A recent study by Canaccord Genuity on the Niobrara shale states that it is only a matter of time until one group (or more) finds itself on top of a delicious Niobrara treat.
The US has succeeded in providing energy companies with a plethora of rich, delightful shale sweet spots that have been continuing to satisfy even the greediest sweet tooth in the industry. The trendiest concoction of them all, the Niobrara shale, continues to harness a good portion of the attention and it seems it isn’t going to mellow out anytime soon. Taking into account recent lease sales and property acquisitions being enjoyed by a variety of companies, it will be exciting to see which one has stumbled across the golden ticket of this Rocky Mountain region.

Ahead of the gameWhile the first discovery in the Niobrara runs all the way back to 1919, a surge of interest occurred approximately 20 years ago when Union Pacific Resources Group (UPRG) developed Silo field with early horizontal-well technology. UPRG completed numerous horizontal wells in the shale until it was purchased by Anadarko Petroleum Corp. in 2000 (Anadarko currently owns 500,000 net acres in the play). UPRG’s most promising well, the #1 McGahan 21-5, drilled in Silo Field, was a harbinger of the Niobrara’s current potential.

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Intrigued by the success of the decades-old McGahan well, EOG Resources was the first to revisit the Niobrara formation with modern horizontal drilling and multistage fracturing technology. And, it won big. EOG bought substantial acreage (400,000 acres-worth, to be exact) at a prices of US $35 per acre. The company’s opening project in the region took place in 2007 across 100,000 acres of Colorado’s North Park Basin.

To date, EOG has reported progress on five wells in its DJ Basin program, where it has shifted its activity. Its first DJ well, #2-01H Jake, produced 50,000 bbl of oil in its first 90 days on production with an average rate of 555 boe/d. EOG’s production rates for its three completed DJ wells range from 730 to 1,558 b/d of oil, but primary blame can be attributed to the Jake well for starting all of the commotion.

Land positions snapped up“Prior to the [Niobrara craze], these areas were getting from $40 to $70 per acre. You can imagine what prices have jumped to now,” said Steven Degenfelder , senior vice president of exploration, Double Eagle Petroleum, in an interview with the Casper Star-Tribune.

Most recently, the state of Wyoming held a mineral-lease sale where officials were able to auction off $42 million worth of property to hungry bidders, according to the Casper Star-Tribune.

Big Bear Oil & Gas proved to be the auction’s big spender as it snapped up a 314-acre parcel with a bid of $3,200 per acre. The company also bought a wide array of additional properties, many that carried a per-acre price at or above $2,000. However, while some areas drew in a substantial amount of money, there were some parcels that only sold for $1 to $3 per acre.

“[The range in prices] were all geologically based on the best educated guesses we have [as to what areas hold the most potential],” said Degenfelder.

At the end of the auction, there were only 11 state leases that remained without bidders. The mineral leases that were sold will expire in five years and if oil and gas is found on any of the leased prospects, the additional severance taxes and royalties are applied that will be distributed between the federal, state, and local governments.

“That’s the name of the game - everyone benefits from actual production,” said Harold Kemp, assistant director of Wyoming’s mineral leasing and royalty compliance division.

Worried your company missed out on the action? Don’t be – Wyoming has already scheduled two additional mineral lease sales for August 4th and November 3rd of this year. Information about the two sales will be provided on the Wyoming state Web site, www.wyoming.gov.

In addition to EOG Resources and Big Bear Oil, a plethora of other companies are vying for the big find. Other big stakeholders in the Niobrara include the following:
• Noble Energy – currently holds 751,000 acres in and around Wattenberg, Lilli, Grover, and Silo fields. Its prospects in this region are projected to be its driving force in the onshore game for the next five years
• Cirque Resources LP – a private E&P firm that has 400,000 net acres in two Niobrara play areas, one near Silo Field. Cirque is currently in the process of several large-scale regional studies on its acreage.
• PDC Energy – after a recent addition of 5,500 acres, the company now holds 70,500 Niobrara acres. It plans to drill its first horizontal well in the fourth quarter of this year and continue drilling other wells into 2011 and 2012.
• Samson Oil & Gas – Samson recently announced it reached agreement to sell some 24,000 acres of its 40,000-net-acre stake in the Niobrara to a large independent for a final price between $61 and $79 million in cash. Samson’s position is in Goshen County, Wyoming, north of EOG’s acreage.

Is Niobrara the real deal?

Many companies, including EOG, are following trails of successful wells. Wattenberg and Silo fields and areas in between are seeing substantial amounts of permitting activity and preliminary drilling results remain promising.

But with all of the hype surrounding this shale, some are wondering exactly how valuable is the Niobrara region expected to be?

According to a recent report by Irene Haas, managing director, Canaccord Genuity, economic estimates of the Niobrara shale are promising. Assuming a type curve with an initial daily production rate of approximately 475 boe and a gross estimated ultimate recovery of 400,000 boe, an average $3.5-million horizontal Niobrara well will generate an internal rate of return of 66% and after tax PV-10 of $3.1 million (33% tax).

Another factor that supports Niobrara potential is a good initial track record. According to Haas, the formation takes to the stimulation process like a champ and the drilling projects that have already been completed went without hitches. Recently drilled wells have also carry an industry-pleasing time frame – on average running from 18 to 20 days. In addition, the area is extremely well mapped, making it easy to predict the gross thickness and lateral extent of the shale.

Any way you slice it when you take history and recent projects into account, the Niobrara is a promising region that will offer up numerous sweet spots to any interested party – it is just a matter of who finds them first.