Reasons for State’s Drilling Slump Depend on Who (and WHERE) You Ask
The issue of whether new oil and gas drilling regulations passed last year are truly driving energy business away from Colorado is a flashpoint among stakeholder groups, particularly on the West Slope
By David A, Hill, Executive Editor
While industry representatives contend that is exactly what has been happening, other observers, including the head of the state regulatory agency in charge of issuing drilling permits, blame the slump on the precipitous drop in natural gas commodity prices during a severe economic recession.
COGCC’’s Dave Neslin, points out that natural gas sold for about $9 per thousand cubic foot in 2008 and dropped to roughly $3 per thousand cubic foot last year.
However, David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, believes the regulations are making the gas industry in Colorado unstable. He is quoted in an article for the Craig Daily Press that discusses Moffat County’s well permits issued last year:
“Like an earthquake, the rule-making created enough instability to keep companies off-balance. Are companies pulling out? No. I’d say they’re rebuilding for the long term and hoping against regulatory aftershocks that might create more instability.” In the same article, Rep. Randy Baumgardner, R-Hot Sulphur Springs, said the regulations “are the straw that broke the camel’s back.”
On the other hand, it has been well reported that outdoor, environmental and public health groups supported passage of the new regs as a way to “level the playing field” in a state that has witnessed a tremendous surge in natural gas development in recent years.
“The new regs are being made “a scapegoat for the drop in new well permits,” one environmentalist leader tells Colorado Energy News. He points out, as have others, that Colorado is home to more well permits than any other neighboring state, including energy-friendly Wyoming, which lacks any comparable set of drilling rules.
WEST SLOPE REALITY
Colorado, like other regions with large deposits of natural gas, is benefiting from advances in drilling technology, including the ability to get at unconventional resources previously economically and physically off limits. Yields have increased substantially in places like the Piceance Basin, Rio Blanco and Moffat Counties in the north to La Plata and San Miguel Counties in the southwest corner of Colorado. It is a double edge sword, of course, since greater production everywhere has added to the glut of natural gas and contributed to lower commodity prices.
The fact is that the major natural gas operators on the West Slope are better land stewards and partners with the communities in which they operate than their predecessors of years ago. Colorado Energy News has seen first-hand the steps companies like EnCana and Williams have taken to mitigate their operations’ impact on the local environment and wildlife. It is expensive — and impressive. The improved results are partly due to technologies such as horizontal drilling being deployed, but mostly because of good old fashioned legwork by managers and workers in the field.
MORE THAN A NATURAL DIVIDE
In the final analysis, one can understand why critics on the West Slope are particularly sensitive to the drilling regs issue. In fact, the divide in policy thinking on the subject between the eastern and western sections of the state seems at times nearly as large as the actual geographical divide of mountains and passes.
For years, the oil and gas industry has annually contributed millions of dollars in the form of employment rolls and severance taxes to communities throughout the state. During the last decade, the sector has been particularly essential to the economic engine of Western Colorado, which lacks the large population pool and diversified business economy of the Front Range. Every nook and cranny of the state has been hard hit by the bad economy, but it has absolutely slammed towns like Rifle, Meeker, Grand Junction and Craig.
The new oil find in Weld County is buoying the O&G industry spirits along the Front Range; and there are signs the overall energy business picture will improve considerably by the end of the year, including an uptick in activity on the West Slope.
For those on the “other side of the divide,” the turnaround can’t come soon enough. The patience of the families, businesses and communities who depend on the natural gas industry for their livelihoods has, understandably, worn very thin.
We can’t blame them.
→ For another perspective, check out the full article in the Craig Daily Press of March 2nd referenced above. It generated some strong opinions.
Filed Under: ARCHIVES • Feature Articles • Western Slope
Tags: COGCC • oil and gas regulations • Piceance Basin • Western Slope
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Comment by cogeo on 4 March 2010:
Overall, this is a good discussion. The author seems to pick points to support a contention that Colorado’s oil and gas decline is NOT due to the new Oil and Gas Commission regulations. True, though, that the recession hammered commodity prices. However, the new commission and regulations reflect an administration hostile to fossil fuels. As the industry bled itself dry and jobs disappeared, the governor did nothing of consequence to mitigate the problem. Oh, he voiced his support, but his deeds and legislation drove more and more jobs out of Colorado that were preserved. As Colorado became more restrictive than other states, operators took the hint and moved their production efforts elsewhere. The ultimate loss of tax revenue is now glaringly apparent and can only be corrected by raising taxes on those who remain (not me!).
