane mold and has had a tremendous impact internationally," Dea said. "Officials with the Gas Research Institute can't believe the number of inquiries they have gotten from people all over the world -- South America, Europe, Canada, just to name a few -- interested in learning more about the Powder River play.
"We have had some of the largest Canadian companies come down and literally go to school on what we've learned here so they can take that knowledge home and look at their own lease holdings, where they have quite a bit of shallow coalbed methane rights that have never been fully investigated.
"The Powder River Basin coalbed methane play has negated conventional coalbed methane wisdom," he continued. "This is not an analog to the San Juan. The true joy for any exploration geologist is to look at accepted paradigms and disprove them -- to ask themselves why others think something can't work and figure out ways to make it work.
"And because some explorationists were not willing to accept conventional thinking coal reservoirs all over the world will now get a second look."