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Oil exploration now a reality for El Paso County

March 3, 2012
photo - An oil drilling rig on state land leased by Ultra Resouces near the intersection of Drennan and Curtis roads in southeast El Paso County. Ultra notified the state it planned to begin drilling at the site on Friday. Photo by Andrew Wineke/The Gazette
An oil drilling rig on state land leased by Ultra Resouces near the intersection of Drennan and Curtis roads in southeast El Paso County. Ultra notified the state it planned to begin drilling at the site on Friday. Photo by Andrew Wineke/The Gazette 
Out of the rolling landscape of eastern El Paso County, a towering drilling rig was preparing on Friday to drive a 7â…ž-inch hole more than 6,000 feet into the earth.

Ultra Resources notified the state it planned to begin drilling at a site in unincorporated El Paso County a few miles south of Schriever Air Force Base, although it was unclear if that work had actually begun on Friday.

This isn’t the first oil well in the county — there were about a hundred exploratory wells drilled in the 1930s, and another company drilled a 4,600-foot-deep well in 2010 near Squirrel Creek Road, but sold it to Ultra after doing some testing. Ultra’s well promises to kick off a wave of drilling activity across the county.

(Read a primer on oil and gas exploration in El Paso County here).

(Click here for a timeline of leases in the county.)

Ultra now has five approved well permits and has applied for several more, and the company holds 81 mineral rights leases totalling more than 100,000 acres in El Paso County. It also owns 18,000 acres in Banning Lewis Ranch, within the city limits of Colorado Springs, where it has applied for two well permits. Mike Watford, president and CEO of Ultra Petroleum, parent company of Ultra Resources, said in a conference call last month that the oil-rich Niobrara shale a mile under El Paso County will be the focus of the company’s exploration efforts in 2012.

A second company, Hilcorp Energy of Houston, Texas, has held preliminary talks with the county about drilling on 21 mineral rights leases in the county. Representatives for Ultra and Hilcorp did not return calls for comment Friday.

Since 1980, oil companies have filed more than 2,500 mineral rights leases with the county, El Paso County Assessor Mark Lowderman said. Most of that is recent activity: From 2000 to 2008, there were 43 leases in the county. From 2009 to 2011, there were 1,256 leases signed. That pace has slowed in 2012, with 16 leases signed so far this year.
It’s still an open question whether the tens of millions of dollars these companies are spending on leases, permits and drilling will pay off. Experts say there’s certainly oil in the Niobrara shale, but it’s not known whether there are economically recoverable deposits in El Paso County, which is far south of Weld County, the heart of the eastern Colorado’s oil producing region.

All of the approved local wells so far have been for vertical, exploratory wells, although Ultra has also applied to drill several horizontal production wells. A horizontal well can cost $5 million or more to drill, while a vertical well costs about $1 million to drill.

What impact, both economic and physical, all of this will have on El Paso County is also an open question.

“That’s the million dollar question: What’s going to come up?” said Lowderman, the county assessor.

Lowderman said that state law lays out a special property class and rate for oil and gas development that would mean the county stands to gain roughly $9,000 a year in taxes from a successful well that produces $1.2 million in oil and gas a year— and perhaps $700 a year from an unproductive well.

That’s just the property tax impact. Oil and gas companies also employ a lot of people, buy a lot of equipment and pump a lot of water. It all adds up: Weld County commissioner Sean Conway said the oil and gas industry accounts for about 40 percent of his county’s revenue. Weld County is home to about 18,000 oil and gas wells.

“Every county in the country ought to want this,” Conway said. “It has allowed us to really do things.”

Property owners, including the state and federal governments, who have leased the mineral rights to their land stand to benefit, too. In the United States, mineral rights can be separate from surface rights and sometimes end up with different owners. Leasing the mineral rights gives oil companies the right to access those minerals.

