The big news this month is the expiration of permits 60746-60750 & permits 60765-60767 for the State Excelsior extension pads just north of M-72 in Kalkaska Michigan. Calgary based EnCana Corporation originally received these permits in 2013 but they transferred to Houston, Texas based Marathon Oil Corporation when Marathon acquired EnCana’s Michigan assets in 2014. Each of these 8 HVHF permits that expired were estimated to require 23,100,000 gallons of water per completion. All told, that’s approximately 185,000,000 gallons of Michigan freshwater that will not be consumed because these wells will never be drilled.
The expiration of these 8 permits is significant because it’s more conclusive evidence that HVHF in Michigan’s Collingwood formation is not economical for operators between $3/mcf & $4/mcf selling prices. Even if natural gas prices were to return to their 2008 level of $7.97/mcf, the highest price in US history, Collingwood wells would not be profitable wells by a long shot. The energy produced from the 7 wells that did make it to production from the Collingwood formation have demonstrated themselves to be an uneconomical use of Michigan’s freshwater resources for energy production. But, the uneconomical use of Michigan freshwater has played no part in why the wells will not be drilled: the wells will not be drilled because they are not profitable for the operator. If the wells could make the operator money, they would be drilled and completed with Michigan freshwater.
Initial excitement about drilling the Collingwood began in 2010 when the Pioneer 1-3 HD1 well was drilled. The Pioneer well lived up to its pioneer name, as it was the first well of its kind in Michigan history and broke Michigan into the modern era of hydraulic fracturing. It had peak production of 3.2 million cubic feet of gas in a single day and required roughly 7 million gallons of Michigan freshwater to complete. Pioneer’s initial production numbers, recorded in April of 2010, were unprecedented in both freshwater consumption and natural gas produced for a Michigan geologic formation. No one knew what to make of this new style of well in Michigan or this newly tapped formation called the Collingwood – it was brand new to everyone. Leasing activity at the State auction spiked to its highest level in Michigan history immediately after Pioneer’s completion in May 2010 bringing in $178 million to State coffers. No one, including the operator, would have thought we would look back on this well as a dry hole, but that’s how the well would be characterized by Chesapeake LLC lawyers in a Cheboygan courtroom years later in 2014.
In 2010, the outlook seemed to indicate hundreds of wells would be drilled targeting the Collingwood. EnCana’s original investor PowerPoint presentation mentioning the Michigan play indicated they were going to drill up to 1,700 Collingwood wells with expected peak production of 8 million cubic feet of gas per day per well. It turns out EnCana was fooling themselves as well as their investors. Subsequent investor presentations showed fewer and fewer wells projected to be drilled in Michigan each time EnCana made a PowerPoint presentation. It wasn’t long before EnCana did not even list their Michigan assets in their investor presentations or mention them in annual shareholder meetings.
EnCana probably figured out their Michigan investment was a bust in 2012. Our organization, not privy to insider information, struggled to figure out the same as it is harder and takes longer for us to gather substantive documents through FOIA protocol. We second-guessed ourselves sometimes as EnCana moved forward with their last attempt, the Westerman 1-29 HD1 well, and filed applications for new wells like the ones that just expired this past month. It was not necessarily easy to forecast EnCana’s next moves when they didn’t want to and weren’t going to let on that the Collingwood was a bust. EnCana wanted to sell their assets for the best price they could get and it made good business sense for them to put up an eminence front to keep people guessing.
If EnCana admitted their Michigan assets weren’t worth much, it would only make things worse for them. Because EnCana had to keep a poker face to get the best price for their Michigan assets and had to give people the impression they would continue to drill by pulling more permits and leasing more land, it might be difficult for some people to understand why we feel so confident that activity in Michigan’s Collingwood formation is over. Some people still think today that the Collingwood might get drilled and fear HVHF might still proliferate in Michigan. We need only to look at the numbers to support the reason why RMP does not believe this to be true and why every action we have seen over the past three years, like the expiration of these 8 permits this month, supports our prognosis for the Collingwood. As we have said before, always follow the money.
Why is RMP so confident that EnCana’s Collingwood exploration has been a financial failure?
