The Centennial State is positioned for resurgence in the oil shale market
OPEC’s Production Cuts Make the D-J Basin Profitable Again – but Caution Remains.
The Green River Formation and the Mancos Shale have been discussed for years as the possible future for oil shale. However, Colorado’s other holdings are proving useful right now.
The Return of the D-J Basin
During the crude-market collapse, explorers ignored the Denver-Julesburg Basin. Considering the price-affecting move by OPEC, the D-J Basin has become reinvigorated. According to Bloomberg, more than $2 billion (US) in drilling deals have been announced in the past four months. Another $2 billion in pipeline deals and extensions have also been granted.
Since OPEC has announced its production cuts are continuing through 2018, prices will likely remain high enough to support Colorado-based oil. Wells have doubled in the D-J Basin, which is the least explored of the four largest North American shale oil deposits. Those outputs are over 100,000 barrels a day higher than last year, reaching a record high of 400,000. According to the U.S. Energy Information Administration, these new wells are responsible for one-tenth of this year’s new American production.
The Inherent Problem
The extraction of petrochemicals from Colorado sources is slightly more expensive than that of other plays. According to Ponderosa Advisors, a Denver-based energy advisory firm, drillers in the D-J Basin recover their costs when oil prices are around $40 (US) per barrel.
By contrast, Permian Basin drillers “break-even” at oil prices in the low to mid-$30s, while the Bakken play in North Dakota starts to be profitable in the high $30s. When prices dipped to 12-year lows last year, Colorado crude output dropped nearly 9 percent. While oil prices have improved since that time, the higher cost of production makes deal-making in Colorado all the more difficult.
Is Colorado Oil Shale Sustainable?
Because of the thin margins, American oil shale producers are keeping a constant eye on the market. For instance, Anadarko Petroleum announced reduction of its exploration and production budgets in Colorado following the second quarter of 2017. CEO Robert Walker stated in July, “We sincerely believe the volatility of the current operating environment requires financial discipline. And as I have said many times, pursuing growth without adequate returns is something we will avoid.”
OPEC likely nodded in agreement.