Back in March, the DC Circuit Court of Appeals ruled that the Bureau of Land Management (BLM) had failed to follow its obligations under the National Environmental Policy Act by neglecting to quantify the potential greenhouse gas emissions associated with the sale of federal lease parcels in Wyoming in its Environmental Assessment of the sale. The lawsuit filed against the BLM also included lease parcels sold in 2015 and 2016 in Colorado and Utah. At the end of May, the Department of the Interior was granted a request to remand the Environmental Assessments for the Colorado and Utah BLM leases for further analysis. In contrast to the March ruling, the judge’s order did not halt drilling activity on the leases in question. In our March Upstream Outlook, we concluded that the ruling on Wyoming leases did not materially change our production forecast for Wyoming because few of the lease parcels in question were in core development areas. Is this also the case for the Colorado and Utah parcels, and what risks could this order present to future exploration and development?
The BLM submitted new reviews of the climate change impacts of the Wyoming leases in April, finding that there would be “minor environmental impacts” from the individual leases. The revised analysis concluded that the agency had acted correctly in placing the lease parcels for sale. By asking the judge to remand the assessments for Colorado and Utah, the BLM will have an opportunity to conduct additional analysis of the lease sales without waiting for a formal ruling in the DC Circuit. The map below shows lease parcels affected by the May DC Circuit order, wells drilled on those leases since 2015 in pink, wells drilled in Utah and Colorado since 2015 in blue and has outlines of BTU Analytics’ Rockies sub-locations.
In the original ruling in Wyoming, there had not been drilling activity by publicly traded E&Ps on the federal leases since they were sold. Using GIS tools, we estimate that there have been 25 wells drilled on the lease parcels in the Colorado and Utah case since 2015. Nine of the wells were drilled by E&Ps that were publicly traded at the time of drilling, as seen in the chart below which shows wells drilled on the leases by operator. Of the nine wells, the most recent well drilled was in January 2018 in BTU’s San Juan sub-location. Encana (NYSE: ECA), BP (NYSE: BP), EP Energy (now de-listed from the NYSE), and Southwestern Energy (NYSE: SWN) all drilled wells on the land leased in the BLM sales. Southwestern Energy has not drilled a well in Colorado since 2015 when they drilled in the Sand Wash Basin. Encana exited the Rockies with its sale of its San Juan assets in April 2018 and only BP remains active. Since the judge has not halted drilling activity on the Colorado and Utah leases, downside risk to publicly traded E&Ps is unlikely.
Like in the Wyoming ruling, the leases under scrutiny in this order are outside of core development areas in the Rockies. Most of the leases in Colorado and Utah are in BTU’s Uinta and Paradox sub-locations, as seen on the map above. The chart below shows percentage of total oil and dry gas production by sub-location where there are federal leases affected by the May order. Of these sub-locations, dry gas production was concentrated in the San Juan (this data includes San Juan New Mexico production) until increased dry gas production in the DJ beginning in 2013 pushed the San Juan’s proportion of total dry gas production below 50%. Increased oil production from the DJ since 2013 also pushed the Uinta’s share of total oil production below 20%. Though the Uinta and Paradox may have the most drilling activity on these federal leases, regional production is concentrated in other areas.
Given the similarity between the leases in Wyoming, Utah, and Colorado, it is possible that the BLM will also find that environmental impacts from the leases in Utah and Colorado would be minor and that the agency was correct in allowing the leases to be sold. Given that the leases have had little drilling activity since they were sold and are outside of core development areas, BTU maintains that the March ruling and this order will not impact our Rockies production forecast. However, the case could set precedent for future BLM lease sales to more directly consider the greenhouse gas emissions potentially associated with drilling activity on federal leases, which could present downside risk to exploration and development in the Rockies over the long run. To follow, BTU Analytics’ view on oil and gas production across the United States and Canada, request a sample of our Upstream Outlook