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Colorado operator pursues large-scale drilling program despite new setback rule

Highlights

Setback extend from 500 to 2,000 feet

PDC eyes 500-well project for DJ Basin

Denver — As Colorado's 2,000-foot drilling setbacks go into effect, PDC Energy looks to become the first operator to seriously test the slopes as it prepares a 500-site plan in the Denver-Julesburg Basin to present to state regulators later this year.

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As of Jan. 21, new drilling permits must provide 2,000 feet from wells to occupied structures such as homes, schools and businesses. However, operators can negotiate with landowners and residents to receive consent to drill closer in certain situations.

The new rule stems from Senate Bill 181, which prompted the Colorado Oil and Gas Conservation Commission to tighten up its permitting process. However, the new regulations failed to deter PDC, as it is pursuing a massive drilling project in the DJ.

"PDC plans to submit permit applications for more than 500 future drilling locations through two oil and gas development plans and one comprehensive area plan," the company reported in its quarterly earnings' report on Feb. 25. "If approved, these locations, combined with the company's current DUC and approved permit backlog, represent all projected wells turned to sales through 2026."

The company intends to present the plan to the COGCC in later summer or early fall.

PDC also does not need to rush to get new drilling permits approved as it holds an inventory of 200 drilled-but-uncompleted wells and 300 drilling permits for new wells in Weld County, the core of the DJ Basin.

Operators in the DJ have been stockpiling permits since 2018 when activists attempted to install a 2,500-foot drilling setback rule through a failed ballot initiative.

PDC forecasts bringing up to 175 new wells into commercial production in Colorado in 2021.

Active rigs in the DJ plummeted from the mid-20s before the coronavirus pandemic struck to average six active rigs from May 2020 through January 2021, according to data by Enverus. However, it averaged 11 during the month of February.

Internal rates of returns in US shale basins, both crude and gas focused, look much more appealing in recent weeks with around $60/b oil at WTI and nearly $3/MMBtu at the Henry Hub. The DJ has jumped to 22% IRRs in the current pricing environment, according to S&P Global Platts Analytics.

IRRs of at least 10% is the threshold typically needed to encourage operators to bring new wells online. Platts Analytics IRRs are based on a half-cycle, after federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, seismic and appraisal drilling.

PDC has been busy developing its Colorado acreage despite the new slate of regulations facing operators. It acquired SRC Energy in a $1.7 billion deal that closed in early 2020. The deal created the third-largest oil and gas producer in Colorado, trailing only Occidental Petroleum and Chevron.

The company plans to spend as much $450 million in capital on developing its DJ Basin assets in 2021, which is more than any other operator has indicated for the play.

Although PDC feels confident about its ability to continue developing new wells sites in the DJ, the new setbacks could lead to lower production out of the basin in the long run.

Platts Analytics estimates oil production could fall as much as 90,000 b/d, bringing the basin's total production down to 353,000 b/d by the end of 2025 due to the tighter regulations. Associated gas production could decline by as much as 400 MMcf/d to 1.8 Bcf/d by 2025.