Colorado is the fifth-largest oil producing state and sixth-largest for natural gas production—output fueled by fracing. Annually, oil and gas (O&G) contribute $32 billion to Colorado’s economy, create 90,000 jobs, and pay $1 billion in state and local taxes. Nevertheless, the state seems intent on killing the goose that lays the golden eggs.
In recent years, Colorado has benefited greatly from surging shale production. Much of the growth has been concentrated in relatively dense suburbs north of Denver; so, unlike fracing in West Texas, operators often must drill relatively close to residences, businesses and schools. This has led to tension/disputes between local communities and the industry. Over the years, these disputes have spawned a series of local fracing bans. However, those were struck down by state courts. A November 2018 ballot initiative on restricting fracing was soundly defeated after a bitter fight.
Ignoring the voters. However, last November’s election resulted in a Democrat-controlled legislature and a new Democrat Governor, Jared Polis. Accordingly, the enviros and “leave it in the ground” crowd went to work. The new legislature moved quickly over Republican objections, and in April, Polis signed into law a major overhaul of state O&G regulations that incorporates many of the restrictions voters overwhelmingly rejected at the polls.
The law fundamentally changes state O&G regulation. Historically, the Colorado Oil and Gas Conservation Commission (COGCC) had ultimate authority over drilling approvals. A landmark Colorado Supreme Court case ruling in 2017 found that county and municipal drilling and fracing bans were unlawful, due to COGCC’s supremacy. But under the new law, local governments have more influence on approving drilling permits. Cities and counties can now make new development difficult through a more stringent permitting process, higher fees, stricter emission regulations, and by increasing setback measures, all of which will discourage new industry investment.
The law changes the COGCC from nine members to five: Only one is an industry representative; the others will be environmentalists and “public interest” representatives. Polis appointed Jeff Robbins as the new COGCC director. Robbins previously served as legal counsel to Front Range communities opposed to fracing, so the commission’s bias is clear. COGCC will promulgate regulations involving financial requirements for abandoned wells, application fees, pipeline integrity, and orphan wells. The industry fears that the new regulations will increase the time required for permits, and that will cause companies to reduce operations in the Denver Julesburg basin.
Fundamental alterations. Nevertheless, the law’s most consequential change concerns who regulates O&G. For the first time, local governments will have authority to restrict where drilling can occur, impose standards for water and air quality, and enforce their rules through inspections and fines. Municipalities have begun to use their new powers to draft, enact and enforce rules on drilling in their jurisdictions.
The law also gives local governments significant new authority to restrict well locations, which could limit or prohibit drilling in some areas near homes and schools. That could make it much harder to drill on the western and southern edges of the Wattenberg field, near Boulder and the Denver suburbs. The law enables cities and counties to employ their land-use powers to regulate O&G, imposing a nightmare regulatory patchwork of different regulations across Colorado. The law will increase the cost of drilling in Colorado, which could drive some companies to states with fewer restrictions. It will stifle industry, destroy jobs, and reduce tax revenues.
Weld County is not expected to impose tougher rules, and it produces 89% of the state’s oil and 40% of its gas. Barbara Kirkmeyer, a Weld County commissioner and industry supporter, is leading an effort to have voters overturn the law in November. Her proposal would create an independent regulatory commission insulated from Colorado’s contentious O&G battles. Of course, Colorado voters spoke loudly last November, and Democrats ignored them.
Two of the biggest losers could be Anadarko Petroleum, which holds over 400,000 acres in Colorado, and Noble Energy (350,000 acres). Much of that acreage could become more difficult to develop. Moody’s Investors Service warned that “The law will be credit-negative for oil and gas operators in the state….”
Hypocrisy abounds here. First, Democrats are incensed over the Electoral College, because it allowed the “will of the people” to be thwarted, because Donald Trump won the Presidency with only 46% of the popular vote compared to Hillary Clinton’s 48%. In Colorado last November, Proposition 112 was overwhelmingly defeated, 57% to 42%. Nevertheless, the Democrat-controlled government has enacted a law similar to Proposition 112. So, apparently, Democrats are only in favor of the “will of the people” when it suits their purposes.
Second, former Colorado Democrat Governor John Hickenlooper is running for President on the basis of his “results-driven, pragmatic agenda,” including how he got O&G companies and environmentalists to agree on regulations. Obviously, his “pragmatic agreement” did not last very long, and the results will be severe hardship for the state’s O&G industry.
The new Colorado governor, Polis, has characterized the U.S. as being “addicted” to fossil fuels and pledged 100% renewables by 2040. Thus, as discouraging as Colorado’s situation appears for the O&G industry, over the next few years, it may get a lot worse. WO
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