Not only did 2020 bring Colorado’s oil and gas industry a pandemic, plunging demand and more than 7,800 jobs lost — it brought a complete overhaul of the state’s regulatory body, the Colorado Oil and Gas Conservation Commission.
Tension between the COGCC and stalwart industry reps like Republican lawmakers and trade associations began shortly after the new, full-time board began a Mission Change Rulemaking to entirely rewrite Colorado’s laws regulating natural resource development with an eye toward “provid(ing) substantially equivalent protections for public health, safety and welfare.”
Many environmental groups and Democratic lawmakers cheered COGCC’s decades-long shift from advocating or fostering the industry, to a body that is adding more and stricter regulations to what industry representatives say is already one of most stringent in the nation.
“We knew fundamental changes were necessary to enhance protection of health, safety and the environment, provide local governments a seat at the table, and cultivate more regulatory certainty for industry,” Gov. Jared Polis wrote at the end of September, in defense of the COGCC’s announcement of a 2,000-foot setback requirement for all drilling operations from any buildings. It used to be 500 feet, except for schools.
The setback issue has been contentious since 2018’s soundly defeated Proposition 112 that called for a minimum 2,500-foot distance requirement for fracking wells. Many from the industry side think Polis and the Legislature did an end-around with SB 181, ignoring the will of the majority of Colorado voters.
Far from the certainty they were promised, industry representatives said the commission has created a permit approval process that could be subjective, onerously time consuming, undoubtedly more expensive.
“We used to get permits in 30 to 45 days,” said Rich Frommer, President and CEO of Great Western Petroleum. “Now it takes 1½ years. The form used to be 20 pages, now it’s approaching 2,000 pages to get that drilling permit.”
An analysis by the Colorado Oil and Gas Association estimated the new process could cost the industry anywhere from $13 million to $80 million more per year in operation costs, further damaging an industry that’s already reeling.
In 2017, Colorado’s oil and gas industry had a $31 billion economic impact, including indirect employers like gas stations and oil-change shops, and generated $990 million in public revenue (taxes), according to a University of Denver study commissioned by COGA.
The Colorado Property Tax Administrator recently estimated that oil and gas revenue will drop by 36% from those levels after 2020 — some $356 million gone from state coffers. By way of comparison, the state’s tourism industry in nonpandemic times generates about $1.2 billion and the state’s marijuana industry generated $1.6 billion in 2019, according to the Colorado Department of Revenue.
The most recent estimates from the National Conference of State Legislatures shows Colorado’s estimated state tax revenue loss at 17% from the pandemic. With a $30.3 billion budget, Colorado stands to lose $5.1 billion in tax revenue in 2020.
The new setback rules will likely impact the almost 5,000 pending drilling permits, which have been stalled for more than a year. There are currently only four active drilling operations in Colorado.
“There are quite literally more rulemaking efforts happening in downtown Denver than there are rigs running across the state,” said Dan Haley, president and CEO of the Colorado Oil and Gas Association.
“It certainly takes a unique expertise nowadays — not just any company out of state can walk into Colorado and expect to have success acquiring a permit,” Frommer said.
Commission Chairman Jeff Robbins on Thursday defended the new setback rules: “I disagree with this idea that it’s a ban or does not create an appropriate permit protocol, as established by SB 181. Our decision was entirely consistent with the Legislature and governor-signed bill.”
New boss means new rules
Senate Bill 19-181 came to be the law of the land in late 2019 and was delivered by the Democratic-controlled Colorado Legislature and Polis, a Democrat. It established the new COGCC as a seven-member group with five full-time paid professionals and two nonvoting members from the U.S. Department of Natural Resources and the Colorado Department of Public Health and Environment. Including Robbins of Durango, the voting commission members include: Bill Gonzales, an oil and gas representative; Karin McGowan, a public health member from Lakewood; Priya Nanjappa an environmental protection specialist of Lakewood; and John Messner from Gunnison.
Not a single Republican sits on the board, which by law can have no more than three representatives from any major political party. Two members are unaffiliated: Nanjappa and Gonzalez. The other three are Democrats.
Shortly after it was seated in July, commissioners started a complete overhaul of Colorado’s regulatory rules. While the new law only stipulated the board be seated by July 2020, there was no deadline for rewriting all the rules.
“We talked to them about a delay,” Haley said.
It’s safe to say the industry was in a downturn that started before the global pandemic caused by COVID-19 upended economies and industries worldwide starting in March. That was largely because of the price wars between Russia and Saudi Arabia. Add to that the plunging demand, as the number of commuters has dropped precipitously with the number of air travelers.
The price of gasoline remains 8% below the five-year average, according to Bloomberg.
Since Colorado permits were “at an all-time low,” commissioners decided the time was right:
“It is actually a good time for COGCC, industry and all stakeholders to work together, as they have been, on the new rulemakings required by SB 19-181," Robbins said in an email Friday.
