Navajo Reservoir gas drilling

Economics dictate investment decisions

When WPX Energy announced last week its decision to postpone a plan to begin a major drilling operation into the Mancos Shale near Allison, the fundamental reason was that which determines all such decisions: economics.

With a glutted market having drawn natural gas prices to low levels, it simply does not make sense for the company to invest in extracting the gas here when others of its plays are producing plentifully. That decision, while unsettling in its impact on the good-paying jobs the drilling would have brought – and their resultant economic benefit to the region – is one that shows quite clearly the factors that drive companies’ operational priorities. In this, as in most cases, it is above all else one of bottom line.

Of lesser importance, as this case shows, is the effect that regulations have on energy companies’ drilling decisions. WPX says that it will focus on areas where its production is established – including a gas field in Northeast Colorado, as well as those in North Dakota and Pennsylvania. Each of these sites is significantly larger a gas reserve, and extracting the resource has proven cost-effective. None is in a rule-free setting.

Instead, companies must calculate a relatively simple equation: the cost of getting the gas out of the ground against the price it will command on the market. In the case of the Mancos Shale, there are a number of unknowns associated with extracting the gas it contains, given that the WPX project was to be the first foray into the formation. The massive layer lies 5,000 feet underground – far deeper than the wells that access gas in the San Juan Basin’s Fruitland formation, which range from 550 to 4,000 feet deep. At such a depth, the process by which the gas is recovered requires more drilling as well as significant amounts of hydraulic fracturing fluids to loosen the fuel trapped in the shale layer. The cost/benefit analysis of embarking on such an effort requires a higher market price than natural gas is currently fetching. That calculation is further reinforced by productive fields in other regions.

But the complexities of accessing the Mancos Shale gas raise another concern that San Juan Citizens Alliance and Wild Earth Guardians rightly pointed out in their appeal of the Bureau of Land Management’s preliminary approval for WPX’s project. The formation, as its name indicates, is rich in shale gas – a close cousin to natural gas, but one that is recovered in a slightly different manner. As such, the environmental assessments done on the impacts of coalbed methane gas recovery are not necessarily adequate to cover the shale gas extraction process. As WPX found, the costs of drilling for the gas did not pencil out for now. The BLM should be similarly conscientious in its calculations of the environmental costs and not assume that all gas extraction wears the same clothing.

For now, though, the simple fact for WPX is that the project is not in the best interest of the company’s bottom line. As it waits for gas prices to rise to the point where drilling in the Mancos Shale become profitable, WPX and the BLM can take a closer look at just how that process will unfold, how it differs from current practices and what impacts it will have. The evidence gathered in the interim will make the math easier and the project’s details and impacts more transparent. That can only benefit WPX and the public resources at stake in its operations.