US oil and gas companies learn to live with higher standards [GGP]
The standard shorthand for political allegiances in the US divides the country into red (Republican) and blue (Democratic) states, but those designations are fluid. Ohio, a state that President Barack Obama won with about 51% of the vote in the 2012 election, has moved towards supporting Republicans, and was won by President Donald Trump with 53% of the vote in 2020. Colorado, which also voted about 51% for President Obama in 2012, moved in the opposite direction and voted 55% for President Joe Biden in 2020. Its last Republican governor left office in 2007.
Colorado’s shift from a Democratic-leaning “battleground state” to a “Democratic stronghold” has been reflected in the positions on energy policy taken by the voters and elected officials. Oil and gas companies have faced increasingly onerous restrictions on their operations, and are threatened by additional regulatory burdens in the future.
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Among US states, Colorado is a top-six producer of crude oil and a top-ten producer of natural gas. Other significant oil and gas producing states are typically more accommodating towards the companies that are responsible for that production. Colorado’s demanding regulatory environment does not seem likely to stop the state’s oil production growing over the next few years. But it is helping to shape the structure of its oil and gas industry.
Chevron this week announced a vote of confidence in Colorado’s future as an oil and gas producer, agreeing to pay US$7.6 billion in shares and assumed debt for PDC Energy, a Denver-based exploration and production company. PDC has a small position of about 25,000 net acres in the Permian Basin, but the majority of its acreage and production is in the Denver-Julesburg Basin in Colorado.
The deal represents a significant diversification for Chevron, which today has about 75% of its upstream net present value in its top four areas: the US Permian, Australian LNG, Kazakhstan and the US Gulf of Mexico. Acquiring PDC adds a fifth major group of assets in the DJ Basin.
At the presentation for the deal announcement, regulatory threats to that business were high on the list of analysts’ concerns. In 2019, Colorado passed the most radical overhaul of its oil and gas regulations in decades, changing the priorities for state regulators from promoting industry development to “public safety, health, welfare and the environment”, and giving cities and counties the authority to control oil and gas development.
Other changes in recent years have included a ban on routine flaring and venting, setback rules preventing most wells being drilled within 2,000 ft of homes or schools, new requirements for oil and gas producers to cut their greenhouse gas emissions over time, and the state’s first comprehensive oil and gas development plan.
This year, there was an attempt in the state legislature to reform air quality rules and permitting in ways that the oil and gas industry warned “would functionally prohibit new permitting for most industrial processes in the state.” That proposed law was substantially revised before being passed, and Dan Haley, President and CEO of the Colorado Oil & Gas Association, said the amended bill would “allow for us to continue producing some of the cleanest molecules of oil and natural gas on the planet.”
Even so, the originally proposed bill was a sign that the pressure on the industry remains. Kait Schwartz, Director of API Colorado, another industry group, commented when it was introduced: “It feels like Groundhog Day, with this measure only the latest in a yearslong series of legislation that aims to completely halt natural gas and oil production in Colorado.”
Chevron, however, believes it can work with the state’s politicians and regulators. Mike Wirth, Chevron’s chief executive, gave an interesting answer on the subject on the call for analysts to discuss the deal. It is worth quoting at length:
“I think both companies have demonstrated a respect for the higher expectations that have been expressed by the citizens of Colorado, by the elected officials in Colorado, and frankly, our industry is holding itself to a higher standard as well. Our expectations for our own operations have risen. Rather than view this as some sort of confrontation, I think we’ve viewed it as a way to raise our own game.”
PDC has already been highly successful in securing permit approvals, obtaining about 1,000 in Colorado in the past nine to ten months. Its Colorado acreage is almost entirely in Weld County, where its approvals will enable it to continue development at current levels into 2028.
For Colorado’s industry overall, the tighter regulatory environment seems unlikely to stop production growing. Wood Mackenzie expects growth of about 18% in Colorado’s crude oil production over 2022-28, only a little less than the 23% growth we expect for the US Lower 48 states as a whole.
For natural gas, we expect the state’s production to be broadly unchanged over the same period. Colorado will lag behind states including Texas, Louisiana and New Mexico, where we are forecasting growth, but we are not expecting its production to collapse.
Where Colorado’s stricter regulations do seem to be having an impact is on the structure of the industry. More burdensome regulatory requirements are one of the factors driving consolidation.
“The result of all of the regulations so far has been to force significantly more planning and commitment by operators, and it’s not an easy environment for small companies to navigate,” says Ryan Duman, a principal analyst in Wood Mackenzie’s Lower 48 Upstream team.
“Following this deal, there will be only three significant companies effectively active in Colorado: Occidental Petroleum, Chevron and Civitas. There are a handful of smaller companies, but anyone with any sizeable position or production has been eaten up. If you don't have very robust environment, health and safety and regulatory teams, you can't operate there.”
It’s a point that can be extrapolated to the US national picture. President Biden’s moves in his first few months in office that would have restricted oil and gas production have largely been abandoned. By last year, he was actively trying to encourage increased output, and his administration’s recent decisions, such as the approval for ConocoPhillips’ Willow project in Alaska, have tended to support that goal.
However, pressure on oil and gas companies for higher environmental standards is still there, from investors and other stakeholders, including the federal government. As Chevron’s Wirth noted, “our expectations for our own operations have risen.” The charge on methane emissions from many oil and gas facilities that was included in the Inflation Reduction Act, passed last year, will add to that pressure.
Scale almost always helps with managing regulatory burdens. Escalating demands for improved environmental performance will be one of the key factors driving consolidation in the US oil and gas industry in the months and years to come.
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.