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Anti-Drilling Initiatives Potentially 'Devastating' to Colorado Oil, Gas Industry, Say Experts

Two measures that may be on the Colorado ballot this November likely would harm not only the state's oil and gas industry but have unintended consequences for citizens, industry experts said Tuesday in Denver.

The Colorado Secretary of State's Office this week was continuing to verify petitions for initiatives No. 75 and 78 to determine whether they meet the requirements to be on the Nov. 8 ballot (see Shale Daily, June 7). No. 75 would amend the Colorado constitution, basically allowing local governments to regulate oil and gas development, as long as the rules were at least as stringent as those overseen by the Colorado Oil & Gas Conservation Commission (COGCC). No. 78, also to amend the constitution, would change setback rules and require any new oil and gas development facility to be at least 2,500 feet from the nearest occupied structure or other specified or locally designated area.

COGCC Director Matt Lepore said the citizen-led initiatives have been years in the making, as the state's oil and gas industry has expanded and moved to horizontal drilling and fracturing (fracking). The changes have come at a breakneck pace, colliding with a huge uptick in population, he said at the 28th Annual Rocky Mountain Energy Summit hosted by the Colorado Oil & Gas Association.

"The technology revolution has increased production in the state and the country at a remarkable rate," Lepore said. "The change, the pace of that transition in Colorado from my perspective, has been astonishing." In 2009, less than 2% of all the state's wells were horizontals. In 2015, 75% of the wells were horizontals. "That is rapid change that has transformed the landscape."

The second factor, unique to Colorado and what has made it unique to the oil and gas discussion, is that the state is the second fastest growing on a percentage basis in population, he said. The influx has been "twice the national average..." and many of the new residents are living in energy-rich areas. "It's an amazing convergence in the last four years. Timing is everything."

The oil and gas industry came to Colorado and remained for its massive energy reserves. For the past few years the the anti-fossil movement has used Colorado as a proving ground to test local control, specifically to allow local jurisdictions to place restrictions on unconventional drilling. In light of the growing protests, Gov. John Hickenlooper convened an oil and gas task force two years ago, which ultimately established rules giving local governments a bigger role in siting large facilities near communities, as well as to bridge the regulatory divide between state and local officials (see Shale Daily, Jan. 26).

However, the COGCC still is the ultimate authority over oil and gas development, which the Colorado Supreme Court affirmed last spring after overturning local bans on fracturing (see Shale Daily, May 3; Dec 20, 2012).

"The Supreme Court really affirmed the status quo," Lepore said. "State oil and gas development is mixed state and local concern and under that scenario, the state preempts...That is what the state believed the status was going in...The decision was very important. It soothes the waters a little bit, but it's business as usual for us in some ways...

"By that I mean, COGCC was founded in 1951 by the [Colorado] General Assembly and we have more than 60 years of rules and regulations that have evolved with the industry. We have a staff of about 102 people who are highly technically trained, highly educated...specific staff to implement the rules at the state level. Those are things that no local government has or is going to have."

As a government official, Lepore said while it was "tempting" to offer his opinion on the two proposed ballot initiatives, he could not. Hickenlooper also has not taken a public position.

"The bigger picture is regulating a complex, rapidly evolving, technically sophisticated industry through a ballot initiative to amend the constitution. It just doesn't make a lot of sense. There is no nuance, no differentiation. It's a sledgehammer approach where a fly swatter will do."

For example, Lepore said there are a "raft" of questions about No. 78. If an operator has an existing permit to drill but hasn't yet drilled -- a real possibility in today's cautious climate -- can the permit still be used if the initiative is enacted? If a well has been drilled but not completed, could it still be completed once the initiative is passed if the well is 1,500 feet from a federal stream?

"There's lots and lots of uncertainty about how that initiative has been written," he said. "With respect to No. 75 on local control, that's going to cause a lot of uncertainty for COGCC. If you have local governments now enacting lots of new ordinances to regulate industry that we have evolved over 60 years, where do they come up with the technical expertise to do that? Where is the staff to inspect and to enforce those regulations?" For COGCC, does it have to become "educated and knowledgeable about every nuance of that local government?"

The "quagmire" is knowing all of the regulations for every single town in Colorado, Lepore said.

