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Anadarko (APC) recently announced that its operations in the Niobrara made another possible discovery below a former bombing range in Arapahoe County, Colorado. First production was reported at 200 boe per day, though this trailed to 127 boe per day after the first 90 days of production. Anadarko Director of External Communications John Christiansen indicated the company will be drilling more test wells to obtain an estimate of the potential oil and gas reserves in the area.

Some are crediting EOG Resources (EOG) with inaugurating the Niobrara, in late 2009, and now Anadarko and competitor Noble Energy (NBL) are both bullish on the play. Total reserves in the area are unknown, but Anadarko is indicating it will spend $1 billion a year developing and extracting from the area. Already the company is producing an average of 80,100 boe per day from its Niobrara and Codell acreage, and has seven horizontal rigs operating with plans for three more to be added this year. For its part, Noble expects to invest $1.2 billion this year on its Niobrara exploration and production. Ted Brown, Senior Vice President, Northern Region for Noble, recently indicated the company will continue to spend between $1 and $1.5 billion a year on the Wattenberg specifically.

Earlier this month Anadarko divested its working interests in the deepwater Gulf of Mexico Pompano field to Stone Energy (SGY) in a deal valued around $67 million. Net production transferred is estimated at 1,000 boe and 3 mcf per day. Stone already owns working interest in the Pompano field, so this deal adds to its existing footprint in the area. This is not a major deal for Anadarko, but I believe that the decision to divest was made to free further resources for the Niobrara and other on-shore plays. This shores up Anadarko for a major run on shale this year.

Pro-E&P Moves by the BLM Good for Anadarko

Anadarko recently received approval from the U.S. Bureau of Land Management (BLM) to drill up to 3,675 gas wells in eastern Utah on federal lands in the Uinta Basin in the Greater Natural Buttes. U.S. Interior Secretary Ken Salazar indicated that the project is expected to produce over 6 tcf over its lifetime. Utah Senator Orrin Hatch also praised the deal, though he noted that “much more has to be done to open up more of our state’s land to development.”

The BLM does not always make it easy for the energy industry. It recently proposed a rule that would require companies to disclose the chemicals used in fracking operations if those operations took place on federal or Indian land, and also proposed strict standards for drill construction and water management. At the same time, the BLM is promising to “implement new automated tracking systems that could reduce the review period for drilling permits by two-thirds and expedite the sale and processing of federal oil and gas leases.” The new system is expected to be online by May 2013, and will greatly expedite the current permitting process, which is almost completely paper based. The BLM is also taking steps to improve the leasing process by standardizing the workflow among its many offices.

These steps are all crucial to Anadarko’s business, as Anadarko drills on federal lands on multiple plays. Besides the deepwater Gulf of Mexico and the project in Utah noted above, Anadarko has operations on federal property in the Bakken and the Niobrara, among others. Anadarko is able to do this mostly through improved technology. According to a recent report from the American Exploration and Production Council, fracking technology advanced over the past few decades to the point where the average well site footprint is now 70% smaller than it was in 1970, and a single well is now capable of reaching over “60 times more below-ground area than possible previously.”

Another mark in Anadarko’s favor are its positive public relations efforts. I think Anadarko’s public relations regarding its fracking activities are among the best in the industry. An information sheet Anadarko prepared, Questions and Answers Regarding Fracture Stimulation, is widely distributed and explains all of the steps that Anadarko undertakes to ensure the safety of its wells, with a specific focus on water protection and conservation. Anadarko also points out that less water is used in deep shale natural gas fracking operations per mmbtu than many other energy resources, including nuclear. Anadarko also voluntarily joined the Frac Focus Chemical Disclosure Registry, where it discloses the materials used on each of its individual wells. Others on the registry include Apache (APA), Devon (DVN), and Occidental Petroleum (OXY).

