Northwest Colorado sees slow-down in oil, gas play
August 6, 2015
Craig — Between low oil and natural gas prices and an onslaught of new regulations for federal lands and minerals, the future of oil and gas development in Northwest Colorado is hanging in a precarious balance.
In the last year, oil prices have dropped by more than half — from more than $100 a barrel to about $45 — and natural gas prices by about 30 percent to below $3, according to John Harpole, president of Mercator Energy, a consulting and brokerage firm for the natural gas industry based in Littleton.
"As a result, we've lost over 110,000 oil and gas jobs in the U.S.," Harpole said, who attributes the price drop to saturation of the market by Saudi Arabia.
In Northwest Colorado, the slump has taken a toll on new drilling, indicated by a drop in the number of drilling rigs operating in the region.
"In 2008, we had 102 rigs running in western Colorado," Harpole said. "Today, we have seven."
Natural gas is the primary resource base as opposed to oil in Northwest Colorado, with Garfield County leading production in the state in 2014 at more than 609 million MCF, a unit of measure representing 1,000 cubic feet of natural gas. By comparison, Rio Blanco County produced more than 81 million MCF to Moffat County's 16 million MCF, with Routt County producing a relatively small 143,000 MCF in 2014, according to Colorado Department of Natural Resources’ Oil & Gas Conservation Commision.
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The region saw a boom in exploration and new drilling in the past decade due to advancements in technology that opened the door to reserves that were previously cost-prohibitive to recover.
"There's been sort of a paradoxical situation where… we've established a new resource base all throughout Northwest Colorado, but we've also determined that that resource base is going be set aside for another day when natural gas prices rise to a more sustainable level," said David Ludlam, executive director of the West Slope Colorado Oil & Gas Association, a statewide trade organization.
Indeed, the largest natural gas operator in Moffat County, Wexpro, a subsidiary of Questar Corporation, disclosed in an April quarterly report that its first-quarter production was down 19 percent in 2015 compared to 2014 due to fewer wells being drilled.
"Because of significantly lower market prices for natural gas, Wexpro has scaled back its gas development drilling program in 2015 and limited its investment to the completion of wells drilled in 2014," according to the report.
Another prospective large player in the area, Southwestern Energy, is focusing more attention this year on holdings elsewhere in the country, according to its second-quarter earnings teleconference call. The company also announced Thursday that it was laying off 102 employees, the vast majority of them based in Fayatteville, Arkansas, according to Southwestern spokeswoman Christina Fowler. She said it wasn't specified whether any Craig-based employees were among them.
Southwestern's activity in Colorado, which spans a 380,000-acre "area of interest" in Moffat and Routt counties, is exploratory at this time, though it has seen some production from the handful of wells drilled in 2014.
According to Moffat County Natural Resources Director Jeff Comstock, Southwestern expressed only a slight interest in renewing its leases on a small portion of the county-owned minerals in its previous leases, part of the overall slow-down being felt by Moffat County officials.
"I don't think we've done one mineral lease (for county-owned minerals) the entire year," Comstock said. "I think the county minerals are a good indicator of (overall) interest within the county."
Compounding the industry's contraction due to prices are several sets of proposed regulations from the Bureau of Land Management — including an oil and gas amendment affecting Rio Blanco, Moffat and Garfield counties and a new sage grouse plan affecting 10 western Colorado counties — which could make oil and gas operations on federal lands or mineral estates more costly.
"Obviously low commodity prices for oil and natural gas are affecting the entire industry, however development is depressed artificially further in Northwest Colorado because of the predominance of public lands," said Kathleen Sgamma, Vice President of Government and Public Affairs for Western Energy Alliance.
If the break-even price is ‘X’ dollars per barrel in North Dakota, it's probably higher in Northwest Colorado because there's so much federal regulation to deal with, making each well more expensive than in North Dakota or Texas. That just means that companies will continue to favor assets elsewhere, Sgamma said.
Though natural gas is a versatile resource and increased demand could promote further development, natural gas production in the United States continues to outpace demand, according to Harpole, who projects the price will remain stuck in the $4 range for at least three years.
Even so, whether there is any price point at which companies will be willing to weather the maze of new federal regulations remains to be seen.