"I don't have to dance around that question,"  attorney Jamie Jost of Jost Energy Law PC said of the ballot initiatives. She shared a stage with Lepore. Jost is counsel to COGA and also provides expertise on exploration development for the oil and gas industry. "If they are on the ballot, they will have a devastating effect to the state, not only to industry, but also to citizens and private property owners.

"Specific to No. 75, it would create a patchwork of regulations...And it provides absolute zero certainty to the operator. Budgetary certainty goes along with development, and having to know 10s or 100s of different regulations" would force industry out of the state. "That alone would have a devastating impact to the economy..."

For No. 78, an estimated 6,000 royalty owners in Colorado could be impacted. If they can't have any say over how their private lands are developed, they may have reason to sue the state for compensation, Jost said.

"If they were successful, they would have to be compensated for their damages and the loss of their ability to operate their private property. Take 75 and 78 together, and it's devastating..."

Local governments should be involved in oil and gas development, Lepore stressed. "But it's clear that from our point of view that it's our rules that should be the lead rules on these issues..." The Supreme Court discussed COGCC's "exhaustive set of rules and regulations that are in place to prevent waste, ensure oil and gas resources and protect health and the enforcement..."

Local governments that are "interested in significant change to regulatory regimes understand now the importance of working with COGCC...Like the operators, we have different relationship with the local governments. Some go their own way and do their own thing. Some want our help. And some want nothing to do with us. Now, if they are inclined to go and do a fracking bank, they need to go after it in a different way."

The task force led to two important takeaways, he said. "One is that the regulatory regime that we have in Colorado, the vision between the state and local regulators, is that it is working for a vast majority of local governments. A smaller number want dramatic change...but we came to the conclusion that what we have works. Second, it has been unequivocally decided that the state is the right place at the end of the day where oil and gas regulatory authority ends. It is informed now by the Supreme Court on the fracturing bans."

COGCC has conducted listening tours at 11 places around the state, a "very deliberate effort" to ensure local feedback as it worked to enact proposed regulations by Hickenlooper's task force. "The other reason was to bring everybody into the tent," Lepore said. "Our process should be one that is transparent, available to everybody, to all stakeholders."

At the end of the day, 72 parties from around the state -- industry, activists, landowners and regulators -- participated.

"It doesn't make it any easier" to have that many groups participating. "It makes it far more challenging. More people are unhappy with you at the end of the day. But it's the right way to go...Industry needs to engage with those people to be part of the process. The understanding is there, the concerns, the needs, the wants. It's fundamental to the success of industry going forward..."

Anti-drilling groups have claimed they don't have equal footing with the COGCC that the industry does. Lepore was asked to explain.

"I would say first and foremost that I believe strongly that all parties have an opportunity to participate in conversations in Colorado. It's hard to make comparisons to other states, but Colorado is probably unprecedented in the amount of input a citizen can have. They can comment on a permit application, they can come to the rulemaking, they can testify...Are they playing catch-up with industry? Yes, they probably are. Industry has been really good about engaging with COGCC. They have a lot of resources to bring, they've been doing it a long time and they put resources into it. But I would say that I can tick off the rulemakings that have occurred under my watch in the last four years...

"We have increased penalties" today for the oil and gas industry (see Daily GPI, Jan. 5, 2015). "Where did they come from? They came from legislative change. Why? Because legislators were listening to citizens. The lower spill reporting threshold is the same thing" (see Daily GPI, Aug. 15, 2013). Every significant rulemaking in the past five years is "tied back to social dynamics, to social pressure upon us, the legislature and industry. I'm sure there's a sense of the underdog, little guy. But the fact is, citizens are changing and moving the conversations."

Jost too attributed Colorado's regulatory overhaul in the past few years to societal changes.

"What we have witnessed in Colorado over the last year, the substantial amount of changes...all occurred because of some call for social change. It requires a level of collaboration from all parties and active engagement."

Fairness, she said "is a very subjective standard. What I think is fair is different from what you think is fair...But the fundamental concept of fairness is built into the regulations. If citizens have concerns, they can pick up the phone. Alternatively, they have an opportunity to participate...COGCC listens to them. Put in the local government scope and they also have public hearings, another layer of citizen involvement...I do think there are ample opportunities for citizens to have input at the local and state regime."

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