Frommer, whose company, Great Western, is the fifth largest in Colorado, based on 2019 production levels but has no active operations, said the current economic environment and the new commission “have all but ended the era of the small operator in Colorado.”
“It’s no longer cost effective for them,” Frommer said. “You have to be bigger, or have that organization behind you, to navigate this new regulatory environment.”
One of those small operators is Michael J. Clark, owner of Petrox Resources Inc.
Clark didn’t mince words when talking about navigating the new regulatory waters. Petrox is leaving Colorado.
“I can’t even imagine facing an appeal in front of a five-member board appointed by Polis with four people who would never side with us,” Clark said. “It’s fixed. We’ve talked to land-use attorneys who have said, ‘Don’t even bother.’
“There are other states where there’s a lot less uncertainty.”
Petrox has mineral rights and interests in La PlataCounty, but more in Archuleta County in the vicinity of the San Juan River and on the San Juan basin. While it has fewer than 10 employees in the state now, it typically can operate up to two or three wells which employs some 40-50 workers.
There currently are 7,850 fewer of those workers statewide, according to the third quarter unemployment claims in Colorado. There were 19 wells in operation statewide just two years ago.
Colorado’s oil/gas cluster makes up 28.9% of the state’s energy and natural resources industry, according to the Metro Denver Economic Development Council. That was about 26,700 direct jobs in 2019 — more than two times the amount of jobs provided by the next biggest cluster in that industry sector, energy generation and distribution.
Great Western is a privately held, family-owned company that’s been operating in Colorado for more than 12 years.
“I’m confident we’ll be able to navigate these new waters, as we always have,” said Frommer. “The investment community does not necessarily share that confidence. They’re saying, ‘Show me.'”
New rules take effect in January
Robbins staunchly defends the process the board went through to settle on the 2,000-foot setback.
“We sorted through thousands of pages of written argument, and supporting documents, and listened to hours of testimony, and took recommendations from the staff where there was party representation,” Robbins said in an interview Thursday. “We went through a month of hearings and testimony and it was a 5-0 vote by the commission, which obviously felt it had significant evidence to take some regulatory steps for locations closer than 2,000 feet to mitigate the impact.”
Robbins bristled at the claim that the commission only relied on one 2019 study from the Colorado Department of Public Health and Education, which COGA dubbed: “A hypothetical, worst-case-scenario modeling from … a study wherein authors conceded that its worst-case conditions had neither ever occurred nor were remotely likely to occur in the future.”
“You have, once again, incorrectly indicated this decision was based on only that CDPHE study,” Robbins said when asked about key evidence the commission based its decision on. “We reviewed thousands of documents that made it very clear that a sitting requirement of 2,000 feet from buildings like schools to be reasonable and necessary.”
Those two words “reasonable and necessary” will undoubtedly be tested in Colorado courts in the coming future.
Oil and gas lawyers questioned aloud while SB 19-181 was being drafted whether those two words translate to one legal standard, or two.
Industry reps allege COGCC ignored staff recommendations and dismissed evidence submitted by COGA by way of an economic impact analysis, that $13 million to $80 million more per year in operation costs.
Frommer said Great Western has one permit in the process now. Commissioners are expected to conclude the new rules will apply retroactively to all the pending permits, but a final decision will not be made until all the rules are finalized and approved — likely before the end of November. The new rules would take effect in January.
“The new rules will force 100% of the new permits” to seek variance of the 2,000-foot setback rules, he said. “Because there’s at least one structure within 2,000 feet — I don’t care where you are.”
COGA estimates up to 80% of land in Colorado will be undevelopable under the new rules.
“We don’t know how this will be applied, or how the off-ramps will be used,” Haley said. “The way it’s written now, the rules are fairly subjective and could allow for subjective rule-making for permits. That’s troubling to us.”
The off-ramps are basically exceptions to the 2,000-foot setback rule, and would cover: proof of “informed consent” of structure owners within 2,000 feet; need for public hearing and commission hearing; that the development is part of a comprehensive plan for the area that existed previously or that a surface location had been previously approved.
Asked when that legal challenge to “reasonable and necessary” could be expected, Frommer said: “About when one of our pioneer families who have settled in northeast Colorado, who own mineral rights, get denied access to those minerals and future earnings,” he said. “Once they’re able to demonstrate harm from not getting those checks due to regulations and restrictions, that’s when we’ll see someone challenge this in courts.”
Robbins thinks all the negative speculation about a process that hasn’t been tested yet isn’t productive.
“I truly do think this is a process the industry can rely on,” Robbins said. “It’s speculative to make statements at the time the staff is, at this moment, attempting to put guidelines and permit documents and the IT protocols together to allow this permitting to take place. I look forward to operators submitting applications and showing we can indeed require appropriately protective measures, yet applications can get approved.”