Colorado's largest oil producer has cut the number of drilling rigs it has in the state in half and is spending tens of millions less on new well development, saying state permitting has slowed so much the company can't support its usual level of business here.
The permitting for new wells in Colorado has bogged down as the Colorado Oil & Gas Conservation Commission implements tighter well location rules, leaving Houston-based Occidental Petroleum (NYSE: OXY) without the inventory of new well sites it would normally expect, the company said Wednesday.
Occidental is reassigning one of two rigs it had working in Colorado to the Delaware Basin in Texas for the second half of the year, where it can be productively used drilling new wells.
“Colorado drilling permits we have in hand are sufficient to run a single drilling rig for the remainder of 2022,” said Rob Peterson, senior vice president and chief financial officer of Occidental, during the company’s quarterly earnings call Wednesday. “It is no longer feasible to run a multi-rig program for Colorado this year given the pace of state approvals.”
Colorado overhauled its oil and gas rules after the 2019 passage of Senate Bill 181. The COGCC enacted sweeping new rules in January 2021 that encourage lower-emissions well projects with fewer impacts to nearby residents and wildlife. The new rules required a new, more detailed permitting process that companies and COGCC staff are still sorting through.
Occidental has projects to drill for about 50 new wells being reviewed for state permitting by the COGCC now and has started working on plans for another 200, the company says.
“As we do go into next year, we’ll really be capable of getting back to that two-rig count next year, maybe more,” said Richard Jackson, president of Occidental’s onshore business.
The company’s had a lot of engagement with local governments and nearby residents for the projects it wants to get permitted in the Denver-Julesburg Basin, he said.
“We feel good about the progress we’re actually making with our permits,” Jackson said.
But the COGCC’s final decision on them won’t come soon enough to warrant keeping the second drilling rig in the state in the second half of this year.
Occidental’s local first-quarter spending on new well development fell to its lowest point in years, with the exception of two quarters in 2020 when the Covid-19 pandemic and lockdowns paralyzed the economy. The company spent $87 million in the first quarter on new well development and related expenses, down almost 29% from a year earlier.
The company projects adding a total of 75 to 85 new wells in Colorado and Wyoming, with between 60 and 68, possibly more, of those expected to be in Colorado. It budgeted a little under $300 million for drilling and well completions in the region in 2022.
It completed 23 new wells in the first quarter, with two drilling rigs running early in the year.
A sense that the slowdown in Colorado permitting is a blip for the company would make the company’s drop in focus here temporary, too, executives said.
“Regulatory certainty early in the [permitting] process will allow us to add activity back in future years given the development plans we expect to submit this year,” Peterson said.
The slowdown in Colorado permitting hasn’t affected Occidental’s output much, thanks in part to better-than-expected production from wells in the area.
Its area wells averaged 286,000 barrels of oil, liquids and natural gas equivalents per day in the first quarter, the company said. That’s 3% less volume in the Rockies than in 2021.
That decline was more than made up for by production increases by Occidental in West Texas and elsewhere.
Overall, high oil prices meant skyrocketing revenue and record first quarter free-cash flow for Occidental.
The company reported $4.7 billion in first-quarter profits, or $4.65 per share, on revenue of $8.5 billion. That reversed $346 million in first-quarter losses on $5.5 billion revenue that Occidental reported a year ago. This year, first quarter free-cash flow hit a record $3.3 billion, triple what Occidental notched a year before, said Vicki Hollub, president and CEO on Wednesday’s conference call.
The revenue growth from high oil prices comes against the backdrop of unprecedented supply bottlenecks, labor shortages and cost inflation across the industry domestically, Hollub said. Occidental has been able to weather the inflation well so far because it has long-term supplier contracts in place covering most of the steel, sand and other materials and services it needs, the company said.
But if Occidental wanted to do more outside those contracts and add more U.S. production beyond its current budget, the supply inflation and scarcity would make that expansion very costly, Hollub said.
“There’s never been a time when companies have been trying so hard to increase production, but you almost can’t add anything new without value destruction now,” she said. “Some of the longer-term projects can’t get started because of the costs involved.”