By - Jim Vess

Colorado oil and gas operators wary of new rules, Gov. Polis says oil prices will determine whether to drill or not

Energize Weekly, September 4, 2019

The Colorado oil and gas industry is facing uncertain times as new state and local drilling regulations take hold, industry executives say, even as the state’s governor, Jared Polis, dismisses those concerns.

That was the divide in sharp display the Colorado Oil and Gas Association’s (COGA) annual conference in Denver, Aug. 28.

The concerns stem from the passage and adoption this spring of Senate Bill 181, which reorganized the Colorado Oil and Gas Conservation Commission (COGCC) and required it to undertake extensive new rulemakings. It also gave more power to local governments over oil and gas operations in their communities.

The commission is now in the process of promulgating new rules, including ones on alternative site analysis for proposed drill pads and financial requirements for drillers. The state’s Air Quality Control Commission is setting new rules on air emissions for drillers.

At the same time, a number of municipalities and counties are developing local rules for oil and gas development. Nine local governments adopted drilling moratoriums while they work on new rules.

“The big question for all these guys is how local control is going to affect their business,” said John Harpole, president of Mercator Energy LLC, a natural gas broker and service company in Littleton, Colo.

Adams County, just north of Denver and one of the most active areas for new drilling, has, for example, proposed a setback of drilling pads from homes of 1,000 feet, double the state’s standard, and a ban on drilling in residential neighborhoods.

Before adoption of the new law, oil and gas regulation was like a football field where industry knew where the goal posts and sidelines were, and there was one set of rules and one referee, the COGCC, said Jason Oates, the director of external affairs for Crestone Peak Resources. Now the sidelines and goal posts look to be shifting with multiple referees.

“We are in this period of very uncertain times where we are trying to understand: What does the field we are playing on really look like?” Oates said. “How do you make capital decisions, investment decisions, make operational decisions?”

Oates’ company is trying to develop sites in Boulder County, where a drilling moratorium was imposed until March 2020, while it reviews its oil and gas ordinance. He said he was concerned that the new local powers could be used as “a proxy ban.”

Rich Frommer, CEO of the Denver-based Great Western Oil and Gas Co., said that the state rulemaking is a process the industry is now working through with the hope that the COGCC “comes up with common-sense rules.”

Great Western’s business would be directly impacted right away. “We have a large inventory of permitted sites in the state,” Frommer said.

Nevertheless, new permit approvals have dwindled with the reorganization of the COGCC and its heavy load of new rulemakings, Dan Haley, COGA’s CEO, said. “They are averaging seven permits a week,” he said.

In a question-and-answer session with Haley, Governor Polis contended that oil prices and macroeconomic trends rather than local rules will dictate whether oil and gas companies drill in Colorado.

“It has nothing to do with me, and nothing to do with our state politics and less, even, to do with national politics,” Polis said. He said that the industry should “be following the ins and outs of Venezuelan politics more than I’d be following the ins and outs of Colorado politics.”

Polis’ argument did get a little support in an analysis presented by Jon Ecker, CEO of Genscape, an energy data analytics firm, which projects a steady increase in oil production from the Denver-Julesburg Basin as long as oil prices hold.

Ecker also noted that the break-even price per barrel of oil for the Colorado basin, at $32.16 barrel, is lower than North Dakota’s Bakken ($36.25) or Texas’ Permian Midland Basin ($40.91).

“We are in something of a sweet spot for the basin,” Ecker said.

Still, Michael Orlando, the managing director and economist at econONE, said the new regulatory landscape is “definitely going to make it more costly” to do business in Colorado.

“I don’t think it made it impossible to do business,” Orlando said. “Is 181 a pretext to shut down the industry? We’re going to find out.”

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