Fracking in Colorado

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Anahí Cecilia Alvarado Melchor Fracking in Colorado

Problem: There is an opportunity in Adams County, Colorado to obtain rights to develop a number
of oil and gas wells on private land, approximately one mile from the nearest town. The price of
the leases is fair and should support a solid return on investment. The oil and gas deposits are in a
shale formation 8,000’ below the surface and are separated from any useable aquifers by nearly
5,000’ of impermeable shale. Hydraulic fracturing will be necessary to produce any appreciable
amounts of oil or gas, and normal surface operations will also be required. Oil and gas production
would be assessed property taxes, bringing a new source of revenue that the county would use to
fund school programs and road repairs. Several Colorado cities have recently enacted fracking
bans, but the nearby town has not. Nonetheless, there is a small but growing group of local
residents who are opposed to fracking so close to the town.

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Introduction

Hydraulic fracturing, or fracking, is perhaps the most important energy discovery in the last half
century. As a result of fracking, U.S. production of oil and natural gas has increased dramatically.
This increase has abruptly lowered energy prices, strengthened energy security and even lowered
air pollution and carbon dioxide emissions by displacing coal in electricity generation. The lower
energy prices have meant more money in the pockets of American families and businesses. And
the lower emissions are certainly good news for our health with large reductions in air pollution
dispersed across the country and, at least for the near term, our climate.

Whether or not we as a society continue to gain from the broad benefits of fracking rests on the
shoulders of the local communities where drilling takes place, or could take place. These
communities must determine if the local benefits exceed the local costs, a calculation that
requires a lot of information to be done well.

As governments and communities with shale deposits in the United States and around the world
continue to grapple with whether to allow fracking, it is vital that they have the facts on its
impacts. This is the only way to ensure that we get fracking’s benefits and minimize its costs.

The company is considering to invest in crude oil exploitation, the first step is to get as much
information about the operators and his or her track record and team. Regardless of the return
potential, don’t consider an oil project if the operator lacks a team of industry experts to support
the well’s drilling, completion and extraction.

Here are a few considerations (and questions we ask) when reviewing the team members of an oil
or gas project.

QUESTIONS FOR OPERATORS

1. How long has the company been in business?

2. Do they participate alongside their investors in the well?


3. Do they have relationships with other operators and form join ventures (JVs) to participate
in each other’s projects? This can be a positive sign if other operators are trusting the
integrity of the team and project of another exploration company.

4. How long have they been active in the basin where the project is located?

5. What are the operators’ means of communication? (Calls, texts, emails, automated
updates, etc.)

6. How many wells do they currently operate on a day-to-day basis?

7. Can the operator provide data for you to compare past authority for expenditure (AFE)
estimates for projects compared with the actual costs?

8. What is their overall track record of finding hydrocarbons?

9. What is their track record of finding commercially viable wells?

QUESTIONS FOR GEOSCIENTISTS

1. Who is the geologist who originated the project?

2. How long has he or she been active in the basin the project is located?

3. How is this team member paid? Is it a contractor fee, a salary or a carry in the well?

4. Was he or she hired just to give an opinion to the operator/project generator or will he or
she be active in the study of the test well and any developmental wells?

5. What is his/her overall track record of finding hydrocarbons?

6. What is his/her track record of finding commercially viable wells? (This is different than
someone’s record of finding hydrocarbons. Just because you were able to locate
hydrocarbons does not mean the well is commercially viable and will make money.)

QUESTIONS ABOUT ENGINEERING/OPERATIONS

Equally as critical as the geologist is the engineer or engineering team. There are five main types of
petroleum engineers: drilling, completions, facilities, production/operations and reservoir
engineers. All are knowledgeable in each department, but most are specialists in one.

While finding hydrocarbons is critical, you need a team of experts to drill and extract hydrocarbons
from the ground. Engineers study the data before and during the drilling to ensure the operations
are safe, economical and maximize the potential of the reservoir through various drilling and
completion techniques.

Similar to evaluating the geoscience team, you should ask yourself some questions about the
engineering team controlling the project.

1. How long have they been active in the basin the project is located?

2. Are they reputable? Do they have a degree in petroleum engineering or are they field
engineers? (I am not knocking field engineers; they are critical to the operations at the drill
site, but when a crisis pops up when drilling 10,000 feet below the surface, make sure you
are comfortable with the engineering team in charge.)

3. Are the engineers sophisticated with the newest technology and software? (There are
many software options available. Just remember when working with modeling and
estimations – garbage in; garbage out.)

4. Was the engineer hired just to give an opinion to the operator/project generator or will he
or she be active in the study of the test well and any developmental wells?

5. Is the engineering team a contract hires or are they employees of the operator?

QUESTIONS ABOUT LAND

You can find all the hydrocarbons in the world, but you can’t drill a single hole in the ground if you
don’t have the rights to drill. Land plays a critical part in acquiring the rights to drill. A quality land
team ensures there are no issues with ownership of the lease, land and project partners.

1. Does the operator have a landman on their team?

2. Does the landman have an AAPL (American Association and Petroleum Landmen)
designation? (Registered Professional Landman [RPL] or Certified Professional Landman
[CPL]) Not only are there four-year degrees in land management, the majority of in-house
landmen obtain their RPL and then their CPL designations through continuing education
programs. All are important factors when qualifying an operator’s land department.

