Oil rigs dotting the Front Range have been lightning rods of controversy and targets of protests, lawsuits, ballot measures and now an expected push at the statehouse for new regulations. But behind those drill rigs is a multibillion-dollar network of processing plants and pipelines that also could be affected.
This part of the industry is called the “midstream,” and its job is to process oil and gas and send them on to national and international markets, primarily through interstate pipelines.
While drill rigs move from site to site and ramp up or down in a matter of months, planning a single midstream project can take two years or more. “These are long-term investments. You are expecting a pipeline to be in service for a very long time,” said Brian Jeffries, a vice president at Outrigger Energy, a gas processor. “You don’t build it and hope they will come.”
More than $10 billion has been invested in pipelines, pumps, compressors and gas-processing plants in Colorado, a sprawling web built to handle record amounts of oil and gas from Front Range wells.
The defeat of Proposition 112 — the November ballot measure to require 2,500 feet between oil and gas operations and homes, public places and natural features — came as much a relief to midstream companies as it did to drillers.
On an earnings call Nov. 6, the day of the vote, Wouter van Kempen, CEO of DCP Midstream, one of Colorado’s largest gas processors, told financial analysts, “We’ve been proud to join Colorado’s industry (and) our state’s top leaders from every political background in a remarkable effort to defeat this draconian ballot measure.”
The day after the setback measure was defeated, on a 56 percent to 44 percent vote, the stocks of six of the biggest midstream companies in Colorado jumped.
Nevertheless, analysts say that neither the midstream nor the industry as a whole are out of the woods since 1.1 million people voted for the setback measure, and the Democrats, who have been supportive of local efforts to manage oil and gas development, now control the statehouse.
“There is still this overhang,” said Stacey Morris, director of research for Dallas-based Alerian, a market consultant focused on companies that move, process and store oil and gas. “What’s going to happen next? There is a ton of uncertainty.”
Colorado Rising, the grassroots group that sponsored Proposition 112, has sent a letter to Gov. Jared Polis calling for a drilling moratorium until a comprehensive health assessment is done and new rules, based on its findings, are adopted. The group says it has also not ruled out going back to the ballot box in 2020.
Polis, who has said he favors local governments having more of a say in oil and gas development, has met with CEOs of oil and gas companies and KC Becker, a Boulder Democrat and House speaker who in her opening speech to lawmakers highlighted the need to pass oil and gas legislation on health and safety and local control issues.
“Oil and gas is gangbusters in Colorado and happening in more and more urban and suburban areas,” Becker said during a Dec. 19 conference call with Baird & Co. investment managers. “So, I think that this current legal framework really was written with different circumstances in mind.”
“I’m not out to screw oil and gas”
The finances of the midstream companies are tied to the volumes of oil and gas produced by drillers, known as the upstream sector. The more the midstream processes and ships, the more money it makes. A decline in drilling could risk a drop in profits in an overbuilt system.
And while drillers can cut operations, close wells until prices improve and move drill rigs to other states if need be, midstream assets are pretty much stuck in place and need to recoup their investment over decades.
“Typically, midstream projects aren’t built on spec,” Morris said. “They have long-term contracts and long-term exposure.”
The most expensive of the horizontal wells being drilled in Colorado runs around $6 million, while the price tag on the 550-mile Saddlehorn-Grand Mesa pipeline — which went into service in 2016 and carries oil from Platteville to Cushing, Oklahoma — was $650 million.
“The question is whether or not the Democratically controlled House and Senate in Colorado, along with a Democratic governor who has been antagonistic to the oil industry in the past, will legislate difficult regulations,” said Will Fleckenstein, a lecturer in the Petroleum Engineering Department at the Colorado School of Mines.
“Gas processors work on a variety of contracts, but typically there are some volume clauses, and those would be impacted by lower production,” Fleckenstein said. “Pipelines also typically will have some volume clauses, with possible long-term commitments by producers, who may claim force majeure based on regulatory changes.”
Yet, both industry representatives, local officials, legislators and community groups say they are seeking a solution to the conflict.
“I’m not out to screw oil and gas,” Becker said during the conference call, a transcript of which was obtained by The Sun. “I think oil and gas can operate safely and profitably in Colorado while also considering neighborhood impacts, air quality impacts, so I don’t think saying ‘Hey, we want to decrease emissions’ means we’re screwing the industry.”
Lynn Peterson, the president of SRC Energy, a Denver-based driller, said he listened to Becker’s call and is taking a wait-and-see approach to what happens at the legislature. “I’d like to just see a little bit of patience on everybody’s part. We are all working and talking,” he said in an interview. “I think we can find a soft landing spot that will work for everybody.”
Controversy often flows along pipelines
Midstream, particularly building pipelines, comes with its own set of controversies. There was a national battle, going all the way to the White House, over the 1,180 mile, $8 billion Keystone XL pipeline to carry crude oil from Canada to Texas. The Obama administration blocked the pipeline. The Trump administration approved it.
The $3.8 billion Dakota Access pipeline, running nearly 1,200 miles from North Dakota to Illinois, sparked months of protests led by the Standing Rock Sioux Tribe, which said it opposed the route through sacred ancestral grounds and that it posed a risk to drinking water.
