Planning Case Study: Oil & Gas. March 28, 2012

Transcription

1 Planning Case Study: Oil & Gas March 28, 2012

2 Presentation outline Just the facts National level Colorado The Niobrara Oil & Gas sector growth in Arapahoe County Economic Impact of Oil & Gas jobs Oil well economics: what one well can do Tax revenue Planning issues

3 The national conversation The middle east is a volatile region The United States wishes to decrease oil imports from the middle east, and other potentially unstable regions around the world To do this, domestic production must be increased

4 U.S. Oil Imports U.S. Oil Imports (in Thousands of Barrels) Source: US Energy Information Administration 3,800,000 3,700,000 3,600,000 3,500,000 3,400,000 3,300,000 3,200,000 3,100,000 3,000, Source: U.S. Energy Information Administration

5 U.S. Domestic Oil Production U.S. Domestic Oil Production (in Thousands of Barrels) Source: U.S. Energy Information Administration 2,150,000 2,100,000 2,050,000 2,000,000 1,950,000 1,900,000 1,850,000 1,800,000 1,750,000 1,700, Source: U.S. Energy Information Administration

6 U.S. Oil Consumption U.S. Oil Demand (in Billions of Barrels) Sources: U.S. Energy Information Administration & Central Intelligence Agency

7 So, what s happening in Colorado? Colorado is estimated to have nearly 2 billion barrels of shale oil in the various plays around the state Ten of the nation s largest natural gas fields and three of its largest oil fields are found in Colorado The Denver Julesburg (DJ) Basin (Niobrara shale play ) is one of those fields Name of Presentation Here

8

9

10 What do we know? In April 2011, Lario Oil & Gas received permits to drill four horizontal wildcat wells south of Watkins in Arapahoe County; Conoco-Phillips has leased these wells and applied for 15 more permits Seismic surveys along I-70 by Conoco Phillips and others Lowry Bombing Range Pact between Conoco Phillips (COP) and the Colorado State Land Board COP pays $137 million over five years + 20% royalties with revenue going to Colorado s K-12 system

11 A little about the Niobrara The Niobrara, created 90 million years ago when an inland sea covered most of the Western states, is a layer cake of shale, limestone and marl, about 200 to 400 feet thick. The oil is produced in the shale and collected in the limestone layers, which are 20 feet to 30 feet thick. There is 4,000 feet of low permeability shale above the Niobrara. The game changer has been the combination of two well-known technologies horizontal drilling and hydraulic fracturing.

12 Breakthrough technology It costs approximately 3X as much to drill horizontally as to drill a traditional vertical well: costs range from $3.5 to $7 million $5.4 million for initial fracking 2 months planning 12 days for actual hydraulic fracturing operation 2-6 million gallons of water to frack one well one time A horizontally drilled well can produce as much as 15X more than a vertical well This makes extraction of oil from shale formations economically feasible at a lower per barrel price than in past

13 Oil production from shale deposits remains speculative

14 Shale oil production is vulnerable to price per barrel movement Correlation: Employment and Price/Bbl Oil, Mesa, Colorado 80,000 $ $ ,000 $ ,000 $75.00 $ ,000 60,000 For date range 1/ /2007 ρ =.94 55,000 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 $55.00 $45.00 $35.00 $25.00 $15.00 Employment Per Barrel Price

15 Price weakness & employment Input-output analysis was done using employment data from the Bureau of Labor Statistics. It was found that just above 35% of job loss in Mesa County in 2009 was due to oil & gas sector job reductions based on natural gas price weakness. In 2010, the recession took root and less than 15% of job loss that year was attributable to the oil & gas sector. 85,000 80,000 75,000 70,000 65,000 60,000 Jan-06 Apr-06 Jul-06 Employment, Mesa County, Colorado, Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

16 What the industry looks like now Job Growth, Oil & Gas Sector, Arapahoe County 8,500 8,000 7,883 8,132 7,500 7,000 6,500 6,350 6,301 6,828 6,000 5,500 5,000 4,500 4,000 4,131 3, Jobs 2008 Jobs 2009 Jobs 2010 Jobs 2011 Jobs 2012 Jobs

17 Impact of 7% sector growth in Arapahoe County Input-output analysis is used by the oil & gas industry to calculate overall potential job growth based on sector growth. In Metro Denver, the multiplier effect for adding jobs in Oil & Gas is This means that for every 1 new job in the sector, another 2.18 jobs are created in other industries. This table projects gains by economic sector. Results of 7% Growth in Oil & Gas Sector, Metro Denver (552 new jobs) NAICS Code Description Change 11 Agriculture, Forestry, Fishing and Hunting 3 21 Mining, Quarrying, and Oil and Gas Extraction Utilities 2 23 Construction Manufacturing Wholesale Trade Retail Trade Transportation and Warehousing Information Finance and Insurance Real Estate and Rental and Leasing Professional, Scientific, and Technical Services Management of Companies and Enterprises Administrative and Support and Waste Management and Remediation Services 61 Educational Services Health Care and Social Assistance Arts, Entertainment, and Recreation Accommodation and Food Services Other Services (except Public Administration) Government 111 Source: EMSI Complete Employment

18 A Sample Timeline A well may produce 35 to 50 years Estimated timeline for extracting resources from Bakken Formation in North Dakota: Drilling phase through 2030 Reduction of oil & gas sector labor force by 7,600 approximately 2030 Production phase 2030 through 2090 Depletion of oil within formation: 2090

19 Oil well economics: what the average well earns Average Horizontal Well Production Niobrara Formation* Production in Barrels per Day (Bbl/Day) 585 Annual Production (Bbl) 213,525 Average per Bbl Price $ 100 Gross Income Per Well $ 21,352,500 Production Cost $ 1,067,625 Net Income Per Well $ 20,284,875 *Noble Energy (NBL) Statement 6/14/2010 Other Associated Production Costs Drilling Cost $ 3,500,000 Water Disposal and $7/bbl hauling and $3/bbl disposal $ 2,135,250 Noble Energy Statement & OilPrice.com

20 What they ll pay in taxes for that well Per Well Tax Revenues Taxing Entity Type of Tax Tax Revenue Where it Goes Local Use Colorado & Arapahoe County and its Municipalities Severance $ 1,014,781 Half to Local Governments Severance Tax Trust Fund; Half to Colorado Severance Tax Trust Fund Offset impacts of oil & gas production Colorado Oil & Gas Conservation Commission (COGCC) Levy Levy of 0.7% to 1.5% $ 304,273 Promote oil and gas production in manner consistent with protection of public health, safety and welfare Indirect: Funds Colorado's regulatory oversight Arapahoe County Ad Valorum Tax 87.5% of last year's production selling price times local mill levy (14.672) $ 274,123 Source: Colorado Oil & Gas Association: Colorado Oil & Gas Industry Tax Whitepaper, 2/25/2011 Mills are proportioned to local taxing districts Various purposes, including open space, schools, infrastructure Severance tax is for resources severed from the earth. It is taken on the dollar value of production the prior year. For this well, severance is ($21.35 million plus $10,750) X 5%

21 Broad planning issues When a county extracts its natural resources, whether oil, gas, coal or precious metals, it is essentially expending its assets. Proactive and sensible planning by community leaders in both public and private sectors can ensure sustainability, and can position the region s economy to retain its vitality when the resources have gone. Environmental Transportation Oil Price Movement Law Enforcement Workforce Planning Issues Medical Services Water & Sewer P-12 Education Housing Utilities

22 Patrick J. Holwell, Workforce Economist Arapahoe/Douglas Works! 6964 S. Lima Street Centennial, Colorado (303)