SHALE Policy Article May 2019 - Colorado Adopts Law Altering Oil & Gas Regulatory Landscape

Colorado Adopts Law Altering Oil & Gas Regulatory Landscape

On April 16, Colorado Governor Jared Polis signed SB 19-181 into law, initiating a sweeping overhaul of the state’s regulation of the oil and gas industry in the latest move of political activism aimed at oil and gas activities in the state. The new law creates a dangerous precedent impacting future oil and gas activity in Colorado and potentially beyond its borders.

SB 19-181 impacts Colorado’s oil and gas industry in several ways. Among other things, it alters the mission and focus of the state’s primary oil and gas regulatory authority and introduces significant uncertainty and potential for roadblocks by increasing local control of oil and gas activities, placing more emphasis on public health, safety and environmental concerns, and revising forced pooling, drilling and operating requirements.

COGCC Mission and Authority

Perhaps the most impactful result of SB 19-181 is that it alters the mission of the Colorado Oil and Gas Conservation Commission (COGCC). Traditionally, the Oil and Gas Conservation Act’s mandate has been to “foster the responsible, balanced production, and utilization of the natural resources,” declaring that such development is “in the public interest” so long as it is done “in a manner consistent with protection of public health and safety” in a way that avoids “waste” of the state’s natural resources.

The statute is now amended to direct COGCC to “regulate” oil and gas development “in a manner that protects” public health and safety, and redefines “waste” to establish that non-production of oil and gas does not constitute “waste.” It also eliminates cost-efficiency and technical feasibility as considerations in its directive to “minimize adverse impacts.”

SB 19-181 also changes the membership qualifications of the nine-member COGCC by reducing the minimum number of oil and gas industry members from three to one and removing the requirement that at least two members have engineering and geology backgrounds. At the same time, it increases the membership qualifications for public health and environmental protection experience.

In total, these provisions constitute a substantial change in the mission and direction of COGCC away from being a body that fosters the responsible development of Colorado’s oil and gas resources.

Expansion of Local Control

The issue of local control has been very contentious in Colorado for several years, culminating in last year’s Proposition 112, which proposed a statewide 2,500-foot mandatory setback on drilling and completions from homes, schools, and other buildings. While Proposition 112 was defeated in the 2018 election (with its opponents including Polis), support for local control and greater regulation of oil and gas activities has been growing.

Traditionally, Colorado’s courts recognized that existing state law does not thwart local governments’ ability to pass local land use regulations impacting oil and gas operations, provided the regulations are not inconsistent with state law or do not hamper Colorado’s interest in efficient production and development of oil and gas resources. SB 19-181 changes that by giving local governments vastly more authority to regulate oil and gas activities in a manner that is more stringent than state regulations.

In increasing the ability of local governments to regulate oil and gas activities, SB 19-181 specifically allows for local government regulation of noise from oil and gas operations, local government regulation of land use and surface impacts, and local government assessment of taxes or fees for inspections and monitoring. In addition, the bill allows local governments to impose regulations on oil and gas activities that are more protective or stricter than state regulations, and requires that oil and gas operators demonstrate that local governments have authorized their operations or do not regulate siting as a condition to receiving permits from COGCC.

Public Health, Safety, & Environment

One of the primary objectives of SB 19-181 was to increase state and local regulation of health, safety and environmental issues in oil and gas operations following the 2017 Firestone flow line explosion and the failure of Proposition 112. Specific goals include: overhauling the makeup and mission of the COGCC, shifting the focus of the Oil and Gas Conservation Act, establishing new health, safety, and environmental rules, and clarifying the roles and emphasizing the powers of various government entities to regulate the industry.

In placing greater focus on the protection of public health, safety, welfare, the environment, and wildlife resources, as well as the prevention of waste, SB 19-181 specifically reiterates that Colorado bodies beyond COGCC have jurisdiction to regulate air and water pollution, oil and gas-related waste disposal, and siting. It also removes cost-effectiveness and technical feasibility as considerations when addressing wildlife mitigation measures; expands COGCC’s authority to focus on health, safety and environmental impacts beyond those that are “significant”; and requires certain oil and gas workers to receive safety certifications to work under certain conditions relevant to public health and safety.

In addition, the bill directs COGCC to establish rules “to ensure proper wellhead integrity” of production wells and revisit existing rules for flowlines and shut-in or abandoned wells. It instructs the Colorado Department of Public Health and Environment’s (DPHE) Air Quality Control Commission to issue rules to lower methane, hydrocarbon, and NOx emissions from oil and gas operations and hydrocarbon transport and usage. It also mandates that COGCC and DPHE analyze alternative locations for proposed oil and gas facilities and evaluate cumulative impacts.

Pooling, Drilling, and Operational Requirements

SB 19-181 made a number of substantial changes to Colorado’s forced pooling requirements and to other oil and gas regulations. Changes to the pooling requirements seek to continue to allow forced pooling, but make it harder to impose forced pooling on unwilling parties.

In order for oil and gas operators to force a shared pool, they will now need 45 percent of the mineral rights owners to provide consent, as opposed to one. Prior to obtaining a pooling order, mineral rights owners will need to get local government sign-off or demonstrate that the appropriate local government is not regulating siting. It increases the non-consenting royalty owner’s rates during the payback periods to 13 percent for natural gas wells and 15 percent for oil wells. Operators are also now required to obtain consent from non-consenting owners prior to utilizing the surface.

As mentioned above, operators in Colorado must now demonstrate local authority authorization (or show that local governments do not regulate siting) prior to receiving permits from COGCC. There are also new financial assurances required to cover abandoned wells and meet current and future requirements.

Impacts

There is much debate over what the impact of SB 19-181 will be to the $30 billion oil and gas industry in Colorado. While some concessions were made to the oil and gas industry late in the process, the overall impact is going to be significant with delays to permitting and the changed mission and role of the COGCC among the greatest concerns to industry.

In terms of the Colorado economy, the REMI Partnership, an organization involving several Colorado interest groups across a variety of sectors, published a report using their own economic modeling program on the potential consequences if the bill passed. The conclusions stated that the legislation has the potential to significantly restrict a critical sector of the Colorado economy and eliminate up to $13.5 billion in tax revenue in just ten years between 2020 and 2030. REMI produced models which found that with a 50 percent reduction in oil and gas production by 2030, there would be 120,000 fewer jobs across all sectors, as well as $8 billion lost in state and local tax revenue and a $158 billion loss in gross domestic product (GDP). The 100 percent scenario found that there would be 185,000 fewer jobs, $13.5 billion lost in state and local tax revenue, and a $257 billion loss in GDP.

While factors like the state’s development of new regulations, current efforts to reverse the law through a ballot initiative, and likely eventual litigation all add further uncertainty to the ultimate impact of the new law, there is real fear that the momentum created by the passage of SB 19-181 could bleed into other states such as New Mexico. While the political makeup of Colorado is uniquely suited to allow the passage of this sweeping legislation, opponents of oil and gas production will undoubtedly look to Colorado as a way to thwart the oil and gas industry in other states.

 

For more information: Cornerstone Energy Solutions, a business line within Cornerstone Government Affairs, provides strategic and business advisory services to a wide range of organizations of all sizes. These services include government relations, regulatory affairs, strategic communications, issues management, non-technical risk management, Environmental Social Governance (ESG), sustainability, and financial advisory services. To learn more, visit www.cgagroup.com.

 

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