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Senate Passes S.B. 19-181 Amendments, Sending Bill to Governor for Signature

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V&E Update, April 05, 2019

On April 3, 2019, the Colorado Senate voted to pass the same version of S.B. 19-181 that passed the Colorado House of Representatives on March 29. As we have detailed extensively, S.B. 19-181 is a comprehensive oil and gas reform package that revamps the role and composition of the Colorado Oil and Gas Conservation Commission (“COGCC”), elevates the power and level of input that local communities have with respect to oil and gas development activities, revises the oil and gas drilling permit program in Colorado, and imposes a host of new requirements on exploration and production activities. Governor Polis has publicly lauded the passage of the S.B. 19-181 and is fully expected to sign the bill in the coming weeks, after it is enrolled and printed.

We now know that S.B. 19-181 will become law in Colorado likely in a matter of weeks, but significant questions remain. The enactment of S.B. 19-181 will set into motion a series of complex regulatory procedures. In many ways, the lasting impact of S.B. 19-181 remains unknown pending the outcome of these regulatory actions. For example, S.B. 19-181 directs the COGCC to:

  • “adopt rules to minimize emissions” of methane, other hydrocarbons, volatile organic compounds, and nitrogen oxides at oil and gas facilities, including processing, storage, and transmission facilities;
  • “review its rules for oil and natural gas well production facilities and compressor station and specifically consider adopting more stringent provisions”;
  • “regulate oil and gas operations in a reasonable manner to protect and minimize adverse impacts to public health, safety, and welfare, the environment, and wildlife resources and shall protect against adverse environmental impacts on any air, water, soil, or biological resource resulting from oil and gas operations”;
  • adopt rules for an “alternative location analysis process and specify criteria used to identify oil and gas locations . . . to be located near populated areas”;
  • adopt rules, in consultation with the Department of Public Health and Environment, that “evaluate and address the potential cumulative impacts of oil and gas development”;
  • “promulgate rules to ensure proper wellbore integrity of all oil and gas production wells”;
  • “review and amend its flowline and inactive, temporarily abandoned, and shut-in well rules”; and
  • “adopt rules to require certification” for certain oil and gas industry workers, including compliance officers responsible for OSHA and industry standard codes, those handling hazardous materials, and welders.

It will be essential for industry to remain engaged in these myriad rulemaking proceedings. But importantly, S.B. 19-181 changes the playing field for these and other future regulatory proceedings in Colorado. For example, the bill repeals the requirement that the COGCC take into consideration cost-effectiveness and technical feasibility with regard to actions taken to minimize adverse impacts to wildlife resources. More broadly, it remains to be seen how the newly-recomposed COGCC will implement its revised mandate, which now will no longer include the directive to “foster” the development of oil and gas resources in Colorado.

A similar process will play out at the local level in communities across Colorado, where local governments and siting authorities will now make a series of policy decisions about how to exercise the greater role given to them with respect to oil and gas development activities. Eventually, local governments’ regulation of oil and gas surface impacts is likely to result in challenges by industry, as S.B. 19-181 limits such regulation to that accomplished “in a reasonable manner,” a phrase begging for judicial interpretation by Colorado courts.

Just as voters’ rejection of Proposition 112 at the polls in November 2018 and the Colorado Supreme Court’s opinion in COGCC v. Martinez prompted the beginning of the political process that resulted in the passage of S.B. 19-181, the enactment of S.B. 19-181 will now prompt the new regulatory proceedings set out above, with judicial challenges sure to follow. Additionally, several local government officials in Colorado’s oil- and gas-producing counties have already begun the process of submitting a proposed initiative—Initiative 67—to repeal S.B. 19-181. If the Colorado Secretary of State approves the proposed initiative and proponents are able to gather 124,632 valid signatures by 3 P.M. on August 5, 2019, Initiative 67 would appear on the November 2019 ballot. Thus, while the story of S.B. 19-181 will soon come to a close, the broader decisions that will determine its effects are still to come.

Read S.B. 19-181 as passed here. Read the proposed text of Initiative 67 as submitted to Legislative Council Staff here.

