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Colorado Oil Industry Takes Hit Sooner, Deeper than Other U.S. Oil Basins. Here’s Why.

Source: Denver Business Journal, Greg Avery, May 8, 2020

The price shock and drop in demand that’s forcing cutbacks and hundreds of layoffs in the oil industry is likely to cut deeper into Colorado’s sector and last longer than in other oil-producing regions.

Oil companies have already been quicker to lay down drilling rigs in response to the collapse of fuel demand caused by the Covid-19 pandemic. Well shut-ins have started to affect production, and experts say Texas is more likely to spring back first when prices recover because of its proximity to the nation’s largest oil refining capacity.

“Certainly in downturns and low oil prices, the Rockies get hit first and then hit worst,” said Chris Wright, CEO of Liberty Oilfield Services, a Denver-based fracking company. “That’s no different this time.”

When the oil markets recover, Liberty Oilfield’s fastest growth will be in West Texas because that’s likely to be where demand for fracking comes back first, Wright predicted on a call with oil industry analysts.

East Daley, a Centennial-based analysis firm, estimates Denver-Julesburg Basin production will fall by 33% over 12 months — the most of any major U.S. oil basin — while West Texas production is likely to drop only 20%.

Crude oil from the Permian Basin can fetch a premium price compared to other basins because oil producers can choose between selling crude to be refined in Oklahoma or on Texas’ Gulf Coast.

Routes to refineries out of Colorado, Wyoming’s Powder River Basin or the Bakken in North Dakota run mostly to Cushing, Oklahoma, the main U.S. pipeline and storage hub. That lack of options, and the higher pipeline costs to transport oil farther, translates into discounted prices for oil produced in the Rockies.

“It’s a story of infrastructure,” said Ryan Smith, a senior director of commodity research at East Daley Capital.

Denver-Julesburg Basin crude tends to sell for at least 20% less than the West Texas Intermediate price, the benchmark for domestic onshore oil.

In late April, when the WTI price hovered near $20 per barrel, crude prices in the DJ Basin ran $12 per barrel. That’s a price low enough to make thousands of wells unprofitable once you factor in costs for natural gas takeaway and processing, pipelines, well maintenance and waste-water disposal.

Oil companies turn off or “shut in” wells that are losing money, saving the crude for when prices rebound and a well’s production can pay for its costs.

North Dakota estimates that oil and gas companies shutting off wells in late April trimmed 400,000 barrels from daily oil production, or 33% of the state’s total.

The Colorado Oil and Gas Conservation Commission doesn’t get a definitive measure of shut-in activity until 30 to 45 days after it happens, said Megan Castle, the regulator’s spokeswoman. But natural gas pipelines coming from the Denver-Julesburg Basin, where wells simultaneously produce gas and crude, show volumes dropped 14% in the last days of April, Smith said.

He suspects that’s a byproduct of producers shutting in wells to keep from losing money on oil. If so, shut-ins may already be cutting DJ Basin output by more than 70,000 barrels a day, he said.

“That’s almost the amount you’d see headed to the Commerce City refinery,” Smith said.

The region’s economics may make oil production slower to recover when prices rise enough to make companies want to drill again.

Companies with acreage in West Texas and good pipeline access are likely to invest there first, prioritizing bigger and speedier profits.