Research Firm Responds To Activists’ Mischaracterization Of Study, Says 112 ‘Will Have Extremely Negative Consequences’ If Passed

The president of a research firm whose client-focused study on the possible effects of Proposition 112 was used by opponents of oil and natural gas drilling to bolster their push in the final days of the election season, pushed back today to clarify the devastating impact a 2,500-foot setback would have for Colorado.

“Our work confirms Proposition 112 will have extremely negative consequences for oil and gas activity in the [Denver-Julesburg] Basin,” according to Manuj Nikhanj, President and co-CEO, RS Energy Group.

In an email to Western Wire, RS Energy said the key takeaways show dramatic impacts from Proposition 112 on Colorado oil and gas operations—a drop of approximately 85 percent of remaining locations within the core drilling field.

“The majority of the DJ Basin’s current rigs and competitive resource is located within Core Wattenberg, home to 90% of Colorado’s current oil production. Today, we estimate ~6,500 remaining locations at Core Wattenberg – a figure that drops by 85% if Proposition 112 passes. After grandfathered permits are drilled, this lower inventory estimate represents less than one year of drilling,” Nikhanj said.

And those estimates represent a best-case scenario, according to the researchers, with even greater reductions once other factors are considered and factored into the analysis.

“Our location estimates are best case and could be further reduced by the impact of setback regulations on lease configurations and flow lines, especially in Area 2 where mineral acreage is mostly accessible via discontinuous ‘drilling islands,’” he continued.

The first-year drop would be substantial.

“If drilling activity stops, DJ Basin production would drop by 40% in one year,” he added.

Cost considerations would also play a role, as cost-prohibitive alternatives, due to restricted surface access and increased costs below the surface, would effectively extend the off-limits areas economically.

“Core Wattenberg economics are currently competitive with the best plays in the L48. Restricting surface access under Proposition 112 will force operators to drill sub-optimal wells and could increase breakevens by $7-$10/bbl, further impairing the basin’s competitive position in the L48,” the group estimated.

The group also said companies and capital would move away from the basin to other more competitive and cost-effective areas outside the state.

“Multi-basin operators are responsible for 63% of total DJ Basin production and can shift capital to more competitive plays outside of Colorado,” Nikhanj said.

On October 29, Denver’s 9News highlighted RS Energy Group’s original research document in a segment that claimed the report concluded “Colorado’s underground minerals still accessible” in a headline.

RS Energy Group explained the nature of the original report, issued for its clients, on October 24and subsequently leaked to the press, where the group said it’s customer-oriented analysis was “misinterpreted.”

“RS Energy Group released a report, ‘Proposition 112 Playbook: Indecent Proposal’ to all of our research clients on October 24, 2018. This report was independently created based on our own analysts’ research within the industry and basin,” the group said. “As with all reports, ‘Proposition 112 Playbook: Indecent Proposal’ was intended only for distribution to RSEG clients, which is a highly-technical audience.”

“‘Proposition 112 Playbook: Indecent Proposal’ was leaked to the press, without RS Energy Group’s authorization. The conclusions RS Energy Group made in the Proposition 112 report were misinterpreted when distributed publicly,” they added.

The misinterpretations of the analysis, RS Energy said, led to the release of a second report on October 31.

“After the unauthorized use and misinterpretation, we released a second report on October 31, 2018 that focused on the macro impact (versus company specific) to the DJ Basin and clarified where the misinterpretation was made,” Nikhanj said.

Details matter, he added, explaining the source of the misinterpretations in the press and by advocacy groups.

“The original report was set up to first discuss the ‘accessible mineral acreage’ across the Basin and within the Core Wattenberg area. In the second part of the original report, RS Energy Group conducted a detailed analysis on 5 individual companies’ ‘drilling inventory’ and economics. We did not do a detailed examination of ‘drilling inventory’ for the basin as a whole. As a result, the 61% and 43% ‘accessible mineral acreage’ were mistakenly interpreted as remaining ‘drilling inventory’ which it is not,” Nikhanj said.

“To calculate remaining ‘drilling inventory’, you need to take into account wells that have already been drilled on this ‘accessible land’, average spacing per well and geologic and surface considerations. The follow-up report reviews ‘drilling inventory’ for the 43% accessible mineral acreage in Core Wattenberg,” he continued.

Claiming the figures as representative of basin-wide availability would not be appropriate. Nikhanj told 9News in an email for the original story that the original report had several important caveats which would make the figures widely shared much lower.

“Some additional things to consider that are relevant that our report did not address were the proposed restrictions for flow/gathering lines, competition for surface rights and the complexity with having thousands of existing wells. When considered, the accessible mineral rights would be lower than the 61 percent/43 percent stated above,” Nikhanj wrote to 9News.

According to 9News, they received the leaked RS Energy Group report from the Yes on 112 campaign itself.

Colorado Oil and Gas President Dan Haley responded to a 9News request for comment, and pointed to the Colorado Oil and Gas Conservation Commission’s (COGCC) requirements for permitting new drilling, which is do not lend themselves to theoretical analysis.

“The COGCC is Colorado’s oil and natural gas regulatory body, and they conducted their own analysis of Proposition 112. Other, theoretical analysis based on broad developmental assumptions is risky, because that analysis can speculate about outcomes that may not be true or even possible,” Haley told 9News.

“I can tell you this, when it comes down to it, the COGCC is the entity issuing permits, so their perspective doesn’t just carry weight, it is the metric from which we must operate. According to the COGCC, in order to determine mineral access, extraction, and production, you have to include geology, drilling methods, reservoir analysis, production engineering, mineral leases, surface use agreements, land use, and economics to provide a true sense of whether or not a location can be drilled. That is a long list of inputs that have to be well understood before knowing if drilling is even possible. It is not a list of theoretical assumptions or hypotheticals,” Haley said.