In Colorado, Industry Navigates New World of ESG

The Daley Note: December 15, 2022

With some of the nation’s strictest environmental and permitting laws, Colorado is the tip of the spear in the new world of Environment, Social and Governance (ESG) investing. The transition has been a cause for concern in East Daley’s outlook for the Denver-Julesburg (DJ) Basin, but recent moves by state regulators go a long way to allay our fears. 

Want environmental rules, social friction and more government? Colorado has it all. Colorado enacted the first state-level methane regulations in 2014, then further expanded the requirements in 2021. Colorado's methane rules were used as a blueprint for national regulations recently proposed by the Environmental Protection Agency (EPA) under the Biden administration.

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Colorado also has a fresh set of regulators and a new rulebook for permitting oil and gas wells. After replacing nearly all sitting members in 2020, the Colorado Oil and Gas Conservation Commission (COGCC) adopted a sweeping reform package for new drilling permits. Since the end of 2020, the COGCC has required all drilling activity take place at least 2,000 feet away from any homes or commercial structures. The 2,000’ setback rule has been a key source of uncertainty for development and long-term supply in the DJ Basin, which spans the rapidly growing Colorado Front Range. 

The pace of permitting had been a trickle following adoption of the 2,000’ setback rule, with state regulators approving around 20 permits per month. This changed in August 2022, when 108 permits were awarded in the DJ Basin. The main operators obtaining new permits include PDC Energy (PDCE), Enerplus Resources (ERF) and Mallard Exploration.

Since the August permit dump, the COGCC has continued to approve plans for large upstream programs. In November, the agency approved an application by Crestone Peak Resources to drill 151 wells near Aurora, CO. Last week, the COGCC approved PDCE’s comprehensive development plan for its Guanella project in Weld County, which could total up to 450 wells.

In total, there are 938 approved permits to drill wells in the DJ, providing about 11 months of permit inventory. Private companies have on average 16 months of permit inventories, while public companies have around 8 months. 

There are 16 rigs active in the DJ Basin currently, which we model on the DCP Midstream (DCP), Western Midstream (WES), Summit Midstream (SMLP) and private Cureton systems in our Rockies Supply and Demand Forecast. The basin rig count is 21% higher than the 13 rigs active a year ago. The gains mainly reflect new drilling by private operators, a trend also seen in other Rocky Mountain basins.

The outlook is encouraging in the DJ Basin. We project 19 active rigs in 2023, with oil production to average 527 Mb/d and gas production to average 2,973 MMcf/d. But long-term growth will be directly tied to the number of new permits awarded in the future. - Maria Paz Urdaneta & James Taylor Tickers: DCP, ERF, PDCE, WES, SMLP.