With the state barely past the long and bitter fight surrounding Initiative 97/Proposition 112, the Legislature’s Senate Majority Leader and Speaker of the House introduced surprise legislation that, if enacted as proposed, revamps the role of the Colorado Oil and Gas Conservation Commission (“COGCC”) and elevates the power and level of input that local communities have with respect to oil and gas development activities. This legislation has the potential to completely change the oil and gas drilling permit program in Colorado and imposes a whole new host of requirements on exploration and production activities. Governor Polis has announced his support for the proposed legislation, and hearings are set to begin today, Tuesday March 5, 2019 in the Colorado Senate Committee on Transportation and Energy. Read the text of the proposed legislation here.

How Did We Get Back Here?

The bill was introduced in part in direct response to the January 2019 decision by the Colorado Supreme Court, Colorado Oil & Gas Conservation Commission v. Martinez. The case was brought by a group of young activists that, amongst other issues, were concerned about the potential adverse effects of oil and natural gas development on the state’s environment. These activists previously filed a petition with the COGCC that sought to revise Commission rules so that a new permit for oil and gas development could not be issued unless the “best available science” demonstrated that “drilling can occur in a manner that does not cumulatively, with other actions, impair Colorado’s atmosphere, water, wildlife, and land resources, does not adversely impact human health, and does not contribute to climate change.” Under the activist’s rulemaking petition these determinations were required to be confirmed by an independent third party. COGCC denied the petition, but a Colorado appellate court found that denial was improper and reversed for reconsideration; the appeal to the state Supreme Court followed.

Following its review, the Colorado Supreme Court upheld the COGCC’s denial of the activists’ rulemaking petition. The decision stated that the purpose of the Colorado Oil and Gas Conservation Act (“COGCA”) is to foster the economical development of oil and natural gas production and that public health and environmental consideration played a secondary role in permitting decisions. The Colorado Supreme Court held that COGCC could take steps to “prevent and mitigate significant environmental impacts to the extent necessary to protect public health, safety and welfare, but only after taking into consideration cost-effectiveness and technical feasibility” of such measures.

The state Supreme Court’s decision provoked backlash from environmental groups, including the groups behind the failed Initiative 97/Proposition 112. Even prior to the Colorado Supreme Court’s decision in Martinez, these groups had begun an effort to pursue legislation mandating the increased setbacks Colorado voters had rejected at the polls, as well as fundamental reforms to the COGCC and measures to promote the transition from fossil fuels to renewable energy. This resulted in both renewed calls in the state legislature to amend the COGCA, and a petition to Governor Polis seeking his support for a legislative remedy. Following the Colorado Supreme Court’s decision in Martinez, Governor Polis also voiced his disappointment with the ruling and announced that he would work to take action in response to the court’s decision. This new bill is a direct response to these recent developments.

The Proposed Legislation – As Bad and Worse than the Ballot Initiatives

The failed ballot initiatives primarily focused on establishing new setback requirements of 2,500 feet for oil and gas development from occupied structures. Local governments would have had almost unlimited power to increase the setback distance from any location designated by the local government as a “vulnerable area.” The new legislation, however, goes far beyond just setbacks.

The bill, if adopted, would effectively change the mission of the COGCC in a manner that makes regulation of oil and gas activity paramount to development of those natural resources. Currently, the COGCA tasks the Commission with fostering the development, production and utilization of oil and gas resources in the state in a manner that is consistent with protection of public health, safety and welfare, including protection of the environment and wildlife resources. This legislative directive has been construed to impose a balancing test between fostering oil and gas development and protecting the public health, safety and welfare. In the Martinez decision, the Colorado Supreme Court relied on this legislative edict, finding that the purpose of the COGCA is to foster the economical development of oil and natural gas production and that public health and environmental consideration play a secondary role in permitting decisions. The new legislation would revamp the COGCC’s prime directive in a manner so as to leave no doubt that oil and gas development is second to protection of public health and the environment. Coupled with concurrent jurisdiction granted to municipalities and counties and allowing the unfettered regulation of air, water, waste and health matters by other state agencies without regard to whether those activities occur within the province of oil and gas development, the proposed legislative changes lead to the unmistakable conclusion that the new leadership in Colorado is seeking to establish a new paradigm for how oil and gas will be developed in the state.

Additionally, the bill, which includes many of the COGCC reforms proposed in the petition delivered to Governor Polis, has the potential to halt the issuance of new oil and gas drilling permits in Colorado. It provides the Commission with discretion to refrain from issuing any new oil and gas permit until the COGCC has issued final rules implementing all legislation amending the COGCA enacted by the legislature in 2019 and those rules have become effective if the Commission has determined that additional environmental analysis or local government consultation is required. In addition, the newly proposed legislation seeks to undo years of judicial decisions and the express will of voters by splitting the authority to regulate oil and natural gas development between the COGCC and local governments and opening the door for establishing virtually unlimited setbacks. Specifically, the proposed legislation would:

  • Repeal the existing limitations on municipalities’ and county governments’ land use authority over oil and natural gas development areas and explicitly provides authority for local governments to:
    • regulate the siting of oil and natural gas development;
    • conduct site inspections;
    • regulate surface impacts;
    • regulate noise, odor, light and water and air quality;
    • require financial assurance, indemnification, or insurance to secure obligations imposed under local requirements;
    • impose fines for leaks, spills, and emissions; and
    • impose fees (without any limits) to fund local government regulatory programs.
  • Alter the COGCC’s obligation to prevent waste with respect to oil and natural gas production and would allow what would otherwise be considered waste as necessary to protect public health, welfare, safety and the environment.
  • Eliminate cost effectiveness and technical feasibility considerations with respect to measures to minimize adverse impacts to wildlife resources.
  • Exclude from the definition of “waste” any restrictions on oil and gas development that the COGCC determines are necessary to protect public health, safety, welfare, or the environment.
  • Remake the membership requirements of the COGCC, reducing the number of Commission members that must have substantial oil and gas industry experience from three to one, and requiring new members that have experience in environmental protection, wildlife resources, soil conservation, public health, and one member who is either an active farmer or royalty interest holder.
  • Adopt rules that require an alternative analysis when siting oil and gas facilities and to evaluate and address potential cumulative environmental impacts.

