Proposition 112 – A $470 Billion loss to Colorado

Proposition 112 – A $470 Billion loss to Colorado

Proposition 112 Overview and Intro to Economic Study

Proposition 112, if passed, will result in a major decrease in oil and gas activity in Colorado. The regulation proposes the oil and gas industry maintain a buffer of 2,500 feet from schools, homes, and businesses. The result eliminates approximately 85% of future drill sites in the state. Additionally, when looking at the most active parts of Colorado, where the greatest value is coming from (the Wattenberg field), over 95% of the future drilling locations could not be developed, even utilizing the latest horizontal technology. What does it mean to Colorado citizens (financially) to eliminate a natural resource, that historically the state relied on for revenues? Our PetroValues team conducted a third-party, independent technical study to inform those affected. PetroValues does not own mineral rights, and did not receive payment to conduct this study.

PetroValues is a team of industry professionals, based in Denver, CO, with decades of experience valuing oil and gas assets. Our employees consists of experienced industry Engineers, Development Planners, Geologists, Landmen, and Systems Developers. We have come together to digitize the process of valuing oil and gas mineral rights. Together we have created a highly differentiated oil & gas valuation platform. Our modern database and website allows for faster, more accurate valuations, and can handle larger assets than traditional methods.

The PetroValues rigorous valuation platform is based on bottoms-up sciences – engineered well by well, considering the productivity of each subsurface formation. We account for current well development costs, development practices, and basin activity for accurate modeling. Collectively, these represent Acquisition & Divestiture (“A&D”) standards common in industry for evaluating Purchase and Sale economics. A year ago, this type of analysis wasn’t possible, PetroValues is the only company able to provide this in-depth analysis in such a short time frame.

State Results – Numbers and Effects

The PetroValues economic impact study found that the total loss of value to Colorado would be $470 Billion. This loss was calculated to happen over the time period it would logistically take to develop the ‘known’ resources of hydrocarbons. A lot of commentators are looking at what the impact would be over the next few years, but this would be a loss felt for generations. This value exceeds the total GDP for Colorado in 2017, which was just over $342 Billion. The study concluded that present value, at and 8% discount rate, would be a loss of over $71 Billion. But what does this mean for individuals and communities?

Economic Impact of Proposition 112 on Colorado

Our study found that 42% of the total $470 Billion would be in direct loss of investment made to drill and operate the wells. These investments result in job creation to build equipment and to  perform projects onsite. Tax revenue would be 25% of the total loss. Those are county, state and federal taxes that fund and support communities, infrastructure, and schools. Mineral owners would lose 12% of the overall loss, in net income from future wells. The remaining 21%, of total loss revenues, would be to investors in the oil and gas operations. These revenues generate jobs, and are an incentive for future investment in the industry, state, and citizens. The overall value loss, is an astounding number, but the breakout of percentages is more thought provoking. The majority of value loss would not be to the big oil operators, but to the economy and citizens of the state.

Results by Individual Counties, School Districts and Fire Districts  

The study becomes personal when you start to break these numbers out by counties, school districts and even individual property owners. Because of the PetroValues large automated database, proprietary algorithms, and use of advanced analytics, our team can quickly value assets of a state, a company or an individual. For the economic impact study, we focused on not only state results, but also included counties, school districts and fire districts.

Interested in knowing how Proposition 112 would affect your community? Use the drop-down below to find out. Search for your county, school district, or fire district and watch the values in the pie chart change.


 

Want to know the direct impact facing your mineral rights? See our blog on how to view your property on the PertroValues map, and determine if Proposition 112 will prevent the future production of your minerals.

Please note that all loss of value numbers represent ‘Direct losses’. This means that the Indirect effect to a local economy is far greater. Consider a highly-paid employee in the oil and gas industry, this citizen will be buying a house, sending their children to school, consuming at local grocery stores, making home improvements, buying cars, going on vacation, etc, which will in return create more jobs and help the economy. In Macroeconomics terms, this is called the Expenditure Multiplier. It means that a Direct Loss (or Increase) of GDP is multiplied throughout the economy by a factor of 1.2 to 5.

