A San Diego company’s announcement Tuesday that it plans to proceed with a liquefied natural gas export plant in Baja California, Mexico, is further brightening the prospects for an eventual rebound of local drilling activity in the Piceance Basin.
The decision by Sempra Energy to build the Costa Azul plant, possibly supplying it in part from gas produced in the western United States, comes as natural gas prices already are becoming more favorable for Piceance producers as they face less competition from gas produced in basins primarily focused on oil production.
“I just frankly don’t have any bad news in terms of price forecasts for Piceance Basin producers. I just see a lot of upside over the next three years. With that I think you’re going to see the (local drilling) rig count increase,” said John Harpole, president of Mercator Energy, a Colorado-based natural gas broker that helps producers in the Piceance Basin and elsewhere connect with buyers and schedule delivery of gas from wells to markets.
Sempra on Tuesday said a subsidiary has issued what’s called a final investment decision to proceed with the $2 billion Costa Azul project. It has 20-year purchase agreements with customers for about 2.5 million metric tons per year of LNG that it says it expects to produce from gas sourced from Texas and the western United States. It hopes for LNG production to begin in late 2024.
Sempra says this is the first LNG project in the world this year to reach a final investment decision. Reduced energy demand due to the pandemic has helped cast doubt on the feasibility of some LNG projects.
But with the Sempra decision, “it’s obvious that there is potential economic viability in these export projects,” said Chelsie Miera, executive director of the West Slope Colorado Oil and Gas Association.
“We’re seeing further projects make these really important milestones, which is, I think, a win.”
Earlier this year the Federal Energy Regulatory Commission approved the Jordan Cove LNG export project in Oregon, but it continues to struggle to get state-level approvals.
The local natural gas industry and its supporters long have been backing Jordan Cove due to its potential for sourcing some of its gas supply from the Rockies. A coalition known as the Western States and Tribal Nations Natural Gas Initiative — which in Colorado includes Mesa, Garfield, Rio Blanco and Moffat counties — has been working in support of projects including Jordan Cove and Costa Azul.
Andrew Browning of the initiative said in a news release about Sempra’s decision, “This significant milestone will help to connect abundant natural gas supplies from the western U.S. directly to countries across Asia where energy demand is soaring from manufacturing and economic growth — all while helping to lower global emissions by developing and offering lower-emitting fuel alternatives to growing international markets.”
Harpole called Sempra’s decision “huge.”
Just how much gas for Costa Azul may come from the Rockies is a question mark. Some of the gas for the project is expected to come from the Permian Basin in western Texas and eastern New Mexico. That basin primarily produces oil, but wells there also produce what’s known as “associated gas” that comes along with oil production.
Over the years, gas produced as a byproduct of oil drilling in places including the Permian Basin, the Bakken Formation centered in North Dakota and the DJ Basin in eastern Colorado helped drive down natural gas prices nationally, resulting in the near-suspension of drilling in the Piceance Basin. For much of this year, only Terra Energy Partners has been operating a drilling rig locally.
However, drilling has slowed considerably in oil basins, partly because of lower demand due to COVID-19’s economic impacts. The Piceance Basin is a gas rather than oil basin, and Miera said it doesn’t depend on oil prices to drive its development, so it only makes sense that at least a portion of the Costa Azul supply will come from the Piceance. She said any project also should be diversified in its supply.
Harpole thinks the importance of the Mexico project to local gas developers isn’t all that tied to whether any gas produced in the Piceance actually goes there. No matter what the source of its gas, the plant is likely to help draw down gas supplies in the West and bolster prices for western U.S. producers.
“I think any exports out of North America, all waters rise, you know what I mean?” Harpole said.
Adding an export facility is just one more favorable factor that is lining up to help Piceance Basin producers. Already, the decline in associated gas production from oil fields is strengthening gas prices for them. Harpole said another thing bolstering the outlook for them is the fact that permits extending the life of gas-fired power plants in California are being issued after blackouts in the state resulted in a recognition that peak electricity demand there can’t be met only with renewable power.
Harpole expects to see a new pipeline built within four years or so to help Piceance gas better reach California. Meanwhile, he said pipeline projects underway to let Permian Basin producers better tap Gulf Coast markets will further ease the competition Piceance producers see from Permian gas production that these days instead is going west. That should further help pricing for local production.
Harpole said this winter might be a little too early to see an uptick in Piceance drilling, as a lot of companies have enough debt to repay that they probably won’t have the cash available to drill. But that should only contribute to gas prices rising even further to a point that it should attract investors who understand the money local producers can make when taking debt out of the mix, Harpole believes.
“I’ve just seen an overall strengthening of the market for western U.S. gas producers. The question is how quickly can they respond to that (higher) price signal given their debt structure,” Harpole said.