Colorado has experienced significant growth in oil development due to horizontal well development and hydrologic fracturing of wells stimulating production in the oil rich Niobrara formation. Niobrara development has expanded to include areas beneath the Company’s service areas in Arapahoe County requiring significant water supplies in proximity to the Company’s existing supplies and infrastructure.
In conjunction with the Company’s acquisition of the Sky Ranch property, Pure Cycle entered into an Oil & Gas Lease with Anadarko E&P Company in which the Company retains a 20% gross proceeds royalty (less certain taxes) from the sale of any oil and gas produced from our property. The Oil & Gas Lease seeks to capitalize on the growing interest in the region’s Niobrara Oil Formation which major Oil Companies such as Anadarko and Conoco have entered into Leases in Adams, Arapahoe and Elbert Counties. In addition to the Company’s Oil & Gas Lease with Anadarko at Sky Ranch, the Company entered into an Oil & Gas Lease on approximately 40 acres adjacent to the State Land Board’s Lowry Range which lease interest was acquired by Conoco.
Developing oil from the Niobrara shale formation has brought new success in Colorado through the use of hydrologically fractured, horizontal wells. Hydrologic fracturing is a highly water intensive process, using between 3,000,000 and 5,000,000 gallons of water per well. Much of the recent leasing activity in the Niobrara formation in Adams, Arapahoe, and Elbert Counties is in close proximity and in some cases directly beneath the Company’s Denver based water supplies. The Company’s existing water distribution system is capable of providing approximately 500,000 of gallons of water per day to its customers and we are expanding our capacities to increase our capacities to over 1,000,000 gallons per day in 2012 to meet the demand for water needs from this Niobrara development.