Study Process

The PetroVaules team is composed of Geologists, Engineers, Landmen, and Computer Scientists who are digitizing the valuation process of oil and gas mineral rights. Our company’s vision and mission is to digitize the valuation and buy-sale process of oil and gas properties, and empower any oil and gas investor to value oil and gas properties instantly and accurately. To do this, we start with the fundamentals of technical reservoir analysis.

Our team begins by assessing the reservoir characteristics and productivity. This process is assisted by our Proprietary Complex Algorithmic Data Conditioning Logics, and done by assessing geological logs and studying the production history of an area. Type curves can then be generated by area, formation, and lateral length. These type curves are used to forecast producing wells and future potential wells (Upsides). Reservoir Simulation, Material Balance Analysis, and Reservoir Characterization allow us to determine the number of future wells that can be drilled. This is done in each type curve area, of each formation, in each basin. Once the technical work is complete, the economic analysis can be run, thanks to our Proprietary Accurate Forecasting Algorithm, guided by manually forecasted type curves.

PetroValues Proprietary Forecast tool – Individual well within DJ basin in Colorado. Depicting historic production data points and forecast production curve for oil (green), gas (red), water (blue), and GOR (purple). Forecast fit to every individual producing well, and type curve applied for all potential future drilling locations.

The wells are automatically uploaded, and continuously updated, in our database with the associated forecast. The project is built out overtime with data-backed input parameters. The date a well starts producing has a major impact on the value of the well, so well start dates are prioritized by value, taking into account the drill times of each location and the rig count in the basin. The Economic Input Parameters, such as oil differentials, basin deductions, operating costs, capital costs, shrinks, and NGL yield numbers are specific for every well, formation, and location. Averages are estimated by our team of Geoscientists and Engineers using: Studies by the U.S. Energy Information Administration (EIA), Lease Operating data / Public data available from Operators, and decades of Operations experience in these basins.

The PetroValues team added the affected acreage overlay (from the Proposition 112 setback regulation) to the PetroValues mineral valuation map. The complete process allowed us to value the loss due to the proposition. Accurate and good studies show that approximately 85% of future drill sites in the state would be affected (COGCC), but thanks to horizontal drilling 42% of the wells could still be accessed (Colorado School of Mines). Our concern is that from a practical Land access and right-of-way standpoint, the number of drillable locations would be much less than 42%. Additionally, and most importantly, the 42% does not take into account where most of the value is. In the Wattenberg field, where the vast majority of the value in Colorado is, the impact of a 2,500 foot setback would leave only 5% of future drilling locations, even using the latest horizontal drilling technology. The images below show, at different zoom levels, where most of the activity is, and how these areas would be affected. You can also visit our website to find properties on our interactive map. Go to Live Map

PetroValues Interactive Map – Focused on DJ basin in Colorado. Depicting all current producing wells (green), drilled wells (yellow), permitted wells (orange), and upside wells (purple).

PetroValues Interactive Map – Focused on DJ basin in Colorado. Depicting future drilling locations, based on current understanding of remaining reserves of known accumulations of hydrocarbons. Wells shown are permitted wells (orange), and upside wells (purple).

PetroValues Interactive Map – Focused on DJ basin in Colorado. Depicting future drilling locations, based on current understanding of remaining reserves of known accumulations of hydrocarbons. Wells shown are permitted wells (orange), and upside wells (purple). Included is the overlay of excluded acreage proposed in Proposition 112 (red acreage proposed to be excluded).

Core of Denver-Julesburg

PetroValues Interactive Map – Zoomed to a core area of DJ basin in Colorado. Depicting future drilling locations, based on current understanding of remaining reserves. Wells shown are permitted wells (orange), and upside wells (purple). Included is the overlay of excluded acreage proposed in Proposition 112 (red acreage proposed to be excluded).

