Oil, natural gas not surging in Colorado despite high prices

Oil prices are staying north of $100 a barrel. Natural gas prices are more than twice as high as a year ago. Europe is looking to replace the oil and gas it gets from Russia as bans and embargoes imposed because of the country’s invasion of Ukraine kick in.

Sounds like a set-up for an energy boom in the U.S. and in Colorado, one of the country’s leading oil and gas producers. But don’t count your barrels of oil before they’re pumped.

Oil and gas producers are not immune from the supply-chain disruptions and labor shortages that have bedeviled businesses since the coronavirus pandemic began. In addition, companies are still toeing the fiscal-discipline line laid out by investors and Wall Street to pay down debt that was racked up when the shale-oil companies were expanding.

And in Colorado, industry representatives say new regulations have created uncertainty and discouraged investment in new drilling. Meanwhile, drivers are hoping for relief as gas prices keep rising.

Demand for oil plunged worldwide when business activity and travel dropped after COVID-19 spread in 2020. The pandemic, coupled with an oil price war between Saudi Arabia and Russia, sent demand for oil and natural glass plummeting, said Lynn Granger, executive director of the American Petroleum Institute-Colorado.

“Now it’s roaring back and unfortunately we can’t just flip it on and off,” Granger said. “And here in Colorado, with our very robust regulatory system, what we’ve seen is other parts of the country have been much more quick to recover.”

There were 16 drilling rigs in Colorado in late May, up from 12 at the end of 2021, according to Baker Hughes. When the pandemic hit, the number of rigs dropped from 21 in March 2020 and stayed in the single digits through March 2021.

Colorado’s oil production soared to a record 191.2 million barrels in 2019. In 2021, the total output was 153.5 million barrels.

The latest data shows that Colorado is producing 429,000 barrels of oil a day, 10.8% below the same time in 2019, said Dean Foreman, chief economist for the national office of the American Petroleum Council.

Foreman said Colorado plays an important role in boosting production to ensure U.S. economic and energy security. The state is the country’s fifth-largest oil producer and seventh-largest natural gas producer, according to the U.S. Energy Information Administration.

The nation’s crude oil and natural gas inventories are at low levels, he said. The country is producing about 11.9 million barrels of oil a day, compared to about 13 million barrels in late 2019.

“The growth is certainly slower than you might expect given where prices are at this point,” Steve Diederichs of Enverus, an energy industry data and analytics firm, said of production nationwide.

Diederichs, vice president of intelligence for Enverus, said one of the factors is the fiscal restrictions managers have imposed on companies to decrease debt and increase cash flow and dividends to shareholders.

“That was always the knock on shale oil. A lot of people had questions about at what point do you shift from growth mode to a more sustainable business model where investors actually see returns on their dollars invested,” Diederichs said.

Other factors affecting how quickly the oil and gas industry can turn up the taps are ongoing kinks in the supply chain and tariffs that have constrained the availability of steel for tubing and sand used to frack wells. A new report by the Payne Institute at the Colorado School of Mines said companies have also cited problems with supplies of cement and workers.

The number of drilling rigs and fracking crews nationwide were down about 25% in the first quarter of 2022, compared with levels in late 2019, according to the Payne Institute. As of May 6, there were 689 drilling rigs and 278 fracking crews across the country.

While Brad Handler, senior fellow for public policy at the Payne Institute, said drilling is picking up in the Permian Basin in West Texas and New Mexico, he thinks the Denver-Julesburg Basin in northeastern Colorado is going to “remain more stubborn than it should.”

“I feel like it’s a basin that’s going to lag at least a couple of the others,” Handler said.

Granger of API-Colorado said the time spent writing new rules to carry out a 2019 law mandating an overhaul of state regulations held up approval of permits. She said it can take companies several months to a year to meet all the requirements for submitting applications for permits and then it can take several months for the Colorado Oil and Gas Conservation Commission to process them.

At the federal level, Granger said the Biden administration has sent mixed signals by first canceling pipelines and issuing a moratorium on new leases on federal lands and then urging U.S. companies to produce in response to the war in Ukraine and rising prices at the pump.

At the state level, COGCC spokeswoman Megan Castle said of 1,432 active well permit applications, 1,026 have been approved since Jan. 15, 2021.

“We would acknowledge there was a learning curve along with the implementation of the new rules. We’ve been working very closely with operators on this,” Castle said.

The COGCC has also reorganized its staff to handle the permitting process and is looking at possibly adding more staff, she added.

The oil and gas industry loves to blame problems on regulations, said Andrew Forkes-Gudmundson, deputy director of the League of Oil and Gas Impacted Coloradans, which has advocated for stronger regulations.

“Production continues in Colorado, the COGCC is approving permits, and the industry is raking in ridiculous profits while blaming the president and the governor of Colorado,” Forkes-Gudmundson said in an email.

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