Colorado's move to impose stricter regulations on the oil and natural gas industry may lead EnCana Corp. to reallocate a chunk of its North American exploration budget to more "friendly" areas of the United States, a company executive said last week.

The Colorado Oil and Gas Conservation Commission (COGCC) in late March unveiled draft regulations that would impose more restrictions on producers (see NGI, April 7). Statewide hearings are scheduled to begin in June, and the final rules could take effect by Nov. 1. With months to go before the final rules are promulgated, EnCana officials suggested that the changes likely will impact how quickly it develops its substantial assets in the state.

"Obviously we're concerned about the impact of the new rulemaking," Jeff Wojahn, president of EnCana USA Region, told financial analysts during a conference call. EnCana's Colorado operations are focused in the Piceance Basin. The company acquired its first Piceance property in 2001 and added to its Rocky Mountain position when it bought Tom Brown Inc. in 2004 (see NGI, May 24, 2004).

The northwestern Colorado basin holds "substantial hydrocarbons," said Wojahn, but he noted that even before Colorado regulators decided to revamp the energy rules, the basin posed operational problems. The basin is "disadvantaged by its remoteness...and it's a high-cost basin." A more stringent operating environment "could make opportunities less competitive within our portfolio."

Some of EnCana's other resource plays, notably the Amoruso Field in the Deep Bossier trend of East Texas, offer a "strong economic environment," said Wojahn. The Bossier play can't be compared on an equal basis with the Piceance; both, he said, offer substantial upside. The Texas assets "are independent from the Piceance...I don't see one trading off one another. Clearly, we have seen a strong regulatory environment [in Colorado] and a strong economic environment in East Texas, which has made it a very attractive investment for EnCana."

East Texas not only has lower operating costs, but it also has less price sensitivity to markets, said Wojahn.

Still, EnCana's Piceance Basin upstream budget remains "steady," and it has been in the "$500 million range for the last several years," said Wojahn. "We have not lost our appetite for the Piceance Basin at all...It remains a core activity, a core property for us." The COGCC "is revising the rulemaking, and we're an active participant."

Whether EnCana's operating plans shift to more accommodating areas after 2008 remains a question. EnCana this year plans to spend $485 million to drill 215 wells in the Piceance Basin; production is expected to average around 360 MMcf/d. The company drilled 286 net wells in the basin in 2007, compared with 220 in 2006. EnCana drilled 83 wells (net) in the basin in 1Q2008.

By comparison, EnCana drilled 11 wells (net) in East Texas in the first three months of 2008. It plans to spend a total of $660 million there this year to drill 85 wells; output is expected to average around 420 MMcf/d.

"Obviously we have great results in Texas and from Colorado," said CEO Randy Eresman. "From the company point of view it is imperative that with any state or regulatory body, our industry will gravitate to the lowest cost structure. If there are impediments to that, they will be factored into investment decisions."

EnCana may be shifting its exploration activities, but it's not going to ignore the prospects in the Piceance Basin, said the CEO.

There is "greater price sensitivity in the Piceance than some other plays," said Eresman. However, "as other high commodity prices go, there is the likelihood of a longer-term investment" in the Piceance.

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