The author indicates that the new regulations simply “leveled the playing field”. The new regulations tipped control in favor of a minority of the environmental hypersensitive. In no other state are rules so restrictive and unrealistic. However, not all the changes in the regulations are bad; the oil and gas industry needed to clean up and become more aware of their environmental and social impacts. Forward-thinking companies such as Encana, Williams, Antero, and the others that remain do a good job in the husbandry of the land, water, air, and community. They continue to improve the way they do business in Colorado and set a very high standard for the oil and gas industry, as well as industry in general. But the overall effect of the new set of regulations is a net negative for the economy of Colorado.
The number of permits for drilling in Colorado is more a reaction to the new regulations than a bellweather of the future. The next few years will show a true effect of the regulatory hostility the governor of Colorado has shown to the extractive industries of this state. The coming years will most likely show that Colorado has regulated itself out of a lucrative oil and gas industry due to a hostile administration in Denver.
Baumgardner correctly assesses the new regulations as the straw that broke the camel’s back, but it would be more apt to say the state simply gave the poor animal a heavy load, then placed obstacles in front of him until he laid down and died. The restrictions, unreasonable fines, fees, and other obstacles have simply forced oil and gas out of state and with it, jobs and tax base. Elsewhere, camels enjoy a better life.
Who remains? A few big operators continue to swim against the torrent. They gamble that they are positioning themselves for better times and a better political climate. In as much as Governor Ritter has read the writing on the wall, the gamble may yet pay off. Certainly natural gas will have its day. But Colorado pales in comparison to TX, OK, LA, and PA for rate of return on investment and the welcome these states provide in return for jobs and revenues to power their economies.
Last, the author seems to paint a bleak picture for the industry, at least for the short term. I don’t think you will find an industry leader in Denver who thought $10+ prices for natural gas were sustainable, and is reflected in the more stable hedging prices operators negotiated. Neither do they consider $3 a sustainable price. As more reserves are added as a result of unconventional shale gas, prices will remain lower. But the important point is that prices will be profitable and stable for companies whose Holy Grail has been commodity price stability. It is ironic that when the planets seem to be aligning for Colorado and Americans, the governor and president are burying their heads in the sand. They seem more inclined to coddle the wind and solar industries while using the oil and gas industries as their political whipping post. Their actions do nothing but add tax burden to the average American and reinforce our national dependence on foreign sources for energy. Whew…
Comment by admin on 4 March 2010:
Cogeo - thanks for the comprehensive comment. You’re prolific, indeed; however, overall, we just don’t see the doomsday scenario for the state’s oil and gas sector that you describe taking place in the next two years. Several operators have told Colorado Energy News they will be increasing their development plans in the state this year and next. The Anadarko story posted today is one example. We have others. In addition, states like Pennsylvania and New York, where the Marcellus gas play dominates the energy headlines, are welcoming the business — but not without concern over drilling operations’ inmpact on the environment, wildlife and lifestyle. Various regulatory proposals are being discussed in some state legislatures to manage the natural gas boom. Energy companies there and elsewhere are not getting a blank check when it comes to development.
Comment by mike foster on 4 March 2010:
Pennsylvania and New york are fine examples of an emerging region with a fair amount of regulatory uncertainty ahead for oil and gas companies. But what about the shale plays in Arakansas, Oklahoma, Texas, and Louisiana? These states are worthy regulatory adversaries for Colorado as all four of those states have stable tax and regualtory enironments. I would challenge you to compare the stable regimes in those states to Colorado’s erratic behaviour over the last four years with the governor’s initiatives to increase severance taxes, curtail federal leasing of the Naval Oil Shale Reserve (a.k.a Roan Plateau), and his complete re-write of the oil and gas rule book. Sometimes you just need to call a spade a spade and admit that the regulatory and tax environment in our state has been anything but stable.