A year ago, it cost the family-owned Kirkwood Oil & Gas a relative pittance to secure drilling rights in the Powder River basin, the lonely, scrubby corner of northeast Wyoming known mostly as a home to cattle ranches and coal mines. Today, it’s a different story.

Drilling permits on federal land that went for less than $1,000 an acre now fetch as much as $17,000, and the region has become one of the hottest prospects for new U.S. supply. Kirkwood has a lot more competition amid the sagebrush and rolling hills, including private-equity firms from Houston and big explorers like Chesapeake Energy and EOG Resources.

After a two-year slump in oil prices that led to a collapse in drilling, the Powder River basin’s oil industry is showing signs of revival. While mostly passed over during the U.S. shale revolution, the region will get a combined $600 million in new wells this year from Chesapeake, EOG and Devon Energy, and pipeline companies are drawing up plans for expansions. They hope to cash in on a geology that looks a lot like the red-hot Permian shale basin in Texas, but with land prices still a third of the cost.

“You’re starting to see some of the optimism return,” said Steve Degenfelder, a land manager for Casper, Wyoming-based Kirkwood, which owns about 30,000 acres in the Powder River region and 50,000 in the Rocky Mountains area. “You don’t spend that kind of money without planning to do a lot of drilling.”

A rebound in oil and gas could help ease the pain caused by the collapse in coal mining. The Powder River basin is the largest source of coal in the U.S., and the business has been the region’s dominant employer for decades. But local production slumped by 21% last year, eliminating hundreds of jobs, as the industry lost ground to cheaper natural gas and renewable energy.

While the region has been supplying oil and gas for decades, the plunge in prices that began in 2014 halted almost all drilling along a 300-mile energy corridor in the Power River area that runs north into Montana. As crude dropped as low as $26/bbl last year, there was just one shale-drilling rig operating in Wyoming’s Campbell and Converse counties, the heart of the basin, according to data compiled by Bloomberg.

Last week, with oil back up around $50, there were 11. That’s still down from 32 back in 2015, but analysts expect activity will keep accelerating like it has in the Permian basin, where companies such as Pioneer Natural Resources say they can break even with oil at less than $30. WTI, was trading around $47/bbl on Tuesday.

“If there’s an area where people haven’t scoured over it yet but there’s a lot of potential upside, it’s the Powder River basin,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New York. “These are prolific wells, there’s a lot of oil, and you’re starting to see signs that it’s repeatable.”

It’s still early days, with the optimism based on results from a handful of wells. Companies are just starting to apply new drilling techniques honed in other shale plays in recent years, and a lack of pipelines and other infrastructure means that, for now at least, local oil and gas sells at a discount to other basins, Pulikkan said.

More Spending

Still, explorers are gearing up to expand. Houston-based EOG doubled its Powder River leases to 400,000 acres in a $2.5 billion acquisition last year. The company plans to sink 30 new wells this year, a 50% increase over 2016.

Chesapeake, based in Oklahoma City, completed several new wells in the region this year and may add an additional drilling rig, CEO Doug Lawler told analysts on a May 4 conference call. The company says some of its Powder River wells can now break even at below $40/bbl.

In another sign of rising interest, Denver-based Meritage Midstream Services said on May 3 that it had bought Devon’s pipelines and other infrastructure in the region for an undisclosed sum, with plans to double capacity of a gas-processing plant and add 425 more miles of pipe. Devon, based in Oklahoma City, has half a million acres of drilling rights in the region and is moving a second rig into the basin to speed up development, Chief Operating Officer Tony Vaughn said on a conference call the same day.

“We expanded our position in the Powder at a time when the industry really didn’t understand the potential value there,” Vaughn said. “Now the industry has recognized that.”

Wells in Converse and Campbell are producing an average of almost 1,000 bpd in their first month, according to data compiled by Pulikkan and BI’s Will Foiles. That rivals the output of new wells in the Permian’s Midland section, although the Texas play tends to have better infrastructure and lower costs.

Cheaper Land

Like the Permian, the Powder River basin holds multiple, stacked layers of petroleum-soaked rock, allowing drillers to attack several targets from the same site. The region isn’t thought to hold as much oil and gas as the Permian, which is roughly twice as large. But it remains far cheaper than west Texas, where drilling rights have surged in the past year to as much as $60,000 an acre.

“Companies that can’t play ball at that price are looking at other areas that have some of the same characteristics,” Kirkwood’s Degenfelder said.

With Powder River coal slumping, oil and gas could be “if not the second coming, maybe at least a softening of the blow,” said Charles Mason, a petroleum economist at the University of Wyoming in Laramie. “Coal seems like it’s yesterday’s fuel, and we have gobs of natural gas, so maybe that’s where you should be banking if you’re the state of Wyoming.”

Source: www.worldoil.com

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