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New Study Suggests Distance In COGCC Setback Proposal Would Have “Substantial Financial Effects”

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A new study from three university researches appears to confirm that the Colorado Oil & Gas Conservation Commission’s proposal to increase the setback distance of oil and natural gas operations from 500 feet to 2,000 feet would render a vast majority of potential production “unavailable” and cost the state’s economy billions of dollars.

The study’s authors, Dr. Peter Maniloff of the Colorado School of Mines, along with Drs. Sean Ericson and Daniel Kaffine at the University of Colorado Boulder, didn’t specifically examine the COGCC’s proposal, but applying their findings to that proposal would cause “substantial financial effects” to Colorado’s oil and natural gas industry and economy.

Ironically enough, the study’s authors published their work with the apparent intent of saying that increased setbacks from the COGCC – or anyone else – would not have a major negative impact on production. Ericson even publicly defended the COGCC proposal when discussing his findings. But a closer examination reveals the study actually shows the proposal would have a significant negative impact on production and that the authors use of flawed methodology that examines operations beyond 1,500 feet underestimates those impacts.

As Energy In Depth reported last week, the COGCC’s proposal ignores the will of the voters who rejected Prop 112’s increased setbacks just two years ago.

Resources Are Completely Unavailable

Although the study doesn’t specifically mention the COGCC’s proposal to increase setbacks to 2,000 feet, the study indicates a severe restriction in production at that distance in two different scenarios, including an ideally designed thought experiment:

“The entirety of the subsurface resource is accessible up to 1,867 feet, and inaccessible beyond that, in our thought experiment geometric model with horizontal drilling and four evenly spaced houses per square mile. Without horizontal drilling, resource unavailability in-creases with the area of the four setback circles until the setback circles intersect (at 1320 feet). Beyond that, resource unavailability rises more slowly as the setbacks create overlapping lenses, and then at setbacks of 1,867 feet, the circles fully envelope the surface area and 100 percent of the resource is unavailable.

“Intuitively, as long as the setback distance is less than 1,867 feet, there will be an “island” of accessible surface area between homes, and horizontal drilling can access the entirety of the subsurface resource. However, if setback distances exceed 1,867 feet, there will be no surface area accessible to drill wells, and the subsurface resource will be completely unavailable.” (emphasis added)

The study then discusses real world scenarios:

In reality of course, the relationship between subsurface resource availability and setback distance for Colorado counties will not be a perfect step function as housing density and spacing will vary across and within regions. Wetlands, other hydrological features, and federal lands not subject to state regulations further complicate the relationship between setback distances and resource availability. Nonetheless, the geometric thought experiment provides intuition regarding the distances at which setbacks may start to impact resource availability. For example, the median housing density for Colorado counties is 6.5 housing units per square mile which (if uniform) would imply resource unavailability at just shy of 1,500-foot setbacks. (emphasis added)

Furthermore, the study states that a setback that goes beyond 1,500 feet increasingly makes resources unavailable:

“Both approaches demonstrate that i) the costs of setbacks up to roughly 1,500 feet are modest, provided firms can drill horizontally, and ii) costs rapidly increase as setbacks are increased from 1,500 feet to 2,500 feet, resulting in a nearly order-of-magnitude increase in resource unavailability and consequently an additional $4.3 billion in foregone annual resource revenues for Colorado.” (emphasis added)

The 2,500-foot setback is significant, because the COGCC is now using the edge of the operations area, not the wellhead, as the setback starting pointing. The result is that a 2,000-foot setback is really closer to a 2,400 setback – basically the same distance that was rejected by voters and what the authors associate with resource unavailability.

Flawed Methodology

In an apparent attempt to smooth over their findings and claim that increased setbacks would not significantly prohibit production, the authors turn to the use of “laterals” in horizontal drilling. They write:

“By contrast, with horizontal drilling of two-mile laterals, Fig. 4d shows that a substantially larger fraction of the subsurface resource, 98.5 percent, can be accessed. With typical two-mile laterals the only inaccessible resources would be located in Greeley and the other population centers in the southwest corner of the county.”

There are two issues with this claim. First, Weld County is the state’s leading producing area by far. It accounts “for 89 percent of the oil production and 43 percent of the natural gas output,” according to the Greeley Tribune. A public policy proposal can’t simply write off major areas of Weld County and not expect the industry as a whole to suffer.

