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Drilling permit activity in Colorado ramps up

Highlights

7,315 Denver-Julesburg Basin permits filed or received so far in 2018

Upcoming ballot item seen as behind some of surge

Denver — Drilling permit activity in Colorado is on pace for a record high in 2018 as producers brace for the possibility of a ballot initiative known as Proposition 112 passing. Oil and natural gas companies filed 7,381 drilling applications for new wells through Monday, according to data from the Colorado Oil and Gas Conservation Commission.

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The vast majority of those were filed for the Denver-Julesburg Basin, which accounts for 7,315 of the permits applied for and received so far this year, according to S&P Global Platts Analytics. For all of last year, just 5,564 drilling permits were issued or applied for in the Denver-Julesburg Basin, which was higher than every other year prior.

PROPOSITION 112 EFFECT

Multiple producers have indicated they are applying for drilling permits at such an accelerated rate to prepare for the possibility of Proposition 112 receiving public approval on November 6.

"We've gone through scenarios of how we could still produce if this passed such as drilling three-mile laterals," said Scot Woodall, CEO of the Denver-based HighPoint Resources. "We've also gone out and gotten as many permits for drilling as we can. We've tried to plan, but we're hoping the industry will defeat it."

The ballot initiative, should it be approved, would increase the distance from all occupied structures required for all new oil and gas wells to 2,500 feet from 500 feet. In addition, it would implement the same setbacks for what it considers "vulnerable areas" such as waterways and parks. Weld County, the heart of the oil-rich Denver-Julesburg Basin, would lose 78% of all future surface drilling sites.

"If this passes, I see it as Sherman marching to the sea and burning everything in sight," said State Senator John Cooke, who represents Weld County.

A poll released Monday by the University of Colorado at Boulder foresaw the measure passing 52 to 48. It was based on responses from 800 registered voters and holds a margin of error of plus or minus 3.5%.

Strong internal rates of return per well in the Denver-Julesburg Basin are also likely driving the increase in permitting activity as well. October IRRs are currently at 46.2%, trailing only the Permian Basin, STACK, Eagle Ford oil window and the Bakken Shale, according to Platts Analytics. IRRs are based on half-cycle analysis, which excludes the expenses associated with exploration and development (sunk costs) and federal income tax.

PRODUCTION INCREASES

Over the past five days, Denver-Julesburg Basin production has jumped more than 120 MMcf/d compared with the prior 30-day average, pushing total Rockies production to 8.53 Bcf/d over the five-day stretch, according to Platts Analytics.

The rise in the basin's output has been almost exclusively observed at sample processing plants on the Colorado Interstate Gas system, but increases have been fairly evenly distributed across a number of different plants. Sample receipts across DCP plants, including Mewbourn 3, are up about 55 MMcf/d compared with the 30-day average. Increases of 18 MMcf/d and 30 MMcf/d were also observed at the Watkins and Lancaster plants, respectively. DCP has commenced construction on the 300 MMcf/d O'Connor 2 processing plant, which is expected to enter service before the end of 2019. As long as Proposition 112 does not pass, Platts Analytics projects Denver-Julesburg Basin gas production will top 2 Bcf/d by next fall.

After beginning the month on pace for the region's first month-over-month decrease since June, this latest production push would bring the monthly production average up to a 10 MMcf/d increase from September's level if it holds through the end of the month.

-- Brandon Evans, bevans@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com