Outlook

Late last month Standard & Poor’s Ratings Services raised its outlook on Anadarko from stable to positive and affirmed Anadarko’s “BBB-” credit rating. In the note, Standard & Poor’s indicated “the positive outlook reflects our expectation that credit protection measures will improve over the next 12 months,” which I believe indicates Standard & Poor’s is strongly inclined to award Anadarko a credit rating upgrade. It appears the major item is, once again, the Environmental Protection Agency/Tronox/Kerr-McGee litigation, which casts a shadow of uncertainty over Anadarko. Standard & Poor’s is predicting the conclusion to the trial may come as early as August, but I think it is more likely that the trial will stretch into the fall.

Anadarko just recently dipped to a new 52-week low, and trading volumes almost doubled the norm for Anadarko. Currently around $59, Anadarko has a price to book of 1.5 and a forward price to earnings of 11.5. Compared to two of its strongest peers, this price to book is extremely attractive. At around $81 per share Oxy has a price to book of 1.7, and at around $92 EOG has a price to book of 1.9. Apache and Devon are trading at price to book levels similar to Anadarko’s, not surprising given these three stocks tend to track one another.

As it is, I agree with the Standard & Poors’ outlook for Anadarko, and I think that once the current litigation is settled Anadarko does not have any predictable barriers to a strong upswing heading through the second half of the year. I am setting a price target for Anadarko at $120 by 2014, given its string of successes and strong balance sheet, as it leads the industry in shale gas booms across the country.

 

original article

By: J. Thomas Ranken

www.wacleantech.org

Is natural gas the new next big thing? It is called a revolution in energy and a game-changer. Daniel Yergin claims that “the rapidity and sheer scale of the shale breakthrough—and its effects on markets—qualified it as the most significant innovation in energy so far since the start of the twenty-first century.” The President has proclaimed that the United States is “the Saudi Arabia of natural gas.” It is “the energy equivalent of the Berlin Wall coming down,” says Robin West, CEO of PFC Energy.

They may be right. Over the course of the next several years, we are likely to witness a dramatic evolution in energy. It will not be overnight, but it is likely that there will be steady movement away from coal and petroleum and towards natural gas.

Natural Gas Supplies are Up Dramatically

The statistics are intriguing. From 1990 to 2010, global proved reserves of natural gas have increased by 49 percent. Because of changes in technology, more can be expected to be found. The U.S. is one of the world’s top five producers with large reserves in New York, Pennsylvania, Texas, Montana, and North Dakota. It is likely the U.S. will become a net exporter of natural gas early in the next decade—a possibility that was inconceivable only a few years ago.

This increase in natural gas supply has put pressure on prices. In early 2011, MIT professor John Deutch noted that, “…oil is three times as costly as natural gas for a given amount for energy, and that is almost double the ratio that has prevailed over the past twenty years.” In early 2012, the U.S. Energy Information Agency predicted that with increased production, average prices will remain below $5 per thousand cubic feet through 2023.

Technical Innovations

Two innovations are responsible for much of the increase in natural gas supply: Horizontal drilling and hydraulic fracturing (or fracking). These developments have allowed drillers to economically harvest gas that was difficult and too expensive to obtain. While these are not new technologies, they have become vastly more cost effective and much more widely utilized in the past decade.

• Horizontal drilling achieved commercial viability during the late 1980s. Horizontal drilling is the process of drilling a well that begins vertically or on a slant and then angles to a target location.

• Hydraulic fracturing (or fracking) is a technique that was first used in the 1940s. It injects large amounts of water, under high pressure, combined with chemicals and sand, into shale. This fragments underground rock, creating pathways for otherwise trapped natural gas to flow through to a well.

Potential Benefits and Concerns

Increases in the supply and use of natural gas present both benefits and concerns.

Benefit—Improved Air Quality and Reduction in Greenhouse Gases. The use of natural gas—particularly as a replacement for oil and coal—has compelling environmental advantages. Compared to coal-generated electricity, natural gas reduces nitrogen oxide emissions by 80 percent. Natural gas emits about 29 percent less carbon than oil and 453 percent less than coal. As a transport fuel, natural gas emits about 20-30 percent less lifecycle carbon than oil. In electricity generation, compared to coal, natural gas reduces emissions of sulfur dioxide by 100 percent.

