PRIMED
Oil rebound is expected to double the number of rigs and push operations deeper into Colo. neighborhoods
Oil and gas producers in the Denver-Julesburg Basin were forced to take two steps back after oil prices cratered in late 2014. But they are preparing to take a big leap forward in 2017, doubling the number of rigs drilling and budgeting 70 percent more to find oil and gas.
“It feels like the producers are picking up where they left off. There is a resurgence from recent lows in investment,” said Taylor Cavey, an energy analyst with S&P Global Platts in Denver.
But as rigs return, so too will conflicts with communities and homeowners, as more activity pushes into places such as Broomfield and Aurora, which aren’t accustomed to drilling. Some of the strongest gains in drilling permit requests this year are coming in northern Adams, Arapahoe and Larimer counties, and Weld County’s more urban southwestern corner.
Higher oil prices more than doubled to $55 a barrel last month from a low of $26.05 in February 2016. Helping drive that increase was a supply-reduction agreement reached in late November among Saudi Arabia, Russia and other top-producing countries.
Although prices have tumbled back under $50 in the past week, domestic producers, who aren’t part of that supply-reduction deal, have lowered their costs enough to support drilling in several areas, the D-J Basin among them.
Platts estimates the break-even point for the typical D-J Basin well is around $32 a barrel. After adding in a discount of $8.57 a barrel that Colorado crude carries on the market, drilling in Weld County and nearby areas can move forward at oil prices above $41 a barrel.
“The economics in the D-J Basin are some of the best in the U.S.,” Cavey said. “The average drill time is seven to eight days, about three to five days lower than
most of the other plays in the U.S.”
Granted, a severe drop in oil prices would delay or derail the best-laid plan. But so far, producers are responding to the signal of higher commodity prices.
As of March 14, the Colorado Oil and Gas Conservation Commission had approved 442 drilling permits in Weld County, the epicenter of oil and gas production in Colorado, and another 862 permits were pending and in process.
Those requests won’t all end up as producing wells, but it is still early in the year and the pipeline of permits this year is at 77 percent of the 1,704 approved across all of last year in Weld County.
In Adams County, 26 permits have been approved and another 196 are pending, which combined are triple the 74 permits the state approved last year. Arapahoe County, which saw only five drilling permits approved last year, has already had nine approved this year and has another 67 pending. Larimer County, which only had four permits last year, has 14 pending.
Black Eagle, a Berthoud-based custom fabricator of the tanks, valve sets and pipelines that producers need to get a completed well up and running, is seeing a big jump in orders, as are other support firms.
“Our backlog of orders this year is more than the business we did all of last year. We have hired quite a few people that were laid off in previous years and we are looking at adding a second shift,” said Todd Erickson, vice president of corporate development at Black Eagle.
Drilling permits offers one window into future activity. Another is the big boost in the drilling budgets of the state’s largest oil and gas producers.
The Denver Post examined the drilling budgets for seven of the eight largest producers active in the D-J Basin, the source of more than 90 percent of the oil produced in the state and a large share of its natural gas production.
The group of seven public companies plans to spend just shy of $4 billion this year, up significantly from the $2.31 billion they budgeted a year ago for 2016 and on par with investment amounts they budgeted for in early 2015.
The number of rigs they expect to run in the D-J Basin this year is 21, more than double the 10 they kept active during much of last year. With today’s rigs estimated to be three or more times as efficient as those operating in 2014, producers will be able to do more with less.
Anadarko Petroleum, the state’s largest producer, has set aside $840 million for drilling in the D-J Basin, up from $500 million last year. A year ago, it had one rig poking around, trying to stay busy. But after oil prices shot up late in the year, it deployed five. The company expects to keep a half dozen going and has a goal of bringing 290 wells online.
“We are prepared to be flexible through the year if we see the opportunity in the Delaware (Texas) and D-J Basin to accelerate activity to capture additional value,” said Al Walker, the Dallas-area company’s CEO in the guidance he provided investors earlier this month.
Houston-based Noble Energy, the state’s second biggest producer, plans to invest slightly more than Anadarko drilling in the D-J Basin, $850 million, up from $600 million budgeted last year. Of the 225 onshore wells it has planned for 2017, about two-thirds are expected to come in the D-J Basin.
“A third operated rig for the D-J Basin has been accelerated and is now planned to be added in the second quarter of 2017,” the company told investors last month.
Another important producer, Denver-based PDC Energy, is taking its Colorado drilling budget from $397 million last year to $490 million and plans to keep four rigs going. But PDC Energy plans to put $235 million into the Permian Basin in southwest Texas, considered the country’s hottest onshore play right now.
Anadarko and Noble, likewise, also are directing more investment into the Permian Basin. Depending how well those wells do and how much they cost, Colorado could see future dollars redirected.
Encana, previously the fourth largest producer in the D-J, has exited the scene, with privately held Crestone Peak Resources now drilling its leases with two rigs. Bonanza Creek, active before the crash, is sidelined in bankruptcy.
An up-and-comer to watch is Extraction Oil & Gas. The Denver producer has said it plans to spend upward of $775 million to drill and compete wells in the D-J Basin, up from the $317.5 million it spent in 2016. The amount is nearly as much as larger rivals Anadarko and Noble.
In October, Extraction raised $681 million in an initial public offering and followed that with a private stock placement that raised another $442 million in December. Unlike some independent producers who borrowed too much and are struggling, Extraction has a clean financial slate.
Extraction has built a strategy of buying up holdings located near populated areas that other producers viewed as too complicated to develop, including in Boulder and Broomfield counties, where opposition to drilling remains strong.
“I’m not sure they were thinking about the community and how much push back they were going to get,” said Ann Marie Byers, a resident of the Wildgrass neighborhood in Broomfield. She is a member of a community taskforce studying Extraction’s proposal to locate 139 new wells near the Wildgrass, Anthem Ranch and Anthem Highlands neighborhoods.
Extraction had wanted to start drilling this year, but residents — some of whom are also owners of the mineral rights under their land — fought back to ensure the drilling occurred as far away from their homes as possible and that impacts were reduced.
“We understand they will be able to drill somewhere, somehow. We want a real negotiation of what is going to be economic for them and what is safest for us,” Byers said. Among her concerns are the volatile-organic compounds and other environmental hazards that might be generated by a drilling program of that size in such close proximity.
The company has consolidated the number of potential drilling locations from around 40 to just four pads and will remove and plug older vertical wells. It has pledged a variety of mitigation efforts, including the use of quieter electric drills, more extensive landscaping, and the installation of pipelines to replace tanks and trucks.
But one pad, near Lowell Boulevard and Sheridan Parkway, is about 500 feet from the closest home and near a city water reservoir. Residents want a setback of 1,000 feet or more, which the company argues isn’t workable at that location and not required by state rules.
A compromise, however, seems possible. If achieved, it could set an example for future development near residential areas. Extraction agreed to pull its permits and will hold off on drilling until later next year. Broomfield City Council voted to indefinitely suspend a proposed six-month moratorium on drilling.
“With this moratorium being suspended indefinitely, we now see a clear pathway to working collaboratively with the community and ultimately receiving the permits necessary to being our operations in the area by year end,” Extraction president Matthew Owens told investors on a conference call Tuesday.