QUESTIONS ABOUT INVESTOR CENTER COMMUNICATIONS

1. During the drilling process, do you feel the operator will keep up a good communication
line with investors?

2. Do they explain why they make their decisions in the field? (There are nonconsent clauses
in most joint operating agreements. sometimes an investor or investment group should
elect to no longer participate in certain situations. A good operator will always be open
with their processes, so you can make educated decisions with your investment
allocations.)

3. Does the operator have a system in place to ensure timely payment of production?

4. How do they handle joint interest billing (JIB)?


SWOT Analysis
Positive Negative
Strengths Weaknesses
 Limited success outside core business
 Good returns on capital expenditure  More investment in new technologies for

Internal

Super performance in new markets the current geology


 Strong free cash flow  Not highly successful at integrating
 Strong dealer community and leadership environmental firms or groups in favor of
Hydraulic Fracturing
 Slow local market growth

Opportunities Threats

 Capitalize on new resources for the county  Regulatory environment


and company  Fracking bans in several Colorado cities
 Opening up of new markets because of  Reliability and security of oil and gas
government agreement delivery
External

 Utilize to state-of-the-art facility for drilling  Shortage of skilled workforce in certain


because the new technology provides an global market represents a threat to
opportunity to the drilling company to steady growth of profits in those markets
practices differentiated pricing strategy in  Any unlikely event during the peak
the new market season may impact the profitability of
 To supply existent refineries or new ones the company in short to medium term.
 Only one drilling company in the region  Price competition
 Competitor reaction

PORTER Market Analysis

Potential Entrants:
 Service and E&P companies
New players in oil & gas equipment & services brings innovation, new ways of doing things
and put pressure on any company, nonetheless, in this case the opportunity to obtain rights
to develop a number of oil and gas wells on private land is likely for a certain company, thus
the potential entrants are not relevant.

Substitutes

 Other sources of energy


 Reduced use
 Lows Oil and gas prices
 Poor demand and supply/demand imbalances

Threat of substitute’s products and/or services is not relevant because for the refinery and other
transformation (oil products), a certain amount in direct consumption and power plants, required
fossil fuels.
Customers:

 Bulk distribution
 Pipeline operator
 Refineries

The bargaining power of customers is indeed important; the customers want to buy the best
offerings available by paying the minimum price as possible.

Suppliers:

 Suppliers in raw materials


 Pipeline operator

Suppliers in dominant position can decrease the margins any drilling company can earn in the
market. Powerful suppliers in basic materials sector use their negotiating power to extract higher
prices from the firms in oil & gas equipment & services field.

Industry Rivalry:

 Low market growth expected


 Price competition likely
 Low prices and decrease the overall profitability of the industry

Supply and Demand Analysis of Colorado Oil and Gas Production

Colorado 2014 2016 2018


Crude Oil Production 9.653 10.26 15.33
(Mbbl)
Natural Gas Production 142.911 144.485 160.074
(Million Cubic Feet)
Energy consumption
Oil (Thousand Barrels) 92228 93019 -
Gas (Million Cubic Feet) 37.491 38.671 42.124

Colorado has increased the oil &


gas production and consumption
over the last 4 years (U.S. E.I.A.,
2018).

If the new drilling company starts


operations, the supply of oil and gas
to the refineries will rise up, hence
the price goes down, consequently
the price of products derived of oil
and gas goes down locally.
POLITICAL IMPACTS USING PEST FACTORS/ANALYSIS

 Political
 Renewal of Subsidies
 Renewal of Tax Rebates
 change in regulations –
 charging connection fees
 Permitting
 New Legislation
 Trade Wars- Tariffs
 Business-friendly
 Lobbying
 Political risk/stability

 ECONOMIC

 Growth of economy, industry and social acceptance


 Low interest rates
 Low inflation
 Low unemployment

Foremost, we have to focus in the supplier’ force, since the drilling company has to get the
permission to transport the crude oil and gas to refineries and so on, likewise the company
depends on the raw materials parties. The relative strong competitive force is the industrial rivalry,
because price competition is an undoubtedly threat. The lower prices in oil & gas are of the drilling
party the lower returns on capital expenditure, therefore, no source of revenue that the county
would use to fund school programs.

Assumptions and Risks

 Sufficient volumes of crude oil and natural gas will be available via pipeline or elsewhere
to satisfy the increased demand.
 Workforce will be available in the region to extract the fossil fuels effectively
 The demand of oil products and the refinery’ production will rise up, so the exploitation
of oil and gas as well
 The drilling company can operate with the environmental standards and the consistent
margins
 There will be an agreement for all parties (local and Colorado environmental groups,
government and industry).

First, this is the situation and plan in the SWOT Analysis, build on the strengths, leverage the
opportunities, shore up the weaknesses and mitigate the threats.
After that, there is a situation and plan for the customers, suppliers and industry rivalry’ forces in
the Porter’ 5 Forces Analysis.
Bargaining power of customers: By building a large base of customers. This will be helpful in two
ways. It will reduce the bargaining power of the buyers plus it will provide an opportunity to the
firm to streamline its sales and production process.
Bargaining power of suppliers: By building efficient supply chain with multiple suppliers. By
experimenting with product designs using different materials so that if the prices go up of one raw
material then company can shift to another.
Rivalry among the existing competitors: By building a sustainable differentiation. By building scale
so that it can compete better. Collaborating with competitors to increase the market size rather
than just competing for small market.

Conclusion

The work necessary to conduct and complete the analysis:

1. review existing business financials to improve efficiency


2. locate and secure other suppliers of reliable product
3. find employees
4. secure end financing
5. Contact congress people to determine whether the tax incentives will be renewed
6. Explore growth markets

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