Uncertainty still surrounds Colorado producers following oil, gas overhaul bill

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Uncertainty still surrounds Colorado producers following oil, gas overhaul bill

 

Highlights

Governor declares end to 'oil and gas wars'

State activists still pursue fracking ban

 

Denver — Although Colorado passed a sweeping overhaul of the oil and natural gas permitting process for drilling new wells in the state, and Democratic Governor Jared Polis declared an end to the "oil and gas wars," legislators worry activists might draw up new ballot propositions.

As the state starts to turn Senate Bill 181 -- the new law giving greater power to local governments over oil and gas drilling projects -- into flesh following the end of the legislative session, communities are re-establishing moratoriums.

"I do believe the work conducted by the legislature under Senate Bill 181 does take important issues that constituents from the state were bringing forward and addresses those issues," said Alec Garnett, the Democratic state House majority leader, during a forum the Colorado Oil and Gas Association hosted. "It creates a little bit of nervousness and uncertainty, but it will take a while to implement the rulemaking for some of the technical issues in Senate Bill 181 to be worked out. It puts us on a wait-and-see course to avoid costly, not well thought out, ballot measures the public puts forward because they don't feel like the General Assembly is doing enough."

"I'm hopeful that it takes a stab at limiting ballot issues," said Rachel Zenzinger, a Democratic state senator from Arvada. "But I've heard from a lot of people that the legislation didn't go far enough. A lot of them were disappointed because their end goal was to ban all fracking. And because this legislation didn't do that, they feel like we were a major disappointment."

She added, "we do have a unique structure in Colorado where people can get things on the ballot. We try to get ahead of them, but it's hard to predict where people might take things in the future."

The city of Lafayette, located in the Denver-Julesburg Basin, added another six months to its moratorium on drilling in the city immediately following the passage of SB 181 last month. Next week, the city council of Broomfield will discuss temporarily banning new oil and gas wells while it mulls new rules on the industry.

Also, Larimer County, located on the northern end of the DJ Basin, is launching an Oil and Gas Regulations Task Force to meet over the spring and summer to come up with recommendations on how county leaders can move forward imposing limits on drilling activity.

Still, despite any long-term concerns over the future of oil and gas production in the state, operators currently hold about 6,500 drilling permits in hand, allowing for growing production from the DJ Basin. For example, Noble Energy, one of the most prolific producers in the basin, just set a company record during first-quarter 2019 at 285 MMcf/d of natural gas, 30,000 b/d of NGL and 67,000 b/d of oil produced. Noble has about 600 drilling locations already permitted, allowing for five years of creating new wells at its current pace.

"The war might be over, but plenty of skirmishes will continue at the local level because control has been shifted to the local folks," said Republican state senator Dennis Hisey from El Paso County. "Oil and gas isn't going to slow down, but at city council and county commissioner meetings, locals are going to show up en masse to stop drilling in a location they don't like. It will be turmoil in the short term."

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New Colorado environmental law stalls oil investment

New environmental regulations in Colorado have chilled investment in the state’s oil and gas fields as companies grapple with how local officials will respond to a law giving them more power to restrict energy production.

Colorado now ranks fifth among U.S. states in oil production at about 500,000 barrels per day (bpd), up from just 90,000 barrels in 2010.

That boom, however, has come just as state politics has shifted to the left with an influx of urbanites who tend to oppose fossil-fuel development.

The Colorado law is one sign of pushback to the oil boom in the United States, which last year became the world’s leading producer, overtaking Saudi Arabia.

New Mexico, the state ranked third in production volume, has also sought to rein in energy development with new rules targeting emissions from hydraulic fracturing. California, another top producer, is considering legislation that would sharply curb oil drilling. Many states have opposed Trump administration efforts to expand offshore drilling near their coastlines, and environmentalists nationally have blocked or slowed new pipelines with protests and lawsuits.

Colorado is “ground zero for a combination of oil and gas production, environmental stewardship and urban sprawl housing development,” said Jack Hamlin, a board member for the Rocky Mountain Pipeliners Club, which is made up of about 3,000 energy industry workers in the region. All three interest groups, he said, are “fighting for the same space.”

