BTU Analytics monitors recent drilling activity as a leading-edge indicator of well economics before they enter our BTU Economics View data set. While most basins’ drilling activity occurs on acreage representing a typical distribution of breakeven estimates, there are months where drilling activity tells an atypical story of well economics. Today’s Energy Market Insight will dissect the anomalous March drilling activity along the fringes of the DJ Basin in higher breakeven acreage.
The DJ Basin is often lauded as one of the lowest breakeven basins focused on oil production due to low well costs and compact well spacing. However, one of the biggest potential threats to long-term activity is the rapidly growing population along Colorado’s Front Range. With new housing subdivisions popping up in what was once farmland, the acreage available for operators to position well pads on is shrinking, particularly in the core of the DJ in Weld county. Additionally, the passage of SB-181 in 2019 has allowed for greater local control of regulations affecting oil and gas development. SB-181 has also redirected the Colorado Oil and Gas Conservation Commission (COGCC)’s mission to prioritize public health and the environment instead of fostering oil and gas production as previously directed. Due to COVID-19 pandemic, the new statewide rules for oil and gas did not go into effect until January 2021.
The COGCC overhauled well permitting regulations as part of the new rules enacted in January 2021. The new rules increased the minimum setback for well pads from occupied structures fourfold to 2,000 feet. Regulators have stated that exceptions to setback requirements will be possible through several measures such as installing mitigating structures. However, the new permit appeals process is largely untested and presents a potential threat to securing future permits. One operator, PDC Energy, recently vocalized intent to navigate the new regulatory process by submitting over 500 permit applications this year, which could provide insight into the new COGCC approval process.
As shown above, drilling activity shifted from acreage with proven well results in early 2021 to the fringes of the basin in March. Producers could believe that recent crude price strength supports drilling high breakeven acreage. However, this acreage has an indicative breakeven of over $80 and thus sets the bar quite high for achieving economic returns on this acreage, even with incremental well cost improvements. An alternative hypothesis is that producers could be drilling wells with already approved permits that would not be approved if applied for under the new setback rules. Previously approved permits that do not meet current setback requirements have not been rescinded by the new rules, but the risk of regulatory changes could incentivize drilling these locations while they are still available, regardless of previous well economics in these areas.
Using drilling activity as a leading-edge indicator for future well economics assumes new well performance mimics previous projects, which is not necessarily dooming these wells to unprofitability just yet. However, it is abnormal for a basin with typically attractive well economics to experience such an uptick in drilling on acreage along the fringes. Strong crude prices could have provided confidence to drill these locations, or regulatory uncertainty could be shifting where drilling activity occurs in the DJ Basin. To evaluate these wells’ performance when turned to sale later this year, request more information about our BTU Economics View for custom breakeven maps.