 In a mineral rights lease, owners usually get an up-front payment, a yearly lease and then a royalty payment if the drilling is successful, typically one-eighth of the well’s production, said Erin Nelson with the Denver Association of Petroleum Landmen.

“Landmen” is the term for the oil company representatives who go into the field and negotiate mineral rights leases with property owners.

“This is up and coming,” Nelson said of oil exploration in El Paso and Douglas counties. “A lot of counties south of Denver are just experiencing this, so they have questions.”

Oil companies are tight-lipped about their lease payments and plans for exploration, Nelson said.

“In terms of getting a company to share where they’re going to go, you’re more likely to speak with the president of the United States, let’s be honest about that,” she said.

The largest lessor in El Paso County is the Colorado State Land Board, which has signed 182 leases covering 91,000 acres, including the land on which Ultra is drilling its first well. The land board receives a royalty usually amounting to one-sixth of any minerals recovered from its lands, which goes to support schools. The state holds quarterly auctions for mineral rights leases, and the terms can change: On Friday, ConocoPhillips agreed to pay $137 million and a 20 percent royalty to lease 26,000 acres of public land east of Aurora, the Denver Post reported.

Mary Kobilan recently leased the mineral rights on 640 acres of her property near Calhan to Meredith Land and Minerals Co. Kobilan said several of her neighbors also signed leases at the same time. She leased the same land in the 1980s to another company, but nothing ever came of it.

“They came here and dug a hole and left — and I never heard anything from them again,” Kobilan said.

This time around, Kobilan said she hopes someone actually finds oil on her property.

The physical and environmental impacts of drilling are another question the region is wrestling with. Drilling through miles of rock and extracting oil and gas is an industrial activity that brings with it a lot of truck traffic, noise and the potential for spills or accidents.

The El Paso County planning commission recommended the county adopt a strict set of regulations governing water quality, noise and visual impacts. The Colorado Oil and Gas Conservation Commission complained to the county that all of those matters were under its authority rather than the county’s. In January, El Paso County commissioners ultimately adopted a scaled-down set of regulations that left most of the regulations to the state, although it still called for an enhanced water quality monitoring program.

In Colorado Springs, the Colorado Springs City Council in November placed a moratorium on oil and gas drilling, and a city committee is studying the issue and plans to make a recommendation to council before the halt expires in May. Meanwhile, Ultra is challenging in court the city’s annexation agreement and zoning for Banning Lewis Ranch,
which do not currently allow for oil and gas development.

Undoubtedly the most hotly debated aspect of oil and gas production is the technique called fracking. Oil and gas in the Niobrara shale formation is locked inside what’s essentially solid rock. Drilling companies release those resources by forcing water, sand and chemicals into the well under high pressure to create tiny fractures in the rock, a process called hydraulic fracturing, or fracking.

Environmental groups worry that those fractures could allow chemicals to get into surrounding aquifers, although industry officials say the oil deposits are separated by thousands of feet of solid rock from the surface aquifers used by domestic water wells. In a recent talk at Colorado College, Colorado School of Mines professor Jennifer Miskimins, an expert on the process, downplayed the risks of fracking.

“I’m not opposed to regulations. Regulate the right thing — the fractures themselves are not going to grow out of (the drilling) zone,” she said.

Miskimins and many industry officials agree that the cement and steel casing near the surface are the most critical part of the drilling process and what should be the focus of inspections.

The Environmental Protection Agency recently released a report out of Wyoming that found contamination in wells near a fracking site, although that study has been extremely controversial. The EPA is working on a larger study on the effects of fracking and plans to issue a fuller report by year’s end.

“The jury is way out on that,” Miskimins said. “That is going to be the initial stepping stone and I have no idea which way it will go.”

For Lowderman’s part, he just wishes all the drama could have held off a few more years.
“I keep telling people I’ve got three more years in office,” he said. “The oil has been out there for millions of years. If they had waited just a little longer...”

Contact Andrew Wineke: 636-0275 Twitter @awineke
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