Colorado’s new law will allow counties and municipalities to make rules governing the distance oil wells can be from homes and schools and to regulate drilling impacts such as noise, traffic and pollution.

Previously, local officials relied on the state and federal governments to regulate energy.

 

The resulting uncertainty over how local authorities will use their newfound power has nearly halted energy deal activity, including acreage purchases. There were only five land transactions of negligible value in the Denver-Julesburg Basin in the nine months ended Mar. 31, down from nine deals worth $2 billion in the same period of 2016-17, according to consultancy Drillinginfo.

ConocoPhillips tried to sell its Colorado acreage for more than $1 billion late last year but failed to find a buyer, according to three sources familiar with the deal.

Conoco-Phillips declined to comment.

Adams County in northeast Colorado, where drillers produced 3.6 million barrels of oil last year, has already launched an effort to examine “health and safety and welfare” from the local energy industry.

The county “will need to look at air and water quality, preventing explosions and accidents, spills and truck traffic,” said Steve O’Dorisio, a commissioner for Adams County, northeast of Denver.

DODGED BULLET

While some oil firms are fretting over the new law, others are relieved that another, more restrictive ballot initiative failed to pass in November.

That proposal would have effectively put most of the state’s land off limits for oil production by imposing bigger buffer zones between energy development and most occupied buildings.

Companies engaged in Colorado energy production expressed a range of opinions about whether and how much the new law would impact their businesses.

 

Hamlin, a Colorado native who owns an energy engineering company, opened a Wyoming office to guard against an exodus of energy companies from Colorado. More than 90 percent of his business has been done outside of the state in the months before and after the legislation’s passage, he said.

Oil firms “have no idea what impact it’s going to have,” Hamlin said of the law. “Businesses, they just don’t invest in uncertainty.”

Extraction Oil & Gas Inc plans to remove acreage in Boulder County from its inventory of anticipated drilling sites because of the regulatory uncertainty, said acting CEO Matthew Owens on the firm’s first-quarter earnings call. Owens stressed, however, that the firm could keep up its drilling pace by tapping fields in three other Colorado counties.

SRC Energy, a Denver-based oil producer that produces about 45,000 barrels of oil equivalent per day, offered cautious optimism in its first-quarter earnings call. While the firm “does not support all parts of the bill,” and acknowledges regulatory risks, the company plans to move forward with current operations, said Chairman and Chief Executive Lynn Peterson.

Chevron Corp and Occidental Petroleum Corp are currently competing to acquire Anadarko Petroleum Corp, which holds more than 400,000 acres in Colorado. Executives from both firms have said they do not expect the new law to pose an obstacle.

“We have no worries about what’s happening in Colorado,” Vicki Hollub, Occidental’s chief executive, said on an analyst call announcing her firm’s bid for Anadarko.

Notably, Weld County, which produced more than 157 million barrels in 2018 - more than every other Colorado county, combined - said it would not adopt stricter rules. But that doesn’t bar municipalities in the county from creating their own regulations.

UNCERTAIN PATH AHEAD

The next steps for the Colorado Oil and Gas Conservation Commission, the state oil regulator, involve amending its own rules to align with the increased focus on health and safety required in the new law. That process, which producers fear could curtail their drilling, should be completed by July 2020, said Chris Arend, a spokesman for the Colorado Department of Natural Resources.

The commission will also be amending criteria for flagging permit applications for additional review when they raise specific concerns, such as a location near a school or a flood plain.

 

The process will be applied to the 6,400 energy permit applications now in the pipeline as of February, many of which were filed by companies rushing to get ahead of the expected tightening of regulations. That compares with 2,600 pending permits in the same month the previous year.

Cities and counties have no set timeline for enacting new rules that might curb drilling. Some, such as Adams County, slapped a temporary moratorium on new permits while they decide what to do. Broomfield, a city northwest of Denver, will likely vote on its own moratorium later this month, said Broomfield City Councilman Kevin Kreeger.

Colorado Oil and Gas Association President Dan Haley called the new law “the beginning, not the end” of a new process for regulating the industry.