Could proposed new rules of the Colorado Oil and Gas Conservation Commission (COGCC) and initiatives to take away tax breaks drive natural gas and oil producers out of the state? Some state legislators expressed their concerns about a possible slowdown in energy development if more stringent regulations are issued, but if drilling permit applications are any indication, the oil and gas industry appears to be in the state for the long haul.

The COGCC is scheduled to unveil on March 31 draft rules that could impose more regulatory oversight on energy operations, but "there's an enormous amount of speculation about what these regulations may or may not say," COGCC Chairman Harris Sherman told state legislators in a briefing on Wednesday. The commission's "work in progress" first was unveiled last November following a series of stakeholder meetings (see NGI, Dec. 3, 2007). Under the proposed rules, the scope of COGCC's authority, now limited to a review of subsurface drilling and underground operations, would be expanded to include activity and environmental concerns above ground.

Sherman, who also chairs the Colorado Division of Wildlife (DOW), told lawmakers the proposed rules would strike a balance among wildlife, health and economic concerns. "I do not believe these rules and regulations are going to drive the industry out of the state of Colorado. I absolutely don't."

Opponents contend that among the initiatives to be released would be a plan by the COGCC and DOW to block drilling in some parts of the state for up to nine months a year to protect wildlife and alleviate environmental impacts. However, COGCC noted that only three wells in Colorado would have fallen under the proposed nine-month restriction last year. Half of the state's drilling permits would have no timing restrictions at all, according to the commission.

Still, State Sen. Josh Penry, a Republican from Fruita, CO, told the Durango Herald that the proposed regulations amount to "uber-regulatory authority" for the DOW.

In La Plata County, CO, which is in the center of the gas drilling frenzy, County Commissioner Wally White said he thought the process had gone well so far. His concern is to ensure that the county would retain the local control that it has gained from working with the gas industry in the past few years. The rules, he said, would not push the producers out of the state.

"It's ludicrous," White told the Herald. "Nobody in their right mind would believe industry is going to give up a billion-dollar industry over some little rules that protect surface owners."

At this point anyway, White's views appear to be correct, if permit applications are an indicator. Oil and gas drilling permit applications in Colorado in the first two months of this year were up 50% from the same period last year. A record 6,368 permits were approved in Colorado last year, up 8% from 2006.

"There's nothing to suggest that development or planned development has diminished," said Dave Neslin, acting director of the COGCC. All indicators point to an increase its development in the Piceance Basin, a gas formation centered in western Garfield County, he said. The first two months of the year are only a "small sampling," but "I didn't hear anything...to suggest industry is fleeing the Piceance Basin."

In Garfield County alone, the COGCC is projecting it will issue about 3,800 permits this year, well ahead of the 2,550 permits issued in 2007. For the first two months of this year, the COGCC approved 418 drilling permits in Garfield County, which accounted for 44% of the state's total permit requests.

The Bureau of Land Management (BLM), which issues permits for federal mineral leases and private leases, also expects to issue more state permits this year, a spokesman said. The BLM's state field offices have issued 166 drilling permits since Oct. 1, and it expects to issue about 800 drilling permits this fiscal year.

Most of the producers have announced plans to keep their gas drilling on the same track or higher this year, according to Neslin. Williams Production RMT, a Williams subsidiary that is the largest and most active gas driller in the region, is planning to drill more than 500 wells in Garfield and Rio Blanco counties this year, which is on par with its development in 2007. EnCana Oil & Gas (USA), an EnCana Corp. subsidiary, is slowing its development down this year a bit: 224 wells are planned compared with nearly 300 in 2007. But that's considered an exception, said Neslin.

Meanwhile, a Colorado foundation for education reform filed a legislative initiative Wednesday to take away tax breaks for the state's oil and gas producers. The Donnell-Kay Foundation said it wanted the extra money spent on higher education and in Colorado communities affected by the energy boom.

"Our state's severance tax is unreasonably low," said foundation executive director Tony Lewis. "Local communities are being hit hard by the rapid growth of the oil and gas industry. They need resources to be able to mitigate the impact of this growth. And by dedicating some of the increased revenue to colleges and universities, the whole state will benefit for decades to come by investing in its future." Neighboring states, he noted, have created trust funds to provide a dedicated revenue source for education.

Colorado's effective tax rate is 5.7% for oil and gas producers. Under the Donnell-Kay initiative, the effective tax rate for producers in Colorado would move closer to the tax rates for producers in New Mexico (9.4%), Oklahoma (7%) and Wyoming (11.2%). The proposed initiative would eliminate a tax credit that currently allows producers to deduct 87.5% of taxes owed to the state of Colorado. It also would remove an exemption that currently allows 95% of all oil wells and 73% of all natural gas wells in Colorado to avoid paying state taxes. The severance tax rate also would be cut to 4.85% from 5%.

The Donnell-Kay initiative follows work by several environmental groups that are seeking a place on the state ballot this fall an initiative to take away the energy industry's tax incentives. A coalition that includes Trout Unlimited, Environmental Defense and The Wilderness Society wants to use an estimated $200-300 million that would come from erasing the tax breaks to increase the use of renewable energy, protect wildlife habitat and help communities affected by gas drilling.

Meg Collins, president of the Colorado Oil & Gas Association (COGA), said it was ironic that the initiatives are coming at a time when "several independent economists" have reported that one of the main reasons the state has avoided entering a recession is the natural gas and oil industry. The COGA represents the energy industry.

"Colorado's current tax policy is uniform and equitable and, most importantly, locally focused, which is a good thing, as it allows local governments the ability to collect taxes at the local level where the dollars directly benefit the communities in which we operate," Collins said. She said the Donnell-Kay initiative "is bad for Colorado businesses, bad for Colorado residents and bad for Colorado communities. It will hurt hardworking Colorado families and the local communities where they live."

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