Colorado’s No. 1 oil and gas producer girds for economic fallout

Colorado’s No. 1 oil and gas producer girds for economic fallout

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Colorado Drilling Setbacks

A drilling rig operates at a natural gas well pad in front of the Roan Plateau near Rifle, Colorado. Weld County is bracing for the economic fallout expected as oil and gas prices continue to dip.

DENVER — Weld County, the state’s dominant oil-producing area, is bracing for major cutbacks in production because of tumbling prices and the coronavirus, and anticipates a roughly $50 million hit to its 2021 budget as a result.

The economic fallout in Weld County, the epicenter of the state’s oil industry, is being felt, said Commissioner Barbara Kirkmeyer. She said she is hearing of reductions at businesses that service oil and gas companies, but declined to identify them because they haven’t said anything publicly.

The county has 20,354 of Colorado’s nearly 52,000 active oil and gas wells. Dropping demand in the face of the economic clamp-down due to coronavirus and falling oil prices spurred by Saudi Arabia’s flooding of a saturated market with cheap oil means some producers will struggle to break even, The Denver Post reports.

Occidental Petroleum, the major producer in Colorado’s big oil play, the Denver Julesburg Basin, said that it will cut its quarterly dividend by 86 percent and its capital spending this year to between $3.5 billion and $3.7 billion from $5.2 billion to $5.4 billion.

Denver-based PDC Energy, which operates on Colorado’s Front Range, said it expects to reduce its full-year capital investments by 20 percent to 25 percent compared to its range of $1 billion to $1.1 billion and to cut the number of drilling rigs to two from three.

Noble Energy, another major producer in the basin, said in a release that it is cutting its capital spending by about $500 million, or nearly 30 percent, and has identified more than $50 million in reductions.

Because of the timing of how oil and gas is taxed, Weld County won’t see the property tax declines from lower production rates until 2021. Kirkmeyer said in 2019, $890 million in property taxes were paid to all entities in the county. Of the total, $490 million came from oil and gas.

Weld County, which has a five-year strategic budget plan, will be able to weather the financial storm, Kirkmeyer said. The county will pare its capital spending.

“Weld County government will be fine because we’ve lived through downturns in the past more than once,” Kirkmeyer said. “Quite honestly, I don’t know what the rest of the state is going to do.”

Oil and gas property taxes and severance taxes, imposed on nonrenewable natural resources that are “severed,” are an important part of the state budget, generating money for education and grants to local governments for roads and other projects.

Oil prices started dropping before the coronavirus began spreading and driving down demand for oil and gas. Companies, including Occidental, were cutting back as Wall Street continued to push for producers to pay down debt and increase cash flow.

In the midst of the coronavirus pandemic, Russia rejected a plan by Saudi Arabia for further production cuts to stabilize prices, leading Saudi Arabia to ramp up production in retaliation. Oil prices have plummeted, shaking Wall Street and markets worldwide. The price per barrel was slightly below $28 Tuesday.

“I think it’s going to drop below at least $20 a barrel for a period of time,” said Bernadette Johnson, vice president of strategic analytics with Enverus, which provides data and intelligence to energy companies.

The price hasn’t been that low since the early 2000s, Johnson said. While Saudi Arabia and Russia, part of the so-called OPEC+ alliance, could call an emergency meeting, no meetings are currently planned until June, which means cuts in production wouldn’t kick in until July, she said.

And no one knows how long the coronavirus crisis and its suppression of demand are going to last, Johnson said.

Kirkmeyer said even then, Senate Bill 181, approved last year, is also a problem for Colorado’s oil and gas industry. State agencies are writing rules to implement the law, which requires that oil and gas be regulated in a way that protects public health and safety and the environment. Some of the changes have included more frequent inspections of equipment to reduce emissions and new rules for underground lines.

“SB 181 was kind of like the first strike,” Kirkmeyer said. “It created uncertainty, instability.”

The number of permits approved in 2019 dropped from the previous year. While the new rules are being written, the Colorado Oil and Gas Conservation Commission has further scrutinized drilling applications based on criteria intended to carry out the goals of the new law. In 2019, a total of 2,111 well permits were approved, compared with 5,116 permits in 2018.

Colorado Rising, which led the failed campaign for a 2018 statewide ballot proposal calling for 2,500-foot buffers around new wells, said events in the global oil market and the U.S. industry’s heavy debt loads are to blame for the downturn, not SB181.

“The U.S. shale industry has been on the rocks for years, prior to SB181. The stresses are simply a result of their own behavior,” spokeswoman Anne Lee Foster said.

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