The Davis family has owned ranchland on the high-desert prairie of El Paso County in Colorado for the past century. Family lore recalls a prophecy of wealth from the Depression years. A geologist came through the desolate region, nestled on the Front Range of the Rocky Mountains, and told the family there might be oil under their land.
In the seven decades since the 1930s, there hasn’t been a single successful oil well on the Davis land – or anywhere else in all of El Paso County, a mostly rural region located south of Denver.
Now, however, subsurface fracturing – or fracking – technology so widely used in natural gas drilling is beginning to unlock oil reserves long considered impossible to tap successfully, like the suddenly prolific Bakken play in North Dakota.
In Colorado, the target is the tight oil of the Niobrara formation. Houston-based Ultra Petroleum Corp. is on the fringe of the formation in El Paso County and believes it can unearth 150 million barrels of oil. North of Denver, where oil and gas drilling are common, Anadarko Petroleum Corp. recently said fracking is the key to tapping as many as 1.5 billion barrels of crude the company thinks it is sitting on.
Rick Davis, whose grandfather was long ago told of the oil by the geologist, works in the county assessor’s office. Like others in the region, he has been pushed to answer a difficult question – the same faced by people in other new energy epicentres such as the Marcellus gas field in Pennsylvania. The possibility that fracking might imperil water is a huge concern in dry Colorado. But the economic bonanza, especially in an era of recession, is too appealing to many to ignore.
Mr. Davis decided his family should make a deal, advising his 88-year-old mother to sign a contract in late 2010 with an oil land broker, who then sold a package of mineral rights to Ultra. Ms. Davis inked a contract for mineral rights beneath about 400 acres of land, receiving cash for five years of leasing rights up front, some $12,000 (U.S.). The big money will come if a successful oil well is drilled. Her 12.5-per-cent royalty could generate several thousand dollars a day – which could add up to $1-million a year.
“It was a difficult decision to make,” Mr. Davis says. “Do we really want to see oil wells all over the place in eastern El Paso County? We’re a rural ranching community. It came down to a matter of economics. My mom lives on my dad’s pension. It was a bonus to get some extra money in her bank.”
El Paso County is one of the new frontiers of the American shale oil revolution, one that has the potential to radically redraw the supply of oil to still-hungry United States consumers.
Driven by high oil prices, and new technology, domestic oil production has jumped more than 40 per cent to 5.6 million barrels a day in September from 3.9 million barrels in the same month in 2008 – the lowest level since 1943, according to figures compiled by the U.S. Energy Information Agency.
The increase has happened after U.S. oil demand peaked in the summer of 2005 at nearly 22 million barrels a day, with current demand down 10 per cent from there.
All this has squeezed imports, particularly from OPEC countries, whose supply to the U.S. peaked in January, 2008, and has plummeted by one-third to less than five million barrels a day. Canada, which eclipsed Saudi Arabia as the No. 1 U.S. supplier in 2004, has gained steadily.
In September, Canada sent a record 69,722,000 barrels of oil to the U.S., 2.3 million a day, up 20 per cent from a year earlier.
The trends – increased U.S. supply, reduced demand because of laws and technology – will continue to squeeze OPEC, so much so analysts believe imports from such countries will eventually not be necessary. Some forecasts even predict the U.S. could become self-sufficient. Even if it’s not the case, Canadian oil producers face a big challenge, as the market gets tougher and high-cost oil sands output, far from the market, competes in the shifting milieu.
Companies are piling in. Oil lease permits have doubled in the past two years and just this week Chinese giant Sinopec entered a $2.2-billion joint venture with Devon Energy of Oklahoma City, whose holdings include the Niobrara.