Energy Debate: Rigs Lost and Unfavorable Energy Climate

With Scott McInnis beating the energy plank hard today, I thought this was a good time look into the background of the debate. My dad and I are currently working on a column for the Free Press; these are a couple of important issues I’ve come across in my research.

As the Denver Daily News reports, McInnis claimed,“What those [Democratic] rules and regulations did, frankly, was take Colorado from No. 1 to rock bottom on states that are friendly to do natural gas and energy business in.”

Amy Oliver Cooke points to (what I take as) the origin of McInnis’s claim.

Here’s what the Denver Business Journal has to say on the matter (June 25, 2009):

Oil and gas executives surveyed about where they are inclined to invest their company’s money have ranked Colorado last among the states.

The latest survey was issued June 24. It’s been conducted annually for three years by the Fraser Institute in Calgary, Alberta, Canada. …

The survey ranks states as well as other countries.

The first survey, in 2007, ranked Colorado at the top of the list of places executives considered positively for oil and gas investment. By 2008, the state’s ranking had fallen to No. 52 out of 81 locations around the world.

The June 2008 survey said executives had grown wary of the state’s efforts to tighten rules governing oil and gas operations here.

Of course this survey is subjective in nature, and articulated preferences may not match revealed preferences. The survey doesn’t mean much. What matters is whether energy companies are staying in Colorado and investing here. (That said, Colorado Pols is more than a little out of line for calling McInnis a liar, given that his remark is based on a credible source. Notably, the AP story that Colorado Pols cites imprecisely paraphrases McInnis; his quote above accurately reflects the survey results.)

Next up is McInnis’s claim: “Statewide, the number of rigs in Colorado is down 71 percent, a testament to his [Governor Ritter’s] anti-jobs policies.”

I’m not entirely sure where McInnis is getting this figure. I did find the same figure in an AP story from March 26, 2009:

New figures show the natural gas rig count in western Colorado’s Piceance Basin has taken a bigger percentage drop than in Utah’s Uinta Basin and the entire state of Wyoming.

Carter Mathies of Arista Midstream Services, a Golden-based energy services company, told The Daily Sentinel in Grand Junction that the Piceance rig count has dropped by 71 percent since October, from 102 rigs down to 30.

He says the Uinta Basin count has fallen 62 percent to 21 and the Wyoming count has fallen 54 percent to 36.

Industry officials say Colorado’s pending new rules for drilling are the reason the count has fallen more sharply in the Piceance than other areas. Officials say the reason is the higher cost of drilling in the Piceance.

Unfortunately, I could not locate the Sentinel article referenced by the AP. I did find an article from December in which Mathies, here identified as “president of Clover Energy Services LLC in Grand Junction,” said that an ExxonMobil deal is “a good signal for the longer-term prospects of natural gas.”

Another claim about rigs lost was reviewed last year by Colorado Pols. Penry stated, “The Piceance Basin has lost 60 percent of its rig count.” The clowns at Colorado Pols pretend to refute Penry by claiming “the only state with a higher percentage of rigs operating than Colorado is North Dakota.” But Penry wasn’t comparing Colorado to other states, he was comparing Colorado Period 2 against Colorado Period 1. However, that still leaves the problem of where Penry got his information.

I did get a tip from the Rocky Mountain Oil Journal, which claims that rigs in Colorado have declined from 78 a year ago to 47 now (though I’m not sure of the original date of the information). The reference is Baker Hughes, which I also found.

Baker Hughes explains:

A rotary rig rotates the drill pipe from surface to drill a new well (or sidetracking an existing one) to explore for, develop and produce oil or natural gas. The Baker Hughes Rotary Rig count includes only those rigs that are significant consumers of oilfield services and supplies and does not include cable tool rigs, very small truck mounted rigs or rigs that can operate without a permit. Non-rotary rigs may be included in the count based on how they are employed. For example, coiled tubing and workover rigs employed in drilling new wells are included in the count.

So I take it this is the relevant measurement, though I’m not entirely sure what this measurement includes or what it means in terms of the overall energy industry.

Notably, the U.S. rig count has dropped by 64 from last year, from 1399 to 1335, or a 4.6 percent drop.

