CU forecast: Low prices to curb energy production

Oil and natural gas production will decrease in Colorado this year as part of a nationwide decline in activity related to lower energy prices, according to a new forecast.

The forecast was conducted by the Business Research Division of the Leeds School of Business at the University of Colorado at Boulder on behalf of a partnership that included the Metro Denver Economic Development Corporation, Denver South Economic Development Partnership and Common Sense Policy Roundtable.

The forecast showed that Colorado oil spot prices were down 49 percent and natural gas prices were down 30 percent in July compared with the same month in 2014.

“The sharp decline in prices has had delayed but measurable impacts on rig counts, industry employment and taxes,” said Brian Lewandowski, lead author of the forecast and associate director of the Business Research Division. “While production thus far has remained stable, we anticipate a fall.”

One side effect of the decline could be lower property and severance taxes paid by the oil and gas industry, Lewandowski said. And that’s translates into less revenue for Colorado counties, cities, special districts and school districts.

“What happens when the prices are cut in half? That revenue stream is essentially cut in half,” Lewandowski said.

Oil and gas wells typically record the greatest volume of production during their first year followed by decreasing volume at a slower rate with each successive year of operation, Lewandowski said.

In examining Colorado production from 1970 to 2014, however, each successive five-year period recorded steeper depletion curves, and the 2010 to 2014 span saw unprecedented depletion, according to the assessment.

Researchers from the Leeds School worked with EE3 to analyze data from 2010 to 2014. During that time, Colorado averaged about 240 new oil and gas wells per month. In contrast, Colorado in 2014 brought an average of 157 new wells online per month.

“Given production depletion, a steady supply of wells is necessary to backfill lost production,” Lewandowski said. “Based on historical production and rig counts, Colorado would need to bring on about 170 wells per month in perpetuity to keep production constant.”

The average number of operating oil and gas rigs in Colorado for the first half of 2015 was 43, while the average number of rigs in the past has been 68 in 2014, 63 in 2013, 65 in 2012 and 72 in 2011, according to Baker Hughes.