Oil and gas production on downward path

Colorado oil and gas drilling permit numbers are expected to drop by 38 percent by the end of the year and the number of active drilling rigs down by 61 percent, according to projections by the Colorado Oil and Gas Commission.

While that may sound like more bad economic news for the state – and it is – the assertion that tougher drilling rules that went into effect in April are the main culprit is one the industry supports and the state’s oil and gas commission rejects.

“There’s no question (the rules are) having an effect on those figures,´ said Nate Strauch, spokesman for the Colorado Oil and Gas Association, which represents the drilling industry. “It’s slowed to a snail’s pace under the new rules.”

The rules, adopted after numerous statewide meetings and over the objections of the oil and gas industry, include stronger environmental protections and require more notice to local landowners about proposed drilling activities.

Critics say the rules will slow down oil and natural gas production in the state and drive away new drilling companies and the jobs they would bring.

But David Neslin, director of the state oil and gas commission that oversees the industry, said this year’s projected drop in production comes after a record year in 2008, when gasoline topped $4 a gallon and natural gas – the state’s biggest mineral resource – sold for close to $8 per million BTUs.

Neslin noted that the price of natural gas has dropped by more than 60 percent since then, causing drilling companies to pull back on their activities overall.

“I believe the largest factor is the decrease in the commodity price,” he said. “That has had a dramatic effect in natural gas production, not just in Colorado but in other western states like Wyoming, Utah and Oklahoma.”

Neslin said natural gas production in 2009 is down by 67 percent in Utah, 64 percent in Oklahoma, 60 percent in Texas and 56 percent in Wyoming. “Colorado’s reduction in drilling activity is very comparable to other states,” he said.

COGA’s Strauch acknowledges that the drop in demand for natural gas has had a widespread effect. “There’s no question the price of natural gas has been the No. 1 factor in the slowing down of activity across the U.S.,” he said.

Worse numbers ahead?

Strauch said Colorado is poised to post even worse production figures because most of its 2009 permits were filed before the new rules went into effect April 1. “New Mexico, which also has constraining rules, added 18 (drilling) rigs since May while Colorado has remained virtually flat,” he said. “Our real concern is that there’s this large cadre of permits keeping (the industry) going. Once those are gone, what’s going to happen?”

Last month, Senate Minority Leader and gubernatorial candidate Josh Penry, R-Grand Junction, and Rep. Cory Gardner, R-Yuma, sent a letter to Neslin asking the commission to consider extending drilling permits from one year to two years with an option to extend the permit for an additional year.

“Changing this rule will open new lines of credit and attract weary investors who might otherwise decline to put forth the time and effort necessary to overcome Colorado’s regulatory hurdles for a one-year permit,” the letter said.

In a reply sent earlier this month, Neslin said the request was valid and worthy of consideration: “I can assure you that our staff and commissioners will give this issue full and timely consideration.”

“We want to work with the industry to make sure these new rules are implemented in a fair and predictable manner,” Neslin said of the letter exchange.

While oil and gas activity is down from last year’s record level, that’s good news and bad news for the government entities that receive severance tax funds from drilling in their jurisdictions.

Don Warden, Weld County’s director of finance and administration, said the county realized a huge severance tax and federal mineral lease bonanza for the 2009 fiscal year that ended June 30, raking in more than $3.3 million. Last year, the county took in about $440,000 combined.

But the fiscal year that began July 1 is expected to have an entirely different outcome, Warden said.

“We’re projecting that next year that could drop by half,” he said.

Steve Porter covers agribusiness and natural resources for the Northern Colorado Business Report. He can be reached at 970-221-5400, ext. 225, or at sporter@ncbr.com.

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