Closer to home, a proposal by Discovery DJ Services to put a gas plant — which operates round-the-clock — in a rural area near Keenesburg touched off a protest by local residents that persuaded the company to switch to a more industrial site in Weld County.
In 2017, an explosion on a gas pipeline in Weld County killed one worker and injured two others. An accident at a compressor station in La Plata County in 2012 also killed a worker and injured two.
To bring natural gas from the wells to the processing plants, a web of smaller gathering pipelines, or flowlines, has been built over decades. DCP Midstream operates more than 3,500 miles of gathering lines and Western Gas Partners has 7,414 miles, according to filings by the companies.
It was a leak in an old flow line that led to the explosion and fire in a home in Firestone in 2017 that killed a homeowner and his brother-in-law and severely injured his wife. In the wake of the accident, the Colorado Oil and Gas Conservation Commission approved new oversight regulations for flowlines.
One thing that the regulations don’t do, despite lobbying from grassroots groups and some local officials, is provide public maps of the location of the lines. A Democrat-sponsored bill to require that did not make it out of the state House of Representatives last session. It was one of seven oil and gas bills, sponsored by Democrats, who now control both House and Senate, to stall in the last two years.
The legislative and regulatory uncertainty comes at a time Colorado midstream has been on a building boom trying to keep up with the state’s ever-increasing production. Oil output was a record 477,000 barrels a day in August, up 26 percent in a year, according to federal data, and production is on a pace to surpass 2017’s record 132 million barrels of oil.
Oil drives activity in the Denver-Julesburg, or DJ Basin, which runs from south of Colorado Springs into southern Wyoming. But mixed with that oil is natural gas, and in 2017, gas production reached 1.7 trillion cubic feet, the second highest year on record after 2012, according to state data.
3.7 billion cubic feet of gas was flared last year in Colorado
For the last few years, there wasn’t enough pipeline capacity to handle all that gas, leading to a spate of new plants coming online in 2018 and 2019, said Erika Coombs, a senior analyst with Denver-based energy industry consultant BTU Analytics.
Having adequate processing capacity feeds all the way back to the wellhead. “If you can’t handle the natural gas, you may have to shut in the wells,” Fleckenstein said. “In the DJ Basin, the drill pads are like little offshore platforms on land, and if you can’t move off location, pressure builds on-site.”
The alternative is flaring, or burning, the gas at the well. In North Dakota’s Bakken formation, a lack of processing led to flaring of as much as a third of all the gas.
Being closer to gas markets and with more infrastructure, Colorado has seen less flaring, Fleckenstein said. But in 2018, with gas processing capacity still pinched, nearly 3.7 billion cubic feet of natural gas was flared, according to COGCC data.
“All parts of the industry have to work, the producers have to produce, the processing plants have to be there, the pipelines have to take it away, and the fractionators and refiners have to process it,” said Don Baldridge, president of marketing and logistics for DCP Midstream.
DCP in August opened its 10th Colorado plant, Mewbourn 3, in Weld County, at a cost of $395 million. It has plans for two more plants. Baldridge said DCP has about $4 billion in Colorado assets.
Western Gas Partners, created by Anadarko Petroleum Corp., Colorado’s biggest driller, has about $3.5 billion in assets and plans to spend another $500 million, according to Gennifer Kelly, Anarako’s vice president for midstream and marketing. The company has a new gas plant under construction in Weld County.
While the natural-gas bottleneck is easing, keeping up could be a challenge. “Our view is that in the future, it could be getting tighter if the DJ Basin continues to develop at the rate it has been developing,” Kelly said.
The more than two dozen gas-processing plants in eastern Colorado separate the gas, mainly methane, which is used as a fuel, from water, impurities that can include mercury and benzene, and liquid hydrocarbons, including ethane propane, butane and pentane.
About a quarter of the dry gas produced in Colorado is used here, DCP’s Baldridge said. The remaining gas is shipped through five pipelines to Nebraska, Kansas, Texas, Oklahoma and then on to Midwest and Southwest markets.
The natural gas liquids, or NGLs, have their own markets. Ethane, for example, is used in making plastics, and they are carried by three pipelines to either Cushing, Oklahoma, Conway, Kansas, or Mont Belvieu, Texas — hubs for fractionation, which like oil refining, divides the liquid into its separate products.
While the region is coming out of a period of natural-gas constraints, there has also been a pinch in capacity to move NGLs. “The pipeline space is tight,” Coombs said.
One of the three pipelines built to carry oil out of Colorado, the $647 million, 527-mile White Cliffs pipeline, which went into service in 2009 and was expanded in 2014, is now being converted to carry NGLs at a cost of more than $60 million.
That will leave two pipelines to carry Colorado oil — the Saddlehorn-Grand Mesa and the 760-mile Pony Express that runs from Guernsey, Wyoming, through Colorado to Cushing.
There is still plenty of capacity to move oil, as well as natural gas and soon NGLs, out of Colorado, Jeffries said. “I don’t think an additional pipeline would get commercial support. To get out of the Rockies region, we are in good shape.”
Staff writer John Frank contributed to this report.
UPDATED: This story was updated at 11:35 a.m. on Jan. 10, 2018 to correct the amount of natural gas produced and flared in Colorado in 2017.
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