press release

Proposition 112 puts Colorado’s oil and gas future in the hands of voters

November 1, 2018
Share Share by Email Share on Facebook Share on LinkedIn Share on Twitter

- Rystad Energy observes strong evidence that operators are hedging against potentially adverse voting outcome

The Denver-Julesburg (DJ) basin in Colorado has turned into a huge success story for the oil industry in recent years, but the upstream sector in the state could be dealt a critical setback when voters go to the polls on November 6. Oil companies in the DJ basin have realized dramatic improvements to well economics, with average wellhead breakeven oil prices falling from $80 per barrel in 2010-2011 to just $30-$32 per barrel in 2017-2018.

The DJ basin does not get the level of attention generated by the highly prolific Permian basin in West Texas and New Mexico – the primary contributor to US oil production growth of late – but the upside potential of Colorado’s oil output is formidable. This upside, however, could effectively be struck down by next week’s decision on Proposition 112, when Colorado voters cast their ballots in the US midterm elections. The proposal would restrict oil companies from drilling any wells within 2,500 feet of homes, water sources and areas designated as “vulnerable”.

Ahead of the upcoming vote on Proposition 112, Rystad Energy has observed the following:

  • Colorado oil production has gained significant momentum over the summer months, trending towards 550,000 bpd by the end of 2018.
  • We see strong evidence of operators fast-tracking permitting activity to mitigate potential effects of an unfavorable outcome of the Proposition 112 vote.
  • If passed, Proposition 112 would eliminate – to varying degrees and depending on proximity to residential areas – many future drilling locations for operators in the DJ basin, ranging from 67-71% for HighPoint Resources and Noble Energy, to 94-97% for Anadarko and PDC Energy.
  • Impact on DJ basin oil production won’t be visible before 2021, but output would likely enter into a multi-year phase of decline after 2020 if Proposition 112 is passed, as opposed to expectations of continuous growth through the mid-2020s if it is rejected by voters. The long-term impact of the Proposition 112 for Colorado’s oil & gas production and industry would be dramatic.

“Rystad Energy observes strong evidence that operators are hedging against a potentially adverse voting outcome. Given that permits approved before the vote will be exempt from the new restrictions, we have seen a strong uptick in permitting activity in the DJ Basin during the third quarter of 2018,” says Artem Abramov, Head of Shale Research.

Weld Country, the core producing county in the DJ basin, exhibited a sequential jump of more than 200 drilling permits granted in the third quarter versus the second quarter, creating an anomaly in the number of approved permits relative to the permitting activity range seen in the previous six quarters.

Rystad Energy has also clearly seen that the recent increase in permitting activity has been driven by locations within the buffer zone, emphasizing attempts by E&P companies to secure locations in case Proposition 112 is passed. Broomfield County (consolidated city) represents an interesting case of how this has played out practically. “No new wells have been turned-in-line since 2012, but this year alone Extraction Oil & Gas suddenly received permits for 71 Niobrara locations, all with proposed two-mile lateral spacing. Needless to say, there is literally no land in Broomfield that is outside the 2,500 foot buffer zone proposed in Proposition 112,” Abramov observes.

Figure 1: DJ Basin Colorado, approved APDs by quarter and County in number of permits from 2016 to 2018, source: Rystad Energy ShaleWellCube

Looking at the potential impact of Proposition 112 on activities in the DJ basin, it is worth noting that three out of the six largest operators (Anadarko, Extraction Oil & Gas and PDC Energy) have more than 90% of their net acreage within the buffer zone. For PDC Energy the impact of Proposition 112 would be particularly dramatic, invalidating 97% of the company’s acreage. Noble Energy, SRC Energy and HighPoint Resources would also be severely affected, but to a lesser extent, as they show, respectively, 71%, 79% and 67% of their acreage within the buffer zone.

“DJ acreage ranks high in portfolios of all active operators. Hence, even a reduced size of the remaining Tier 1 well inventory should not eliminate its development as long as operators’ decisions are guided by economic rationale. In the medium-term, we expect activity to migrate gradually towards federal lands,” says Alexandre Ramos-Peon, Shale Analyst at Rystad Energy.

