Niobrara Not Yet Proven as Resource Play, Says IHS Special Report

Despite growing optimism by exploration and production (E&P) companies and investors who expect to unlock the Niobrara horizontal oil play’s resource potential, successful development in the expansive play has been limited and more time is needed to further delineate its true potential as a resource play, said information and analysis provider IHS (NYSE: IHS) in a special report. The vast U.S. formation extends from Wyoming and Colorado into Nebraska and Kansas.

The IHS Herold 2011 Regional Play Assessment: Niobrara Has Not Yet Proven to Be a Resource Play, analyzed well performance of the few modern horizontal oil wells present in the play and also compared initial production (IP) for those early wells against IP rates for median-producing oil wells in the core of the Bakken/Three Forks shale play.

The median Bakken horizontal well completed since 2009 in the core of the play averaged about 230 barrels of oil per day in its sixth month online, according to the IHS report. Two modern Niobrara horizontal wells matched or exceeded that oil production level, with the remaining 10 wells producing between 10 barrels of oil per day and 190 barrels of oil per day. In their sixth month, five of these wells produced 70 barrels of oil per day or less; three produced between 100 barrels of oil per day and 125 barrels of oil per day, and the remaining two wells produced approximately 185 barrels of oil per day.

While Sven Del Pozzo, study author and senior principal energy equity analyst at IHS, appreciates that enthusiasm for the potential in the Niobrara is likely tied to the success of the Bakken/Three Forks play, he reminds investors how preliminary any analysis of the play is, due to the limited number of wells and their short production histories. “We stress that definitive conclusions can’t be made at this early stage, since fewer than 20 modern horizontal Niobrara wells (in the DJ and North Park basins) have 365 days of IHS production history, and just 10 of those have a meaningful oil cut,” he said. “The Niobrara is situated at various depths and has diverse rock properties as it spans multiple basins, making it very risky to generalize about its prospectivity at this early stage.”

Del Pozzo stressed that early entry and development of the Niobrara introduces risks, and that time is needed to delineate the play. When examining the differences between the production in the two plays, he noted that the Bakken’s production is also predictable over a wide area, compared with the Niobrara, where well performance still varies considerably, even in the same field.

“Since the well performance in the Niobrara is so variable and there are so few wells, resource play predictability cannot yet be demonstrated through well performance,” Del Pozzo said. “However, despite this variability and lack of production data, some people are citing the play’s best wells as indicative of future results, and I would say that taking that approach is a bit premature.”

The Niobrara’s strong, early-month IPs that decline relatively rapidly, beg the questions of whether it is mainly induced fractures that contribute to IP rates, and whether the horizontal oil play can evolve into a resource play like the Bakken. Most E&Ps are in the early stages of shooting and analyzing 3-D seismic to better identify faulting and fracturing, the study noted.

E&Ps anticipate that experience will enhance both well performance and predictability, and Del Pozzo doesn’t necessarily disagree, but he’s giving the nod to experience and urging patience for investors.

“We believe patience is a virtue for investors seeking profit as this early-stage play evolves. Established operators with the most experience and pre-existing seismic and well data to consult will have an advantage over the competition and produce more consistent results earlier in the play’s evolution,” he said. “We also believe that acreage in the Niobrara should be heavily risked, and low-cost entry into large acreage plots is the key to success.”

Several major deals have been announced regarding the play, including a deal between Chesapeake Energy and the Chinese National Offshore Oil Corp. (CNOOC). According to Del Pozzo, at this early stage in the play evolution, that deal looks good for Chesapeake shareholders, but less so for CNOOC shareholders.

“Comparing our best-case investment metrics with merger and acquisition deal values,” said Del Pozzo. “CNOOC’s acquisition of Chesapeake’s acreage in both the Powder River basin and the DJ basin looks like it was overly aggressive. Based on results to date, and without the advent of down-spacing that the industry thinks likely, CNOOC did not add value for their shareholders in this deal, while Chesapeake did.”

In addition to insight and analysis regarding prospectivity and values in the emerging Niobrara horizontal oil play, IHS plans additional similar special studies covering other plays of interest, including a recent assessment of the Bakken/Shale Forks play. The company also covers financial performance of companies and transactions across the entire energy spectrum.

For more information on The IHS Herold 2011 Regional Play Assessment: Niobrara Has Not Yet Proven to Be a Resource Play, please contact sales@herold.com.  To speak with IHS analyst Sven Del Pozzo, please contact melissa.manning@ihs.com, or press@ihs.com.

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IHS (NYSE: IHS) is the leading source of information and insight in critical areas that shape today’s global business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence.  IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 4,400 people in more than 30 countries around the world.

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