Baker Hughes offers an Excel file called “Rigs By State — Current & Historical Data.” This includes a monthly count from 2000. Here I’ll list the average counts for Colorado from the January listings:

January, 2000: 18
January 2001: 26
January, 2002:25
January, 2003:31
January, 2004: 45
January, 2005: 65
January, 2006: 84
January 2007: 96
January 2008: 100
January 2009: 87
January 2010: 45 (The February 5 figure is 48.)

The recent low is October 16, 2009, with 36 rigs. The high is November 7, 2008, with 124 rigs. (May of 2008 is nearly as high.)

Based on these figures, then, both McInnis and Penry are roughly correct in their estimations of lost rigs, depending on which time frame we care to specify. From the highest mark to the latest figures, the number of rigs has dropped by 76, or 61 percent.

I’m confident the folks at Colorado Pols will apologize to Penry at their earliest convenience.

Of course, the lost-rigs figure does not prove the political rules are responsible for the lost rigs. As David Neslin pointed out to me today over the phone, we’re in the middle of a recession, and natural gas prices have tanked; “as a result, drilling activity and natural gas development declined across the nation.”

I don’t know how to square Neslin’s comment, “production was up a little bit in Colorado last year from 2008,” with the loss of rigs in 2009. Again, I don’t know how closely rig-count is related to total production. But I sure wish an expert in the field would lay out the full set of facts!

Or, fancy this: somebody who gets paid to report the news might, you know, actually research the issue rather than rely on sound-bites from bureaucrats and politicians.

One thought on “Energy Debate: Rigs Lost and Unfavorable Energy Climate”

  1. Comment by Mike Spalding February 11, 2010 at 11:27 AM

    As an investor I’m sure that the rig count decrease is mostly because of the price of natural gas. It has stayed in the low $3 area even during an unusually cold winter. No one wants to operate a rig when you are barely above break even (~2 – 2.75 depending on the area). Inept moves by the state government aren’t helping but these will only become a factor when it is worth drilling again.

    Comment by Nathan February 22, 2010 at 8:51 PM

    No, Mike is wrong: the rig count decrease is due to a number of factors, and not just the price of natural gas. I haven’t kept very much track of the actual count of working rigs – but keep in mind that the Baker Hughes count is considered to be the professional and accurate count of work being done in the Patch. What I am aware of, because of the impact it has on the economy in the Four Corners, and on many of my clients, and many of my friends and neighbors, is that the number of rigs drilling new wells has dropped significantly due to a number of reasons, some of which have been growing steadily worse over the past several years. Not only state regulations but local regulations have driven up the cost, caused delays, and reduced the availability of workers, access, and rigs. No one of these factors can be said or shown to have accounted for the decline: it is the total cumulative effect. I have personally seen wells, already permitted by state (and often, federal) agencies delayed for months and months due to the vindictive actions of county officials (both elected and unelected), delayed more months by attempts to prevent the drilling by various special interest groups (including but not limited to environists), and delayed still further by unjustified, arbitary acts of state, federal, and local officials where new interpretations of the laws and regulations (themselves constantly changing) have required obtaining additional permits and clearances, preparation of studies, conduct of field research, and other actions in a vast network of petty bureaucracy, each taking its toll in dollars spent, manhours consumed, and further delays. In many cases, these delays have caused companies to find projects delayed while gas prices dropped, thus leading to withdrawal of investments and reallocation of their resources to out-of-state where the delays and costs are less onerous. An example is the recent BPAmoco moratorium on new wells for the next six months in LaPlata County; another is the delays caused to drilling in both Archuleta County and Montezuma County by major cost increases and delays in obtaining temporary CDOT access permits; yet another is the denial of permits for various necessary support operations (such as pipeline construction) which has meant that wells drilled cannot produce anything because gas can’t be transported to market. When you add the tremendous uncertainty created by new laws concerning produced water and water rights and permitting; a clear and unmistakable anti-industry bias in both the Executive and Legislative branches, and a steady drumbeat condemning the oil and gas industry as evil, is it any wonder that the owners of drilling rigs seek other and more hospitable climes?

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