Out in the Rockies, natural gas isn't worth a whole lot of money today. The ability to transport gas out of the region via pipeline, also known as takeaway capacity, is extremely constrained. Production volumes have risen steadily, and local demand simply isn't there. This explains the yawning gap between national benchmark Henry Hub gas and Rockies gas.
In a little-reported event on Monday, a fire at a Wyoming compressor station led Cheyenne gas to trade for less than $0.05 per thousand cubic feet (mcf). Compared to the mid-$6 range for Henry Hub, that's free gas, for all intents and purposes. Without those key pipelines, however, customers have no choice but to pass on this gas.
Clearly, it's not a great time to be a Rockies producer. I can't imagine people are tripping over themselves to pick up the developed fields that Anadarko Petroleum
The true pain has been reserved for the coal bed methane (CBM) players. The simple economics are bad enough -- after $1/mcf of transport costs, these operators aren't clearing much on their gas sales. Add to that various geological and regulatory issues, and you're looking at some real basket cases.
Pinnacle Gas Resources has been in freefall ever since its May IPO was priced well below its initial offering range. A spinoff of Carrizo Oil & Gas
Unfortunately, neither of these serious setbacks is limited to Pinnacle. GeoMet
One of the interesting things about CBM wells is that their gas flow rates actually increase as pressure drops in the coal seam. That's the opposite of a traditional natural gas well, which displays a high initial production rate that drops off with declining pressure. Unfortunately, flows at Gurnee wells have been flat for several quarters now. If these are in fact peak flows, then either the estimated gas in place will be recovered over a longer time period, or the estimate was wrong.
GeoMet isn't even a Rockies-focused CBM player, but it still faces serious pipeline issues. The company is tied up in a nasty tussle with larger CBM player CNX Gas
I don't mean to pick on GeoMet. The most serious issue faced by all of the CBM players is water. These wells' pressure drops over time because water gets pumped out of the coal seam. But this isn't Evian we're talking about; it's high enough in sodium and metals to wither plant life with as much as a sideways glance. And there are billions of barrels of it.
Environmental concerns are holding up a tremendous amount of potential coal bed methane development. Fully 93% of the Powder River Basin in Wyoming and Montana is presently closed to CBM drilling. There are competing solutions to this wastewater issue, ranging from ion exchange treatment to reinjection to hydrogen generation. It's a tremendous opportunity, given the acute need for fresh water out West. Whichever company can unlock this water's utility has the potential to reap bigger gains than even the most skilled coal bed methane operator.