V&E Update, April 01, 2019

Colorado House Passes S.B. 19-181, Sending the Amended Bill Back to the Senate

On March 29, 2019, the Colorado House of Representatives passed S.B. 19-181, the sweeping oil and gas reform legislation introduced by Senate Democrats on March 1. The final House vote to pass the legislation followed nearly six hours of floor debate, the adoption of almost a dozen amendments, and the rejection of several others. While the majority of the amendments adopted by the House are minor and clarifying in nature, several affected the substance of S.B. 19-181:

  • New language requires local governments to regulate the surface impacts of oil and gas operations “in a reasonable manner.”
  • The House made significant changes to the provisions relating to the composition of the Colorado Oil and Gas Conservation Commission (“COGCC”). The amended bill now requires a seven-member, “professional” COGCC. This means that the five COGCC members appointed by the Governor (subject to the consent of the Colorado Senate) will be excluded from other employment and entitled to compensation. The remaining two COGCC members comprising the seven-person commission will consist of the directors of the state agencies for natural resources and public health and environment, who will serve as non-voting members.
  • New language clarifies that the reports issued by the technical review board, the COGCC-appointed body made available to review “issues in dispute” as between local governments and operators in the siting process, must not address the economic effects of local governments’ preliminary or final siting determinations.
  • The House lowered the percentage of owners necessary to force pooling from 50% to 45%.

Despite these amendments, the key provisions of S.B. 19-181 remain in place. The bill will now return to the Senate for a floor vote to consider the amended legislation. That vote is currently scheduled for April 2, although additional delays remain possible. If the Senate votes to pass S.B. 19-181 as amended, the bill would move to Governor Polis’s desk for signature. Governor Polis has already expressed his support for the legislation. Read the current version of S.B. 19-181 as amended here.

V&E Update, March 14, 2019

Colorado S.B. 19-181 Passes Senate

The Colorado Senate voted along party lines on March 13, 2019, to pass S.B. 19-181, the sweeping oil and gas reform legislation introduced by Senate Democrats less than two weeks ago. The Senate vote was not without controversy. In an attempt to delay action on S.B. 19-181, Senator John Cooke requested on March 11th that a 2,000-page bill be read in its entirety on the Senate floor. Senate Democrats responded by using five computers to simultaneously read various portions of the bill out loud at speeds well beyond the capacity of human speech. Cooke, along with other Senate Republicans, brought suit against Democratic leadership on March 12th, arguing that the bill must be read intelligibly. Although a Denver judge has issued a temporary restraining order against Democratic leadership and further proceedings in that case are scheduled for March 19th, the fact remains that the Colorado Senate has passed S.B. 19-181, which will now move to the Colorado House of Representatives for further consideration.

The precise timing for House action on S.B. 19-181 remains unknown; currently, the bill does not appear on the House calendar. Nonetheless, given how quickly the bill has moved thus far, and the composition of the Colorado House—41 Democrats to 24 Republicans—the bill could reach the Governor’s desk as early as the week of March 18th. Governor Polis has already expressed his support for the legislation.

While additional amendments remain possible, oil and gas operators in Colorado should consider the version of S.B. 19-181 that passed the Senate likely to become law, and likely very quickly. The reengrossed version of the bill—including all amendments—passed by the Senate is available here. Notable amendments include:

  • requiring the Colorado Oil and Gas Conservation Commission (“COGCC”) to review its leak detection and repair rules to consider making them more stringent;
  • requiring the COGCC to promulgate rules (i) regulating wellbore integrity and (ii) requiring certification for certain oil and gas industry workers, including compliance officers responsible for OSHA and industry standard codes, those handling hazardous materials, and welders;
  • allowing local governments and operators to seek review of local governments’ location and siting decisions by a technical review board appointed by the COGCC Director to assess any “issues in dispute,” including whether (i) the local government’s siting determination “could affect oil and gas resource recovery,” (ii) the local government’s determination is “impracticable” or would require technologies that are “not available,” and (iii) the operator is proposing to use “best management practices”;
  • stating explicitly that local governments may regulate the land use and siting of oil and gas facilities in a manner “more protective or stricter” than the state-level requirements; and
  • requiring the COGCC Director to submit a report to the Colorado General Assembly by January 1, 2021, regarding “any recommended structural changes to the Commission.”

The REMI Partnership, a “partnership of public and private organizations” that aims “to develop independent, fact-based analysis that quantifies the broader economic impacts associated with policy changes” in Colorado has estimated that if S.B. 19-181 cuts new oil and gas production in the state by 50%, Colorado would lose 120,000 jobs, more than $8 billion in state and local tax revenue, and over $58 billion in GDP by 2030.

V&E Shale Insights, Updated March 06, 2019

Colorado Legislature Proposes Sweeping Changes to State Oil and Gas Laws

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 on March 6, 2019 the Colorado Senate Committee on Transportation and Energy approved the bill in a 4-3 vote. The bill must now be approved by at least one other Senate committee and then the full Senate before going to the state House of Representatives. 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.

Visit our website to learn more about V&E’s Shale & Hydraulic Fracturing Disputes practice. For more information, please contact Vinson & Elkins lawyers Larry Nettles, Larry Pechacek, or Matt Dobbins.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.