COLORADO REGULATIONS NAVIGATING THE BATTLEGROUND STATE

The implementation of SB 181—Colorado’s controversial new oil and gas law—poses significant challenges for the state’s oil and gas industry. But savvy operators will continue to adapt to the regulatory landscape, as they have done successfully in the past.

ARTICLE BY olorado is in the midst of a heated battle ing processes at the COGCC and other state BEAU STARK, to determine the future of oil and gas agencies, such as the Colorado Department of FREDERICK R. Cdevelopment in the state, with propo- Public Health and Environment (CDPHE). SB YARGER AND nents and opponents of the industry clashing in 181 leaves the technical details to the COGCC GRAHAM VALENTA recent years at the ballot box, in the courtroom and CDPHE, but the fundamental changes to and in the Colorado General Assembly. Colorado’s regulatory landscape are contained These clashes have intensified as significant in SB 181 itself. Of those changes, two in par- increases in oil and gas production in Colora- ticular have caught the industry’s attention: do, which has nearly quadrupled since 2010, 1. The shift in the COGCC’s overall regula- continue alongside fast population growth in tory mission and priorities; and Denver and its surrounding suburbs. The in- 2. The new ability of local governments to creased proximity of Denver’s residential areas directly regulate oil and gas production to well pads has spawned attempts by indus- and impose restrictions that are more try opponents to curb oil and gas production stringent than those found in statewide through several different avenues, including: laws and regulations. ■ Proposition 112, a 2018 ballot initiative While these changes appear daunting, Col- that would have required 2,500-ft setbacks orado’s industry is accustomed to adapting to for new wells across the state; and a changing regulatory landscape. In the years ■ Martinez v. Colorado Oil and Gas Conser- before SB 181, the state adopted dozens of vation, a lawsuit that, if successful, would precedent-setting regulations affecting all as- have overturned more than a decade’s pects of the production cycle, many of which worth of rulemaking by Colorado’s pri- were among the toughest in the country, and mary oil and gas regulatory body, the the industry continued to boom. As SB 181 is Colorado Oil and Gas Conservation Com- implemented at the state and local level, the mission (COGCC). industry will be required to stay engaged and After the defeat of Proposition 112 in the nimble as rules are finalized and their opera- fall of 2018, and after the Colorado Supreme tional impact becomes more clear. Court maintained the regulatory status quo in its Martinez decision in early 2019, industry COGCC mission change opponents shifted their focus to the legislative SB 181 fundamentally transforms Colora- arena. In the 2018 elections, Democrats— do’s approach to oil and gas regulation by re- many of them critics of the industry—gained vamping the mission of the COGCC. For de- simultaneous control of the governor’s office cades, the primary goal of the COGCC was to and both houses of the Colorado General As- “foster” the efficient development of oil and Excerpted from sembly. Anti-industry activists capitalized on gas resources within Colorado in a manner these majorities in the 2019 legislative session, consistent with various other considerations, immediately introducing Senate Bill 19-181 including public HSE. The COGCC sought to August 2020 (SB 181), which was signed into law by Gov- balance these other considerations against the Copyright© Hart Energy Publishing LLP ernor Jared Polis on April 16, 2019. development of oil and gas resources where 1616 S. Voss Rd. Suite 1000 SB 181 mandates a host of changes to oil possible, but the COGCC’s overall mission Houston, TX 77057 and gas regulation in Colorado, either through was clear: promote the efficient production of (713) 260-6400 the bill itself or through the formal rulemak- Colorado’s oil and gas.

