With oil prices touching historic highs, will Colorado energy producers rush to increase production? Will our state’s rig count, currently at 14 according to Baker Hughes, follow prices higher? Here are four reasons why it may not.
1. Consolidation in Colorado’s DJ Basin continues to gain momentum. While oil prices are soaring, the number of DJ drillers is declining, with Civitas closing its acquisition of Bison Energy this week and PDC Energy announcing plans to acquire Great Western Petroleum. Seven operators active in the DJ previously – Bonanza Creek, High Point, Extraction, Crestone Peak Resources, Bison, Great Western and PDC – now have become two.
In light of pending transaction closings, rigorous assets evaluation processes and enormous merger integration complexities, how quickly can surviving Colorado operators move to boost production, even if they want to? Will they find the infrastructure and talent pool – drilling and completions contractors, engineers, geologists, landsmen, suppliers of pipe and sand – ready to go, or has consolidation already taken a bite out of capacity?
2. Expectations from oil and gas investors for operating and financial discipline, substantial free cash flow and hefty investor returns won’t necessarily give way in the face of price-driven euphoria. PDC’s CFO told investors recently that “our first commandment is to honor the base dividend.” In addition, the emergence of ESG as a powerful force informing decision-making and resource allocation inside oil and gas companies may serve as a boardroom counterweight to operations leaders eager to ramp up drilling plans.
3. In an industry with very long planning and capital deployment horizons, executives and investors have long memories. None have forgotten that less than 24 months ago, the WTI futures contract settled in negative territory for the first time, closing at -$37.63 on April 20, 2020. It was a pandemic shock that won’t be forgotten anytime soon.
What happens to prices in six months if world oil markets are not rocked further by the Ukraine – Russia conflict, or if another Covid variant in the fall impacts consumer and business appetite for petroleum? What if monetary tightening by the Fed leads to a demand-damaging recession later this year? Uncertainty, and the cost of being wrong in a capital markets environment with little tolerance for risk and no tolerance for error, may restrain producers’ decision-making.
4. While the 2019 passage of Colorado SB-181 and resultant rulemakings in 2020 – 21 have not yet proven to be the industry death knell that some predicted, there are signs that regulators and operators are still finding their way on how to permit energy production while protecting public health and the environment and fulfilling legislative intent.
One recent example is the Colorado Oil and Gas Conservation Commission’s decision to delay approval of a drilling plan submitted by Occidental Petroleum subsidiary Kerr-McGee and a request that the company reconsider and explore using other sites. The Kerr-McGee plan called for 33 new wells on two sites in Firestone, within 2,000 feet of nearby homes. Chances are that oil and gas operators in Colorado are watching this application closely as a test case for post-181 permitting of large projects under the new regulatory framework.
Only time will tell whether more drilling rigs will rise throughout Colorado’s Wattenberg Field in response to today’s gravity-defying oil prices – or whether longer-term fundamental realities will get in the way.
What’s your reaction? Leave a comment below. If you are a Colorado oil and gas operator with permitting plans, we’d welcome the chance to discuss putting our communications and community engagement expertise to work for you.