PetroValues Interactive Map – Zoomed to well level view of an area of DJ basin in Colorado. Depicting future drilling locations, based on current understanding of remaining reserves. Wells shown are permitted wells (orange), and upside wells (purple). Included is the overlay of excluded acreage proposed in Proposition 112 (red acreage proposed to be excluded).

 

Explore Proposition 112 on PetroValues Map

 

Study Assumptions

The study included a number of assumptions within the economic model. The first is that the study was only conducted for the Denver-Julesburg (DJ) basin. This is important to note because while the vast majority of the state oil and gas production currently comes from this basin, there are six less active basins in the state that the study does not take into consideration: Greater Green River Basin, North Park Basin, Uinta Basin, Paradox Basin, San Juan Basin, Raton Basin. This means that the economic impact would be greater should we included all the remaining basins.

Our team continuously updates all future drilling locations, in each basin, based on our current understanding of the reservoirs and formations. We used the analysis from the COGCC, regarding the areas that would be affected by the 2,500 foot setback, and filtered the future drilling locations that could not be drilled under this proposition. As a result the economic model was built using 37,791 impacted future drilling locations. Well locations were excluded from the dataset that we considered not drillable with the latest horizontal technology. These include locations where a permit would be difficult to obtain. With the current rig count in the DJ basin (28 rigs), it would take approximately 100 years to drill the locations within the study. We assumed that the highest value locations would be drilled first. The $470 Billion loss was calculated over this assumed 100 year period of development, at a flat price of $70/bbl and $3/mcf, and calculated using 2% discount and inflation rates. The PV of $71 Billion was calculated at an 8% discount rate and a 2% inflation rate. The tax percentages assumed were 24% average household federal income tax, 6.43% Colorado State tax, and 21% average corporate federal income tax.

In order to determine the effect to segments within the state, our team made the following assumptions. The direct loss of investments in Colorado are the capital and operating costs spent by the investors. These are the direct costs associated with drilling and producing the wells. These operation services include wages and materials. The loss of tax revenue includes county, state, and federal taxes paid by mineral owners, and investors. The direct loss of net income to mineral owners is calculated from the gross revenue, of an assumed 20% royalty interest, and deducting state severance tax, county ad valorem tax, state income tax, and federal income tax. The direct net loss of revenue to investors is calculated from the total revenues less the (1) capital expenses, (2) operating expenses, and (3) the 20% net revenue interests in royalty payments, with the following additional deductions: state severance tax, county ad valorem tax, state corporate income tax, and federal corporate income tax.

According to the SEC reserves guidelines, future horizontal drilling locations within a distance greater than 3 miles of an existing horizontal well are considered contingent resources (CONT). According to the Society of Petroleum Engineers (SPE), “Contingent Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable”. With the current technology and commodity prices, these contingent resources are considered not recoverable, but our team has experienced numerous times throughout our career that ten years later, these contingent resources are produced. The production of all future drilling locations flagged as Contingent were risked to 50% of the production of the type curve it belongs to.

The calculations displayed in the figures are rounded to the nearest Billion USD. Percentages, or values may not add up to 100%, because they are rounded to the nearest Billion.

Why PetroValues Completed this Study

The majority of the PetroValues team lives and works throughout Colorado. As citizens, we enjoy the beautiful and amazing opportunities that our state provides us. We appreciate raising our families here, and we want to see the state maintain its beauty and prosperity. Many of us have worked closely to oil and gas operations which would be eliminated by Proposition 112. Our knowledge of the industry, and separation from it, give us a unique opportunity to provide an unbiased economic valuation of the proposed 2,500 foot setback.

The valuation tool developed by the PetroValues team allowed us to perform a 100 year economic impact calculation for the state of Colorado in a day and the complete analysis within a week. PetroValues’ unique and proprietary digitization of oil and gas mineral valuations allows the processes to be incomparably faster and more accurate. We are happy to provide this information to our fellow citizens.

Explore Proposition 112 on PetroValues Map

Please visit us online, or call us at 855-867-3876 to learn more.

 

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