Doug Hock, a spokesman for EnCana in Michigan (and the USA), in the first quarter of 2014 said his company had invested over $230 million dollars in Michigan over the past five years. His statements came as he was under fire for criminal charges filed by Michigan Attorney General Bill Schuette alleging that Chesapeake LLC and EnCana colluded to engineer a drop in lease prices from the approximately $1,500/acre price in the May 2010 lease auction to under $40/acre in the November 2010 auction less than five months later. Emails were exchanged between top executives in both companies outlining where each would bid on acreage as to not “bid up” the other company. Both companies’ actions seemed to follow what was allegedly outlined in the emails. The goal of their alleged collusion was to not bid on the same parcels of land and thus artificially (& illegally) keep the lease prices down. It worked, the State of Michigan as well as Michigan landowners were cheated out of millions of dollars when lease prices fell a staggering 97% in a span of just five months.
When Doug Hock mentioned the $230 million number, it finally provided an opportunity to try to figure out EnCana’s financial position in Michigan with regard to what was spent vs EnCana’s revenue. By sending an FOIA request to the MDNR along with a $45 fee, RMP received copies of the remittance checks from EnCana’s production wells. With remittance advices in hand, approximate revenue generated from the 6 wells EnCana currently has on production and the 4 off production could be calculated. As of the date of this publication, production reporting is current though March of 2015. RMP approximates that EnCana’s Collingwood wells have generated nearly $32 million in revenue through March 31, 2015 in aggregate from oil, NGLs, and dry gas. Because we the taxpayers own the surface land and the hydrocarbons that EnCana is selling, the State of Michigan gets a cut of approximately $5.3 million of that approximately $32 million. That means all of the Collingwood wells drilled by EnCana to date need to generate more than an additional $200 million in revenue before they would create a single penny of profit. We don’t know what Marathon paid EnCana to buy these wells, but we do know they are unprofitable by a long shot for anyone attempting to drill & complete one. Here is a breakdown of what we estimate the wells have generated in revenue through March of 2015 based on MPSC production figures and check stub pricing from FOIA request:
Even if revenue is recalculated using the highest dry gas prices in United States history ($7.97/mcf in 2008), the wells would have only generated about $45 million through March 2015. RMP used an NGL average rate of $29.75 for the above approximations and NGLs represented about 1/3 of total revenue. The NGL rate could have upward variability toward a $45/bbl or $50/bbl ceiling. If the wells maintained their current rate of production and we used the highest prices in United States history they would still need about a decade just to break even. But, production does not stay steady; it’s constantly falling off over time. It is a very safe assumption to say these wells will not only never break even, but they won’t even come close; even at an unrealistic dry gas price of near $8/mcf and an NGL price between $30/bbl & $45/bbl.
HVHF continues to generate interest in Michigan but it is waning for reasons outlined in this and every month’s edition of the MOGM. HVHF is proving to be an uneconomical use of Michigan’s freshwater natural resources as demonstrated with the data we have collected. Michigan natural resources owned by Michigan tax payers should be used to help us get lower cost energy that does not waste or threaten 20% of world freshwater reserves unnecessarily. Tell your legislators and governor that we want jobs, low cost energy, sustainable energy, and energy independence and none of those things are happening as long as we continue to permit HVHF wells and allow waterflooding for EOR of oil. These statements are not environmental radicalism, this is just common sense supported by objective non-partisan data.
The Collingwood is not the only newly targeted formation that has been demonstrating itself to be an uneconomical use of natural resources in Michigan. The A1 Carbonate, a formation that also was not targeted until roughly 2010, is proving to be uneconomic for creating energy for Michigan consumers and jobs for Michigan workers. We have seen operators swing and miss in the thumb area of Michigan, Fowlerville, Lansing, and Oceana county while targeting the A1 Carbonate formation, yet permits continue to be issued. Michigan can do better for its citizens by not allocating tax revenues toward oil exploration administration , tax abatements for oil exploration, and appropriating millions of dollars of general fund money toward environmental remediation because of BTEX contamination of ground water. Michigan can use its natural resources smarter to become energy independent, stop putting garbage in landfills, and use our available resources to build better roads or invest in the manufacture of cleaner forms of energy that provide Michigan workers long term well paying jobs.
We still continue to watch new permitting activity in Grand Traverse county by a company called Wyotex targeting the A1. But, Wyotex has yet to break ground on any of the wells they have been permitted to drill; most likely for the reasons we continue to outline in our MOGM. We will continue to see if WyoTex joins the long list of companies that have tried, failed, and exited Michigan.
We can create new jobs for Michigan workers by responsibly migrating away from oil production. We can create jobs fostering energy sources that truly give Michigan a chance to be energy independent for workers now and in future generations. Even though oil will be around for decades, it is technologically obsolete and should be phased out as an energy source. Michigan and the USA can never be energy independent as long as we use crude oil as an energy source.
