Reaping Restraint

GG has written a few times about the state of oil and gas regulations here in Colorado. A lot of that is now changing as Senate Bill 181 has passed the Colorado Legislature and heading for the governor’s desk, where it is expected to be signed.

As is typical these days, the public debate was overheated.  Claims that passing this legislation would end petroleum development and cripple the Colorado economy were broadcast in commercials, while some advocates felt that the bill didn’t go far enough and were upset when amendments loosened some of the language of the original bill. Others felt that this was overturning the voters’ rejection of proposition 112 last fall (e.g., comments here). Votes in the legislature were along party lines.

So is this the death knell of oil and gas in Colorado? Best to see what passed rather than rely on public pronouncements. So let’s look at what is in here.

The first set of changes are to the Colorado Oil and Gas Conservation Commission (COGCC). Its mission shifts from promoting to regulating the industry, and it is no longer considered to waste things if oil and gas is left in the ground rather than create a health or environmental hazard. The membership of the commission shifts to drop two industry representatives and adds wildlife, soil conservation and environment representatives.  While making the commission shift to more of a regulatory body makes a lot of sense, leaving only one (of nine) commissioners familiar with the way industry operates is probably going a bit too far.  Not every company operates the same.  Industry suggested and the bill’s authors accepted an amendment to make the positions professional (meaning, paid full time). This is a positive step as viewed by all parties to increase the speed of the commission’s work. Whether these changes result in profound changes in statewide regulation remains to be seen.

The second set is to give local governments more control over siting of wells, inspection and health requirements; it also gives local governments power to fine oil and gas operations that violate local regulations.  This is arguably the biggest thorn in the side of industry; the one-stop shopping Colorado had offered in terms of regulation is now gone, and instead the region is balkanized. Almost certainly some urban counties and some cities will effectively make drilling nearly impossible; however, the oil and gas industry did get something of a reprieve in that an amendment changed the wording allowing local regulation to be “necessary and reasonable.” So in some places where there is enough oil or gas to be worth fighting over, there will be lawsuits. Conversely, though, the places most upset over this law may see little or no change.  Weld County will be free to continue to issue drilling permits as rapidly as possible (unless, of course, COGCC’s change results in other major changes to state regulations).

A third set of changes is to forced pooling.  The ridiculously low bar of a single mineral owner triggering forced pooling is now history and is replaced by a need for 50% (or 45% according to one source) of mineral rights holders (by area) to agree to development.  This will effectively end the trolling of subdivisions that somehow have kept mineral rights for the one owner willing to sell out; this requirement is more in line with other states with forced pooling laws. This also changes the accounting on how royalties are paid. Beyond that, a surface owner not participating in the development cannot have their land used for development [this would have been huge when the western slope was being developed for gas some years back].

A fourth change is really a whole bushel of less sweeping changes to how oil and gas operations are managed and overseen.  The air quality control commission is explicitly told to look for volatile organic compounds and methane and other pollutants from oil and gas operations; COGCC is explicitly removed from this concern.  COGCC is to make rules on ensuring wellbore integrity, disclosure of feeder lines and other infrastructure, and to determine when older wells need inspection to be restarted [recall the Firestone well that led to the house explosion was one shut down and then restarted]. The cap on permit fees used to finance COGCC is lifted and replaced with asking for an amount consistent with the cost to the commission to permit and regulate that well.

This is what industry has reaped from nonstop efforts to block regulation and insist on development against local wishes. Had they agreed to better regulation and sharing of maps of oil and gas field infrastructure after the Firestone house explosion, they wouldn’t have had that widow sitting in front of the committee drafting legislation demanding that more be done to protect people. Had they not defended the 1 person forced pooling law, representatives from areas where the majority of mineral rights holders were angry at being shanghaied might have been more sympathetic.  Had they taken more seriously the complaints about air pollution, they might not have seen this bill directly demand regulation of air pollution.  In short, they were handed a plate full of crow derived from their own previous victories.

Will this undercut Colorado’s economy? Pretty unlikely; Colorado has a pretty diverse economy and oil and gas, while substantial (somewhere under $15B), are nowhere near number one in the state, which has a GDP approaching $300B. Colorado is not Wyoming or Alaska.

Will this cripple oil and gas in Colorado? While exploration will certainly be curtailed in some areas, a lot of wells are already in production–a really large number (tens of thousands). Those won’t be shutting down because of this. Oil and gas is traditionally a boom-and-bust business, something the geoscience community in Colorado is well aware of (many of the local consultants were industry employees back in the 1980s before the industry tanked in the state; many of them know to make their money while the chance is there because this will end, sooner or later). Unlike proposition 112, this bill doesn’t immediately shackle the places that want this development; whether it will eventually slow areas like Weld County remains to be seen.  It is possible that a few companies might sell their properties to others in the industry; this happens all the time. A greater risk might be that some of the smaller companies might go belly up if they bet on developments that will be sidetracked or blocked; capping their wells or patching the leaks in their lines might fall to the state if their existing developments are not attractive enough for others to purchase. The ultimate wildcard is what happens with COGCC.  Industry can guess which local governments will be trouble and which won’t, but with new members, new guidelines, and new tasks, COGCC’s path forward is unclear and critical to the oil and gas industry. Odds are, that group will want to make things work–for the public and for industry.  But there are no guarantees–and the thing industry hates the most is uncertainty. And that is arguably the most significant punishment of all.

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