August 2020 • HartEnergy.com 68 COGCC’s restructuring on July 1. However, these processes have suffered numerous de- SB 181 recasts the COGCC’s mission. lays since the adoption of SB 181. This is due Rather than fostering oil and gas develop- in part to the contentious nature of rulemaking ment—language that no longer appears in under the COGCC, which has grown increas- the statutory description of the COGCC’s ingly heated since SB 181 was passed, and mission—the COGCC’s primary goal is now because of the COVID-19 pandemic, which to “regulate” oil and gas development “in a prevented the COGCC from holding hear- manner that protects public health, safety and ings that allowed members of the public to welfare, including the protection of the envi- speak in person about the proposed rules. The ronment and wildlife resources.” This new COGCC’s mission change rulemaking hear- mission puts greater emphasis on the protec- ings are scheduled to take place in August and tion of public HSE, backing away from the September of this year. regulatory “balancing” that once defined the agency’s work and is the standard approach to Local regulatory control government regulation of industries with envi- The other fundamental change ushered in ronmental impacts. by SB 181 is the new role local governments The COGCC’s new mission is echoed in the will play in industry regulation. Under SB 181, restructuring and professionalization of the local governments can adopt their own oil and new-era COGCC mandated by SB 181. The gas regulations for the first time, even when the COGCC was historically composed of nine COGCC or CDPHE enacts statewide regula- volunteer commissioners, of whom at least tions governing the same topics. If a municipal- three were required to have extensive expe- ity approves rules that are stricter than statewide rience in the oil and gas industry. As of July counterparts, SB 181 allows the municipality’s 1, 2020, the COGCC will have seven com- rules to override statewide rules. This new abil- missioners, each of whom will be a full-time ity to preempt statewide rules gives local gov- state employee, and, in keeping with SB 181’s ernments unprecedented power over oil and gas de-emphasis of oil and gas development, only production within their territories and will re- one commissioner will be required to have in- quire the industry to work with regulatory bod- dustry experience. ies at both the state and local levels. SB 181 also requires the COGCC to adopt Local control over oil and gas production regulations that reflect its new mission. The is a historical break with Colorado’s previous COGCC had intended to complete all of its approach to oil and gas regulation, and it runs rulemaking processes (including the mis- counter to the regulatory frameworks found in sion change rulemaking process) prior to the other states. For example, Texas passed a law

69 Oil and Gas Investor • August 2020 Colorado Well Approval Permits 90 81 83 80 70 60 51 53 52 50 46 44 38 40 34 36 27 27 28 30 24 25 Well Location Approvals 22 20 19 20 20 15 16 12 9 10 10 5 0

May-18Jun-18 Jul-18Aug-18Sep-18 Oct-18Nov-18Dec-18 Jan-19 Feb-19Mar-19 Apr-19May-19Jun-19 Jul-19Aug-19Sep-19 Oct-19Nov-19Dec-19 Jan-20 Feb-20Mar-20 Apr-20May-20

Source: Colorado Oil and Gas Conservation Commission in 2014 forbidding a municipality from pass- delays, allowing municipalities to extend their ing ordinances regulating oil and gas in re- permitting moratoria for nearly a year. sponse to a ban on hydraulic fracturing passed The combination of the COGCC’s stringent by the city of Denton. The Texas law grew out review of permitting applications and local of the concern that allowing municipalities to permitting moratoria has led to significantly regulate oil and gas production would lead to fewer approved permits. In the 12 months after an impractical patchwork of local regulations. SB 181 was enacted, the COGCC’s approval Before SB 181, Colorado lawmakers shared of well location permits was down by more this concern, believing it would be difficult for than 50%. For example, the COGCC approved oil and gas operators to juggle competing sets just 215 well location permits from May 2019 of local regulations. Under SB 181, however, through April 2020, compared to the 442 and Colorado’s top priority is regulating oil and 572 well location permits approved by the gas to ensure public health and safety, with COGCC over the same time periods in 2017 significantly less emphasis placed on ensuring and 2018, respectively. Further, the decline in a uniform regulatory landscape. Local control well location permitting in the 12 months after over the industry is a natural consequence of SB 181 cannot be attributed to one or two slow Colorado’s reordered regulatory priorities. months—since SB 181 was signed into law, monthly approvals of new well locations have SB 181’s effect on the industry remained consistently lower compared to the SB 181 was designed as a long-term solution previous 12 months. to the state’s oil and gas wars, but the full effect Approvals for drilling permits are also of the law has yet to be felt. SB 181 requires down compared to previous years. According multiple extensive rulemaking processes, and to a report by the University of Colorado’s full implementation of the law will take many Leeds School of Business, the COGCC ap- more months to complete. However, in the proved an average of 203 drilling permits per year since SB 181 was signed into law, it has month through October 1, 2019, a decrease of already affected the industry in critical ways. about 54% compared to the 443 drilling per- Increased permitting scrutiny and per- mits per month approved over the same peri- mitting moratoria. One of SB 181’s largest od in 2018. This trend has continued, with the impacts has been a decline in permitting activ- COGCC approving an average of 144 drill- ity. Immediately after SB 181 was signed into ing permits per month from November 2019 law, the COGCC adopted interim guidelines through May 2020. imposing more stringent review of applications It is not clear if the declines in permitting for drilling permits and well location permits. activity are only temporary or if they reflect a Because the purpose of these guidelines was to new normal after SB 181. Approval rates for ensure that the COGCC’s analysis of new per- drilling and well location permits may increase mit applications complied with the new law’s as the COGCC and local governments final- overall mandate, they offer a window into a ize their respective regulations and the vari- world in which SB 181 is implemented in full. ous permitting moratoria expire. On the other At the same time, several cities and counties hand, if permit approval rates remain low, the in Colorado enacted temporary permitting mor- industry may have to revisit and reshape its atoria. These moratoria were designed to halt oil current approach to permitting. As has always and gas activity while statewide and local reg- been the case, flexibility and engagement with ulations were finalized and to ensure that any regulators will be crucial. permits granted post-SB 181 complied with the A potential patchwork of local regula- new regulations. However, the state and local tions. Although the rulemaking process is not rulemaking processes have suffered repeated complete, so far some local governments in