RMP has gathered much information about HVHF activity in Michigan and elsewhere over the past five years to be able to speak about these findings and forecasts we publish with confidence. We will continue to publish articles about the rise and fall of HVHF in the Michigan Basin in the coming months. Our upcoming HVHF articles chronicling the entire five-year history of High Volume Hydraulic Fracturing in Michigan will examine all of the failed wells drilled so far to date. You can also check out an exposition paper written by our friends at Friends of the Au Gres-Rifle Watershed here to learn more about HVHF in Michigan.
Now let’s take look at other oil & gas activity that occurred in July 2015:
On July 27, this press release story about operating Antrim wells on a vacuum was offered to the public. There are also 419 documents about operating Antrim wells on a vacuum at this link. We will dig into this story a bit more in August because on July 25, 2015 we have 7 new applications to drill into the Antrim and we have not seen much Antrim activity since the Mighty Marcellus changed natural gas production around the world. The 7 new Antrim wells applied for by Evergreen are in Milton Township. Milton Township is in the same area as the #1 gas producing PRU in Michigan based on our 2014 production rankings here.
July 2015 – List of New Oil & Gas Well Applications
In all, we have 14 new applications in July: 5 oil wells, 2 gas storage wells, and the 7 natural gas wells mentioned above. The application detail for July 2015 is shown below and can be enlarged by clicking on the image.
July 2015 – List of Permits Issued for Oil & Gas Wells
Nine new permits were issued in Michigan in July 2015: 8 oil well permits and 1 waste water well permit. Permit detail for July is listed below and can be enlarged by clicking on the image.
July 2015 – Oil & Gas Wells Published as Plugged
25 wells were reported plugged in July of 2015. We continue to see Chevron plugging a lot of their Michigan Antrim wells. It looks like Chevron is cleaning up their loose ends to get ready to conduct some business in Michigan. The pluggings are shown below. Click the image to enlarge.
The 5 Year Trend Number of Permits Issued Per Year KPI:
In June, we extrapolated that 2015 was on pace to be the slowest year for oil & gas permits in Michigan history. This month we are up to 63 apps and 63 permits. We are still at a slow pace but it will remain to be seen now if 2015 turns out to be the slowest year in Michigan history. With Cheniere‘s first LNG train set to ship soon, we may see natural gas prices trend upward because of investment speculation on Wall Street. Cheniere can only ship a tiny fraction of the US gas supply. But, by shipping even a small amount of natural gas Cheniere can cause market price changes based on speculation. This could cause an uptick of activity in Michigan’s Antrim play which could cause permit activity to start again trending upward. Antrim wells have a high success rate but paybacks vary greatly depending on pricing.
The Apps to Plugs Ratio KPI:
The apps to plugs ratio is self explanatory. By looking at the number of applications to wells plugged KPI we can see wells coming vs wells going. This KPI along with the previous one supports our original 2014 & 2015 outlook post with more numbers and data.
2015 Apps to Plugs Ratio KPI:
63 Applications : 153 Wells Plugged
The Permits to Plugs Ratio KPI:
The permits to plugs ratio is nearly the same as the apps:plugs ratio but with permits instead of applications.
2015 Permits to Plugs Ratio KPI:
63 Permits Issued : 153 Wells Plugged
In the July 2015 featured image (Photo Credit: Neo), workers drill an unplanned water well in front of the Westerman 1-29HD1 well pad as silica sand rises from fracing operations being performed by Halliburton in the background. All pictures in this post are symbolically of the Westerman 1-29 HD1 well because it was the last well of its kind to be drilled and completed in Michigan. We are forecasting that wells of Westerman 1-29 HD1’s magnitude targeting the Ordovician Collingwood will never again be drilled in Michigan. The Westerman 1-29 HD1 well completion consumed 12,718,500 gallons of water and 10,330,000 pounds of silica sand. Although Encana was green lighted to use 12,718,500 gallons of water and more from a glacial aquifer, the aquifer did not have that much water to give. This is why the unplanned water well in this month’s featured image was being drilled during fracing operations. Normally, water wells are drilled before the start of fracing operations. 2,130,576 gallons of the 12,718,500 gallons of freshwater used to complete the Westerman 1-29 HD1 well featured in this month’s MOGM had to be trucked in from Kalkaska and Mancelona municipal water systems as an emergency measure to keep fracing going. Because the aquifer did not have the water it was authorized to give, the water table dropped below the water pump level of a nearby resident causing their household water pump to run dry, burn out, and fail. EnCana eventually replaced the resident’s water pump.