The more than two dozen drilling rigs operating today in Colorado’s oil and gas fields won’t be going silent any time soon, even with the enactment this year of a law that promises to make life tougher for the industry statewide.
For starters, most operators in Colorado already have hundreds of completed permits in the bag that will keep them busy for months to come regardless of what happens to the pace of future approvals to drill. A report from Moody’s Investor Service issued right after Senate Bill 181 was signed into law in April gave a relatively sanguine forecast for oil and gas production in the state.
The firm concluded that the new law — which grants local governments more control over energy extraction and places emphasis on health and safety in oil and gas operations — would be blunted by the fact that “most of the producers have permitted activity in hand that would allow them to operate normally for the next six months to two years.”
Then there’s the overriding reality, energy experts say, that the global price of minerals has exerted and will continue to exert a far greater influence on production levels in the state than will SB 181.
“Lots of geopolitical momentum is affecting a lot of these producers,” said Matt Hagerty, an analyst with Lakewood-based BTU Analytics.
Over the longer term, BTU Analytics projects that Colorado oil production will continue setting annual records for at least the next half dozen years, jumping about 39% from 2018 to 2024, when the firm expects nearly 250 million barrels of oil to be lifted from the ground.
Much of that increase, Hagerty said, is because of “productivity improvements” realized out in the field in just the last couple of years.
“A well completed today produces a lot more oil and gas than a well completed back in 2014 or 2015,” he said. “The Denver-Julesburg Basin (largely centered on Weld County) is still an attractive basin from an economic perspective.”
But that doesn’t mean the industry isn’t keeping a close eye on SB 181. The specific rules for the new law have only begun to be debated by the Colorado Oil and Gas Conservation Commission and the uncertainty as to what might come out of that process could keep companies already here from expanding development plans while deterring new players from entering the state.
“If it’s me, I might choose other options in other parts of the country until I can see what’s happening in Colorado,” said Bernadette Johnson, vice president of market intelligence for Drillinginfo. “If you don’t know what it looks like, you don’t know how to plan.”
Ethan Bellamy, a senior analyst with Baird who focuses on the energy industry, said he’s less worried about what has occurred so far with energy regulation in Colorado as what might occur down the road.
“We have a politically lopsided legislature and a fairly easy direct-democracy approach to the ballot,” he said. “Either of those channels could produce more onerous (legislation) that impedes or stops oil and gas drilling.
“Activists like Colorado Rising will not be happy with SB 181 and lay down their arms. Colorado politics remains a red flag for many investors.”
“All options on the table”
Colorado Rising, which spearheaded an unsuccessful attempt at the ballot box last fall to dramatically increase the distance of new wells to homes and schools, is determined to make sure implementation of SB 181 isn’t diluted with too many concessions to the oil and gas industry.
Joe Salazar, the former Democratic state lawmaker who now leads the anti-fracking group, said his organization “is planning multiple actions related to rule-making, the ballot initiative process and for next legislative session.”
“Colorado Rising will push for whatever protections are necessary for the state and environment. Our current and future generations rely on us to keep all options on the table,” Salazar said.
Asked if that might include an attempt to eventually ban hydraulic fracturing in the state — the process by which shale rock is punctured and pried apart to release hydrocarbon deposits beneath the Earth’s surface — Salazar said yes.
“I think the more this industry pushes and abuses communities, the more the appetite grows for a fracking ban,” he said.
So far, New York is the only state to ban fracking.
Dan Haley, president and CEO of the Colorado Oil and Gas Association, said any moves to severely curtail drilling in Colorado — up to and including a ban — would be a deceitful reading of the intent behind the new law.
“Legislators and members of the administration testified repeatedly that SB 181 is not a moratorium or a ban on industry,” he said. “It’s up to the (Gov. Jared) Polis administration to implement this sweeping law, to make sure local communities understand the framework being developed, and to make sure it safeguards jobs and our environment.
“Industry and environmental protection are not mutually exclusive.”
The effort to draft rules for SB 181 hasn’t gotten off to the smoothest start, with two days of hearings in front of the COGCC at the end of July peppered with interruptions, including coughing, finger-snapping and heckling from members of the audience.
Rule-making for the new law is expected to continue for the better part of the coming year.
Weld County as insurance
Who can best ride out the uncertainty surrounding the rollout of SB 181 will hinge on several factors, said Drillinginfo’s Johnson.
“It depends on who you are, where you are and what your assets are,” she said. “The further away from the populace is better.”
Big, well-capitalized players, like Noble Energy and Anadarko Petroleum (which on Aug. 8 was officially acquired by Occidental Petroleum in a $38 billion deal), will have an easier time maintaining operations in the state. But SB 181 could pose “a particular business hazard” for smaller players, like SRC Energy and Extraction Oil and Gas, according to Moody’s.
While the state works out its rules, local governments in Colorado are already moving ahead with plans to tighten their own regulations on oil and gas activity. This month, Adams County will become the first community in the state to consider doubling the setback for new wells to homes — potentially bumping up the distance from 500 feet to 1,000 feet.
That could mean trouble for operators with energy plays along the Interstate 25 corridor north of Denver, considered by many to be the “sweet spot” in the Denver-Julesburg Basin but also heavily populated and prone to conflict between oil and gas companies and neighbors.
According to a BTU Analytics report issued in March, 29% of all drilling activity in the basin over the last four years occurred within a 10-mile radius of I-25.
Jason Oates, spokesman for Crestone Peak Resources, said a tighter regulatory regime brought about by SB 181 could actually work in the company’s favor because it has experience facing down opposition and community agitation over its operations.
“There may be growth opportunities for those companies willing to operate in this complex environment,” Oates said of the Firestone-based company, which has 1,600 wells in the state. “Our intent is to stay here, operate here and possibly grow here.”
The latest permit data from COGCC indicates that life after SB 181 is slowly ramping back up for operators in the state. Whereas only 41 drilling permits were issued in April — the same month the law took effect — approvals jumped to 166 wells in June and 130 wells last month.
That remains far below the 715 wells approved last November and the 687 wells approved in December, however.
Perhaps the industry’s most effective insurance policy against SB 181 as the law takes form is Weld County, which accounts for nearly 90% of all oil production in Colorado.
The county has made it more than clear that it intends to facilitate business for the oil and gas industry going forward, first declaring itself a “mineral resource area of interest” in June and this month opening the first-of-its-kind oil and gas department to process drillers’ permit applications.
“Weld County, for the most part, is the oil and gas industry in Colorado — and it is still pro-oil and gas,” said BTU Analytics’ Hagerty.