August 2020 • HartEnergy.com 70 Colorado have used their newfound powers Under SB 181, Colorado’s top priority under SB 181 to adopt regulations different is regulating oil and gas to ensure from those of their neighbors, creating the regulatory patchwork feared by Colorado’s public health and safety, oil and gas industry. The neighboring coun- with significantly less emphasis ties of Weld and Boulder, for example, have taken diametrically opposed approaches. Weld placed on ensuring a uniform County, which accounted for nearly 88% of regulatory landscape. Colorado’s aggregate oil production in 2019, has expedited new production in the county, going as far as attempting to create its own permitting department that would bypass the Looking ahead statewide permitting system. Boulder County, SB 181 represents a significant departure on the other hand, enacted a moratorium and from the regulatory scheme that had existed in is seeking to strengthen its existing oil and gas the state for decades. For the industry itself, SB regulations and expand its regulatory authori- 181 has brought new regulatory and legal chal- ty. Indeed, activists have filed a lawsuit asking lenges that will continue to evolve as the law the Boulder County District Court to give its is implemented statewide. But this is not the stamp of approval to the notion that the county first time Colorado has seen significant chang- can impose fracking bans and permanent drill- es to the way in which the industry operates. In ing moratoria that under prior state law would this environment, success will require the in- have been preempted by state law. dustry to remain nimble and engaged, at both The differences among regulations adopted the state and local level. The key will be to un- by other counties are likely to be less extreme derstand the details of the new regulations and than the divide between Weld and Boulder. the political forces behind them—an increased Even so, producers with leases, wells or oth- desire by regulators and affected communities er mineral interests in more than one county to protect public health and environment while will need to stay on top of competing sets of maintaining responsible access to the state’s local regulations, in addition to statewide reg- energy resources. M ulations adopted by the COGCC and CDPHE. Compounding these difficulties are the differ- Beau Stark is partner-in-charge of the Den- ent speeds at which cities and counties have ver office of Gibson, Dunn & Crutcher and a adopted these regulations, with certain munic- member of the firm’s M&A, corporate trans- ipalities finalizing regulations within months actions, and oil and gas practice groups. after SB 181 was passed and others yet to en- Frederick R. Yarger is a partner in the Den- act final regulations. Even when state and lo- ver office of Gibson, Dunn & Crutcher and cal regulations are finalized, court challenges a member of the firm’s administrative and to the new rules are likely. While it may take regulatory practice and oil and gas practice some time before the state and local regulatory groups. Before joining the firm, Yarger served landscape is settled, the industry can take com- as solicitor general for the State of Colorado. fort in the fact that the vast majority of Colora- Graham Valenta is an associate in the Den- do’s crude oil production is located in possibly ver office of Gibson, Dunn & Crutcher and the most industry-friendly county in the state: a member of the firm’s M&A and oil and gas Weld County. practice groups.

Annual Colorado Crude Oil Production And Denver Metro Area Population Growth

200 3,000,000 180 2,500,000 160

140 Total Population 2,000,000 120 100 1,500,000 80 1,000,000 60

Crude Oil Production (MMbbl) 40 500,000 20 0 0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Year Total Population Crude Oil Production (Bbl/d) Source: U.S. Energy Information Administration, macrotrends.net

71 Oil and Gas Investor • August 2020