The MIT study, “The Future of Natural Gas,” concluded that “substitution through increased utilization of existing combined cycle natural gas power plants provides a relative low-cost, short-term opportunity to reduce U.S. power sector CO2 emissions by up to 20 percent, while also reducing emissions of criteria pollutants and mercury.”

Concern—Drilling. Natural gas recovery has been widely criticized for the impact that drilling has on the environment. These concerns fall into three basic categories: Polluted waste water, the potential for earthquakes, and the risk of contaminating drinking water.

• Polluted wastewater. The fracking process generates large amounts of dirty water. Water is forced underground, along with sand and chemicals, to free natural gas for extraction. These waters are then extracted. This is a significant concern and waste waters need to be handled properly and disposed of safely. “Some operators have conspicuously misbehaved and some regulators have fallen short,” says the Rocky Mountain Institute’s Amory Lovins, “making fracking controversial even in normally drilling-friendly places like Texas and western Colorado.”

• Earthquakes. Earthquake concerns are raised both from the fracking process and from disposal of waste waters pumped underground. A Washington Post editorial suggests that “more study and probably more regulation will be needed” as more experience accumulates. But they note, “Of the 144,000 storage wells of this type in America, only a tiny fraction have been linked to earthquakes.”

• Contaminated drinking water aquifers. Critics warn that fracking is contaminating drinking water aquifers. Methane has been found in water wells in gas producing regions, but, according to Yergin, this could occur for a number of reasons (improperly sealed wells or naturally occurring shallow layers of methane, for example). The industry argues that fracking occurs a mile or more below drinking water aquifers and is separated from them by thick layers of impermeable rock. Further, they note, there are more than a million wells where fracking has been employed in the United States dating back six decades.

An MIT study concludes, “The environmental impacts of shale development are challenging but manageable. Research and regulation, both state and Federal, are needed to minimize the environmental consequences.” Not everything is known about these issues; they require continued scientific monitoring and research. As more experience and knowledge is attained, more regulation and oversight may be necessary.

Benefit—Energy Security. Increased utilization of natural gas may reduce our dependence on imported oil from unfriendly sources. While this is not a total solution, “the past image of the US as helplessly dependent on imported oil and gas from politically unstable and unfriendly regions of the world no longer holds,” (says) John Deutch.

Benefit—Impact on the Economy. There can be little doubt that a significant reduction in the export of U.S. dollars to foreign nations to pay for energy imports will be a positive development. It is likely to reduce the nation’s trade deficit and enhance the value of the dollar. It is likely that new jobs and investments will develop in the creation of enhanced energy infrastructure to support growing utilization of natural gas. In Washington, there are several examples developing:

• WaterTectonics is an Everett-based company that specializes in water cleaning systems including electrocoagulation treatment, chemical treatment, and automated pH adjustment. The company has seen significant growth in the treatment of flowback and produced water in natural gas extraction.

• World CNG is a Kent, WA-based company specializing in the aftermarket conversion of light- and medium-duty passenger and cargo vehicles to use compressed natural gas instead of conventional gasoline or diesel.

• HotStart is a Spokane Valley company that creates engine heating devices in markets including oil and gas. Much of the company’s growth has been in delivering large pipeline pump engine heating solutions that significantly reduce wear and tear.

Concern—Alternative Energy. Juliet Eilperin of the Washington Post wrote recently, “Perhaps the biggest force working against not just Solyndra but clean energy in general is this: Because natural gas has gotten so cheap, there is no longer a financial incentive to go with renewables.” Investor interest, at least for the moment, is moving in a new direction.

Conclusions

Is natural gas the next big thing? There are few certainties in forecasting, but natural gas looks big. Overall, this is a good thing, albeit with legitimate concerns. There are three reasons to move to new sources of energy: Environmental, economic security, and national security. Natural gas may be environmentally beneficial. It is certainly an improvement to U.S. economic and national security. If it can ultimately provide a bridge to a cleaner, more efficient energy future—and is regulated appropriately—it will indeed be a boon to the world.

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