Rystad Energy expects that Proposition 112, if passed, would have only a marginal impact on oil and gas volumes that are expected to come from already producing wells, drilled but uncompleted wells (DUCs) and already permitted drilling locations. Hence, existing DUCs and approved permit inventory is sufficient to maintain oil production growth through the second quarter of 2020 and will be able to push DJ basin production upwards from 470,000 bpd in the third quarter of 2018 to more than 630,000 bpd in the second quarter of 2019 without contributions from future permits. Significant production support from existing permit inventory will extend even into 2021, as the current size of inventory suggests that not all permits will be drilled within the initial two-year period and they will have to be renewed to be drilled later.

Figure 2: A chart showing DJ, Colorado, oil production outlook and Proposition 112 Impact in thousands barrels a day from 2018 to 2021, Source: Rystad Energy ShaleWellCube Premium

“If Proposition 112 fails to find sufficient voter support, we see DJ basin oil production approaching 800,000 bpd by the end of 2021. However, if Proposition 112 passes, we conclude that some operators, whose inventory size is impacted dramatically, would not be able to deliver on expectations,” Ramos-Peon says.

In addition, with activity migration towards federal lands where permit processing times are much longer, Rystad Energy expects to see gradual decline in activity as current permit inventory depletes. In such scenario, we see DJ oil production peaking in early 2021 and falling below current production levels by 2023-2024.

“The long-term impact of Proposition 112 on Colorado’s oil and gas industry would be dramatic. While the state economy is believed to be well diversified, the impact would be felt by the entire state with up to 200,000 anticipated job losses, up to $10 billion in lost tax revenue by 2030 and a reduction of more than $200 billion in GDP over the same period,” Artem Abramov concludes.


Proposition: On November 6, 2018, Colorado voters will decide on Proposition 112, which, if passed, would require any new oil and gas development to be set back 2,500 feet from occupied structures (homes) and “vulnerable areas” like playgrounds and natural water sources. The requirements would not apply to oil and gas development on federal lands and to all drilling permits approved before the effective date of the measure. The current requirements specify that wells must be 1,000 feet from high-occupancy buildings such as schools and hospitals, 500 feet from occupied buildings such as homes, and 350 feet from outdoor areas like playgrounds.

Horizontal drilling: The shift towards horizontal drilling and gradual growth in well complexity (lateral length, proppant and frac fluid loading per foot) have led to improved well productivity in the DJ basin over time. “The improvement in the cost structure of horizontal wells was particularly impressive in the DJ basin, with costs per foot falling by about 60% between 2010-2012 and 2016-2018. As of 2018, average drilling and completion costs per perforated lateral foot for Niobrara wells in the DJ basin are observed around $500, which is rarely seen in other US plays. Moreover, costs per foot in the $400-$450 range are quite frequent for two-mile laterals. This efficient cost structure is a result of relatively shallow landing zones, efficient in-basin logistics and infrastructure, "monster" multi-well pads with 12-20 wells, resulting in low cycle times, and a high degree of consolidation within the basin where most activity is driven by five or six operators,” comments Artem Abramov, Head of Shale Research at Rystad Energy.

Colorado oil production: While Colorado cannot compete with the Permian, Bakken and Eagle Ford basins in terms of total oil production, it is among the top six producers in the US Lower 48 states, behind Texas, North Dakota, New Mexico and Oklahoma, and competing with declining oil production in California. In fact, preliminary production data for August 2018 indicates monthly additions of at least 40,000 bpd in the conservative case, whereas actual additions are likely to exceed 50,000 bpd. Start-up activity jumped to more than 200 wells per month and has been maintained at this level in both July and August. While preliminary fracking data suggests that activity levels should ease towards the year-end, typical Colorado oil completions reach peak production two or three months after the wells are turned-in-line. Hence, the impact of abnormal start-up activity on production will persist until November 2018. Consequently, Colorado oil production will continue growing and is set to move above 550,000 bpd before the end of 2018. This will correspond to growth of about 30% over a six-month period.

Figure 3: Colorado oil production and TIL activity in thousand barrels per day, history and outlook




Artem Abramov
Head of Shale Research
Phone: +47 97 60 89 44

Julia Weiss
SVP, Head of Marketing
Phone: +47 48 29 87 61

About Rystad Energy

Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry. 

Our products and services cover energy fundamentals and the global and regional upstream, oilfield services and renewable energy industries, tailored to analysts, managers and executives alike.