Currently, the definition of an “oil and gas facility” under the COGCA is very broad and includes facilities used for the treatment and processing of crude oil, condensate, E&P waste, or gas. Thus, any new rules promulgated pursuant to the proposed legislation have the potential to extend far beyond the wellhead. Moreover, many of the powers the proposed legislation would grant to local governments are already addressed by existing COGCC regulation.

At its core, the legislation shifts power back to local governments to control the siting of oil and natural gas projects. Operators would have to file proof with the COGCC in connection with their application for a permit to drill that a local government had already issued any applicable siting approvals or proof that no local requirements exist. The bill also amends state preemption law and provides for concurrent authority for the COGCC and local governments to regulate oil and gas operations, and conflicts between overlapping authority would be resolved in favor of the more stringent environmental requirements.

The bill’s potential for duplicative regulation is also demonstrated by the additional air monitoring obligations that would be imposed. The proposed bill goes beyond existing regulations and requires the Air Quality Commission of the Colorado Department of Public Health and the Environment (“CDPHE”) to adopt rules for the installation of continuous emission monitoring (“CEM”) equipment for hazardous air pollutants, volatile organic compounds, and methane emissions. The CDPHE would have the option to phase in the CEM requirements depending on production capability, the age of the facility, and the availability of CEM equipment. The legislation also contains a vague directive to the CDPHE to promulgate new regulations that would minimize emissions of methane, other hydrocarbons, and nitrogen oxides from “the entire oil and gas fuel cycle.”

The legislation does not set any threshold for when CEM would be required. Moreover, Colorado already has some of the most advanced methane control regulations in the country, complete with leak detection and repair requirements, complimented by state implementation of the federal New Source Performance Standards for emissions of volatile organic compounds. Operators could be facing increased and duplicative costs that provide only marginal environmental benefits depending on if and how the CDPHE implements the proposed legislation. Finally, the directives to adopt new rules addressing emissions from the entire oil and gas fuel cycle and “evaluate and address the potential cumulative impacts of oil and gas development” have the potential to reach far behind traditional emission controls at drilling sites. The proposed legislation is filled with aspirational goals that may prove problematic with respect to the actual implementation of any rules adopted should the bill be enacted.

Additional COGCC rulemaking directives in the legislation include new well integrity testing, welder certification, and inspection requirements for reactivating flow lines and inactive or shut-in wells. In particular, new rulemaking would allow for public disclosure of flowline information and determine when a deactivated flowline must be inspected before being reactivated. New rules would also address when and how inactive and shut-in wells must be inspected prior to being put into production or used for injection.

The proposed legislation also mandates that forced polling can only occur following the consent of more than 50% of the affected mineral interest holders and raises the minimum royalty interest for nonconsenting mineral owners from 12.5% to 15%, subject to certain deductions for costs incurred by consenting royalty owners. The legislation also directs the COGCC to consider new rules for increased financial assurance to secure plugging and abandonment and any remedial obligations, and to keep such financial assurance tied directly to a well or group of wells, not a specific operator.

Key Takeaways

The premise of the existing COGCA is that it is in the public interest to foster oil and gas development in a manner consistent with the protection of the environment, public health, welfare and safety. Colorado’s oil and natural gas conservation law is not unique. The primary focus of these statutes is not environmental protection, but rather to ensure the protection of the state and property owner’s economic interest in oil and gas and provide for the reasonable development of mineral estates. Environmental concerns are generally addressed through the implementation of other state laws, such as air permitting and emission control, spill reporting, and waste management requirements, but these requirements typically compliment mineral conservation laws, rather than control how such laws are implemented.

The proposed legislation has the potential to transform the COGCA into something more akin to state environmental quality acts, which typically require environmental impact analyses and, unlike their federal counterpart, can mandate certain outcomes to ensure that environmental protection goals are met. The legislation represents a fundamental shift in how oil and gas development projects would be analyzed and permitting decisions would be made. Moreover, it would leave the door wide open for local governments to implement their own version of the onerous setbacks previously contemplated by Initiative 97/Proposition 112, which had the potential to severely hinder new oil and natural gas projects in the state.

It is surprising that the legislature would go so far given how numerous statewide ballot initiatives calling for additional regulation of oil and natural gas development in Colorado failed to win at the ballot box. Reportedly, the co-sponsors of the legislation drafted the bill without any input from the oil and gas industry. There are also indications that the COGCC is slowing or otherwise refusing to process new oil and gas drilling permits until the Commission receives further clarification on the scope of its permitting authority, a topic the Colorado Supreme Court’s decision in Martinez had appeared to address with finality just weeks ago. Operators need to engage with the legislature and ensure that consideration of this bill is not rushed, and that there is an open and transparent process for addressing the concerns of all parties raised by the proposed legislation.