Can Colorado’s Oil & Gas Industry Survive the Stricter Rules?

The Colorado Oil and Gas Conservation Commission (“COGCC”) on Monday gave preliminary approval to a statewide initiative that would require new oil and gas wells to be drilled at least 2,000 feet from most buildings, quadrupling from the current requirement of 500 feet. The panel is expected to undertake a final vote in early November, with the new rules set to take effect next year.

The new setback distance falls under the Senate Bill 19-181 (SB-181) – a breakthrough legislation passed in 2019 that changed the way oil and gas drilling permits are issued in Colorado.    

The push for the industry’s overhaul gathered momentum after a deadly house explosion and fire in Firestone killed two people and badly injured another in April 2017. The fatal event was traced to the seepage of an odorless gas from a line owned by Anadarko Petroleum, which has since been acquired by Occidental Petroleum OXY.

The Senate Bill 181 in a Nutshell

The hotly debated and controversial measure is within SB-181 passed last year and referred to as ‘the most sweeping oil and gas reforms’ the state has seen. It was a comprehensive overhaul of Colorado’s oil and gas development regulations by expanding the authority of local government/communities over drilling sites. The bill also strived to address concerns about climate change, pollution and threat to wildlife from drilling operations, while protecting the interests of unwilling mineral rights owners. Finally, the law aimed to rewrite the mission of the Colorado Oil and Gas Conservation Commission – the state agency overseeing the energy industry – from economic gain to public safety and environmental protection.     

Let’s debate the pros and cons of the new setback rule.

Pro: Backers Hail the Health and Safety Provisions

Proponents of the measure and environmental groups in particular argue that the new setback rule is a decisive step toward protecting Colorado residents’ health, safety and welfare. Its goal is to ensure that state regulators prioritize citizen welfare while ensuring the responsible development of the local oil and gas industry. Moreover, the proposition — that claims to have dwelled upon evidence and testimony from varied stakeholders — looks to protect wildlife resources and the environment of the fifth largest U.S. oil producing state. Seeking to dispel apprehensions, there are certain exceptions in place to allow shorter setbacks depending on favorable topography or advanced technology. 

Con: Opponents Fear Devastating Blow to the Industry

People who are against the initiative, along with industry groups, argue that the rule changes, if finalized, would have an overwhelming economic impact on the entire state. Terming the recommendation “completely arbitrary, not based on science”, they fear a crippling blow to the state’s energy landscape. Moreover, with Colorado economy depending heavily on oil and gas industry for tax revenues, funds for infrastructure and welfare projects could be hit as the increased setback requirement will keep a large portion of the region’s land surface off-limits to new production. They warn that the move could potentially lead to job losses and economic hardship at a time when the commodity price plunge and the impact of coronavirus have wreaked havoc on the industry through layoffs and production cuts.

Which Companies Will be Impacted by the New Regulation?

The new rules within Senate Bill 181 are expected to be a real concern for the energy operators in Colorado.

Oil and gas explorers who are exclusively focused on the state’s Denver-Julesburg (or, DJ) Basin including HighPoint Resources (HPR), Bonanza Creek Energy BCEI, Extraction Oil & Gas XOGAQ and PDC Energy PDCE among others could be in for some rough time. Biggies like Occidental Petroleum, which is invested heavily in the prolific D-J Basin following last year’s Anadarko acquisition also stands exposed to an element of uncertainty. This Zacks Rank #3 (Hold) company is the region’s top oil and gas producer holding approximately 650,000 net acres in the DJ Basin.      

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Energy infrastructure providers like DCP Midstream DCP, which is involved in gathering and processing operations in the DJ basin, will also be affected by the stricter rules.

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