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Black Hills Exploration and Production
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Category: Exploration & Production
Company profile
Black Hills Exploration and Production, the oil and gas subsidiary of Black Hills Corporation operates 516 oil and gas wells in Colorado, Nebraska, New Mexico, and Wyoming. The company owns a non-operating working interest in a total of 480 wells located in California, Colorado, Gulf of Mexico, Louisiana, Montana, North Dakota, Oklahoma, Texas, and Wyoming.
Natural Gas and Oil Production
Development and acquisition strategy focuses on long-lived gas reserves.
174 BCFE reserves at year-end 2004, with natural gas comprising 79 percent of total reserves.
2004 production – 12.6 BCFE – was the seventh consecutive annual record and a 16 percent increase over the previous year.
Production is concentrated in New Mexico, Colorado and Wyoming, with additional production in Montana, North Dakota, Nebraska, Oklahoma, Louisiana, Texas, the Gulf of Mexico and California.
Oil and gas production expands again
Our oil and gas operations increased production for the sixth year in a row. Spurred by the acquisition of Black Hills Gas Resources, Inc., total production in 2003 was 12.6 BCFE, a 16 percent increase over the previous year. The Black Hills Gas Resources properties are comprised almost completely of natural gas; consequently, gas production was 79 percent of total production, compared to 77 percent in 2003. Total proved reserves at year-end 2004 were 174 BCFE, 82 percent of which is natural gas. Prevailing prices for oil and gas were strong for most of 2004, and financial results reflect that strength.
Most of Black Hills Gas Resources production and reserves are located in northern New Mexico in the San Juan Basin. We are pleased with the cooperative working relationship we have established with the Jicarilla Apache Nation, on whose land our program is primarily based. An active drilling program is expected to progress for a number of years to come – not only based on the strength of existing reserves, but also on our belief that additional reserves may be discovered in deeper, under-explored horizons.
Black Hills Exploration and Production has a total of almost 60 full-time employees with half in Golden, CO, where engineering, geology, land and accounting personnel reside. Production employees are located at the Finn-Shurley Field office, and at the East Blanco Field office, including roustabouts, rig workers, pumpers, clerical and supervisors.
Services
Wholesale Operations:
-Black Hills Energy
-Black Hills Energy Resources
-Black Hills Exploration & Production
a)Introduction to New Mexico operations -- Black
Hills Gas Resources
-Enserco Energy
-Wyodak
Black Hills Energy, our wholesale energy subsidiary, generates electric power, produces natural gas and oil, mines coal and markets energy. In 2004, these activities represented about 70 percent of our asset base and nearly 80 percent of our income from continuing operations. Our energy diversification is instrumental to our long-term growth strategy. We excel approach because our operations complement and strengthen each other.
For example, we are both a consumer and producer of natural gas, and we create a business advantage from the two operations. Our power generation benefits from an indirect fuel hedge, protecting against price volatility. This also applies to coal mining operations, where the fuel is directly tied to our generation. Our ability to harness the energy value of low cost coal gives us a vital competitive edge in the marketplace for baseload power. This integration model also extends to our energy marketing businesses, which optimize the value of our power generation and fuel production assets.
Effective risk management is another key aspect of our wholesale business strategy. Nearly all of our power generation is provided under long-term contracts to load serving utilities. The power purchaser bears the fuel risk under most of these agreements. Likewise, nearly all of our coal production is under long-term contracts, most of which are life-of-plant agreements. We employ hedge on a portion of our oil and gas production to assure strong, stable cash flows as market conditions change.
Our energy marketing operations are governed by strict practices minimizing market risk, such as back-to-back trading positions and low value-at-risk tolerances. We monitor our credit exposure to counterparties on a continual basis. Our business diversity itself is also a way to manage our overall risk profile, with no heavy reliance on a single energy segment to deliver financial results. As a result, our risk-managed, diversified and integrated energy approach gives us both flexibility and stability as we continue advancing our prudent and balanced growth agenda.
Power generation performance rebounds
In April 2004, we began operating our Las Vegas Cogeneration II power plant under a new long-term tolling contract with Nevada Power Company. With that accomplished, our power generation business is expected to demonstrate a more stable earnings profile. In 2004, this business segment earned $15.6 million from continuing operations.
Our operated fleet of wholesale power plants located in Colorado, Nevada, Wyoming, Calfornia ans Idaho. Most of our generation capacity is used in peak demand periods. Several peaking plants are strategically located in regions of population and economic growth. We believe some of these sites will have the opportunity to increase capacity, through turbine additions or combined-cycle expansions, as demand for power increases. We also seek to build mine-mouth baseload power plants, either at our Wyodak energy complex or in other regions where coal resources are available near growing load centers.
Record oil and oil production
Our oil and natural gas operations had another good year, with record earnings of $12.2 million. For the seventh consecutive year, production achieved a new record, with 12.6 billion cubic feet equivalent (BCFE) produced in 2004, a 16 percent increase. Reserves also increased 11 percent, to a record-high BCFE of proved developed and proved underdeveloped reserves. These achievements were accomplished by our ambitious deployment of drilling and development capital. Last year, we drilled or participated in exploratory and development wells (64 net wells), completing 127 wells (43 net) by year end. With our extensive inventory of undeveloped locations and our planned development program in San Juan Basin of New Mexico, we fully expect a continuation of production and reserve growth for the next several years. While not yet explored on our properties in the San Juan Basin, additional reserves are believed to exist in deeper drilling zones known to be productive elsewhere in the basin.
Stable coal mining operations
Our Wyodak coal mine is a steady performer, earning $7.4 million from continuing operations in 2004. Production of 4.8 million tons was slightly down from the record level set in 2003, due in part to planned and unplanned outages at power plants utilizing our coal. Coal reserves were 294 million tons at year-end – representing a 59-year supply at current production rates. We also are pleased the Wyodak Mine was recently presented the prestigious Sentinels of Safety award sponsored by the federal Mine Safety Health Administration.
Solid energy marketing performance
Marketing operations increased earnings to $10.2 million in 2004. We increased average physical and financial gas volumes marketed by 40 percent last year, to more than 1.7 BCF per day. Best described as a “physical” marketing strategy, we offer producer services, assisting natural producers with collection, storage, transportation and marketing. We also are very active at the other end of the pipeline. Our origination services focus on arranging supplies and scheduling shipments of natural gas to larger consumers: primarily utilities, manufacturers and industry. In the case of oil, we operate two pipelines in Texas, which link port areas to major connection points about 200 miles to the north. In addition to oil transportation services, we also provide oil marketing expertise to our clientele.
Connecting to the customer
Delivering quality customer service and competitive value unites our diversified activities. This is a core business philosophy, because we believe long-term relationships create the best and most productive climates for growth. With that vision guiding us over time, we see opportunities to expand our power generation operations, increase production and reserves of natural gas, oil, coal, and provide additional marketing services to both existing and new customers.
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