Second, the authors use of “laterals” has been showed to be flawed. During the Prop 112 debate in 2018, Maniloff published a similar commentary that also made use of laterals. His colleagues at the Colorado School of Mines swiftly rejected his findings as Energy In Depth noted at the time.

Dr. Will Fleckenstein – who Denver7 called “the most unbiased expert we could find” – and Dr. Jennifer Miskimins, called the “laterals” argument theoretical and one that would fall apart in practice because of the need for properly placed well pads, flowlines, and other infrastructure. They said:

“Regardless of how far you can horizontally drill, the subsurface still can’t be accessed in the most important areas, since you still have to have a surface area to drill from. Additionally, there is a technical and efficient limit as to how far horizontal wells can actually be drilled. The surface access is the key.”

“The drilling engineers can move that surface location some distance from the ‘perfect’ surface location, but the surface access has to be close to where the horizontal well starts. It is that lack of surface access, regardless of the length of the horizontal well, that will cause Colorado’s oil production to quickly drop, along with the associated revenues.” (emphasis added)

In fact, even Maniloff acknowledged the limitations of this methodology back in 2018, explaining:

“An important caveat is that restricting oil and gas operations to a small portion of the surface would impose substantial operational difficulties. These include constraints on reservoir engineering (the ability to place wellbores to maximize production), as well as potentially requiring additional infrastructure such as new roads and utilities (if wells are effectively required to be far from utilities.”

“Furthermore, this analysis does not consider the varying quality of resources – in particular, the sweet spot of the Denver-Julesburg basin largely coincides with the densely populated areas which would generally be inaccessible under Prop 112.”

Nonetheless, this latest study relies on the same assumptions that the use of laterals can continue to allow access to subsurface resources.

Major Impact On Economy

As the study previously noted, a 2,500-foot setback would cause a loss in resource availability by an “order-of-magnitude,” which would have a major effect on Colorado’s economy. The study cites the U.S. Bureau of Economic Analysis and says:

“Aggregating statewide, with a 2500-foot setback the total resource revenue loss is $90 billion in net present value (assuming a 5% discount rate), or about $4.5 billion per year, which is approximately 1.5% of Colorado’s Gross State Product.”

Notably, Weld County would be the most impacted – a more than 533 percent higher than average cost at 1,500 feet and nearly 1,800 percent higher at 2,000 feet. As the authors explain:

“At the county level, the average county oil and gas revenue loss is $96 per person per year under a 1500-foot setback, increasing to $637 per person per year under a 2500-foot setback. This is right-skewed and dominated by counties with very large production or very low populations. Weld County, a major oil and gas producer, would lose $608 per person per year in revenue under a 1500-foot setback and $11,872 per person per year under a 2500-foot setback, but fewer than 15 percent of counties have above-average losses. Alternative horizontal drilling assumptions (1 mile or 3 mile) yield similar order-of-magnitude resource revenue losses. Thus, while the ability to drill horizontally can initially mitigate the costs of increased setbacks, this is true only up to the point that overlapping setbacks begin to quickly eliminate the surface areas needed for drilling access.” (emphasis added)

Health Benefits

The authors also acknowledge that there would need to be major health benefits of increasing the setback distance to 2,500 feet – just slightly higher than COGCC’s proposal if it were measured from the well head –   to offset the dramatic loss in production and revenue:

“However, because of the rapid increase in costs as setbacks are increased (approximately $4.5 billion annually at 2500 feet, roughly 1.5 percent of Colorado’s Gross State Product), the health benefits would have to be substantial to justify setbacks as large as the recent policy proposals of 2500 feet in Colorado (Prop 112) and California (AB 345).”

But a study published last year by the Colorado Department of Public Health and Environment found no such health benefits would be found at the 2,500-foot setback distance because oil and natural gas operations do not pose a threat to public health in nearly every scenario at the current 500-foot setback distance.

Conclusion

While some have already jumped on this latest study’s findings that most subsurface resources would be developable with large setbacks, the reality is that the study confirms what even COGCC acknowledged about the similar setback requirement proposed in Prop 112: Despite a lack of justification, these large setbacks will have significant impacts on the state’s economy.

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