On April 16, Gov. Jared Polis signed Senate Bill 181, thereby ratifying a sweeping overhaul of oil and gas regulation in Colorado. The mandates of SB 181 will apply to conduct occurring on and after April 16, including action on approximately 6,000 pending permit applications. While much still depends on subsequent rulemaking by the Colorado Oil and Gas Conservation Commission, and upon action by local jurisdictions, SB 181 will be highly consequential for all operators. This article provides a brief overview of the regulatory and political landscape leading up to the legislation and a summary of SB 181’s most significant changes.
The SB 181 Backstory
The COGCC is the lead state agency with jurisdiction over oil and gas operations. It has extensive cradle-to-grave regulations that apply to all types of oil and gas development. The Colorado Department of Public Health and Environment regulates certain environmental aspects of oil and gas operations through its regulations to address air and water quality concerns, including widely-publicized methane regulations.
In 2017, in the face of mounting public attention to possible health issues associated with oil and gas development, CDPHE issued a screening assessment and literature review, concluding that “the risk of harmful health effects is low for residents living near oil and gas operations.” In reaching this conclusion, CDPHE determined that air concentrations for people living within 500 feet of an oil and gas well are below safe exposure levels for non-cancer health effects and that cancer risks are within the acceptable risk range established by the Environmental Protection Agency.
Despite this study, oil and gas activity along the Front Range heightened environmental and other concerns for some residents. As a result, several Front Range local governments adopted permanent or temporary bans on hydraulic fracturing. These were ultimately invalidated by the Colorado Supreme Court. The opposition to oil and gas development in some quarters was further heightened by a recent 2019 Colorado Supreme Court decision (Martinez v. Colo. Oil & Gas Conservation Comm’n.), which some commentators portrayed as encouraging the COGCC to prioritize oil and gas development over health and environmental protection.
The Colorado legislature responded to these court decisions with the passage of SB 181, vesting local governments with additional authority over oil and gas development and modifying the COGCC mission and review standard to emphasize protection of the environment and public health. However, the impact of SB 181 goes well beyond these two concerns.
Summary of Key Amendments
The following summarize some of the most significant changes in SB 181:
1. Expanded Local Authority: Local governments can exercise much greater regulatory authority over surface impacts of oil and gas development. This includes the authority to approve facility siting and regulate environmental effects such as air emissions, water discharges, noise, odors and reclamation.
If a local government chooses to exercise its new siting authority, its siting decision must precede the filing of an application for spacing or an application for permit to drill. Local governments can also adopt environmental requirements and impose conditions that are inconsistent with, and more stringent than, COGCC regulations. This effectively eliminates operational preemption as a check on local government regulation.
2. Changes to COGCC Mission: The COGCC mission has arguably changed from fostering the responsible and balanced development of oil and gas consistent with protection of public health and the environment to regulating such development only to protect public health and the environment. By itself, this change is probably not significant, as courts rarely rely on statutory declaration language, and the COGCC itself has relied on it only sparingly. Nevertheless, the COGCC and participants in agency proceedings may rely on this change and the new COGCC review standard discussed below to justify a more aggressive environmental agenda.
3. New COGCC Review Standard: The COGCC also is subject to a new environmental review standard.
Where the prior standard authorized the COGCC to address significant impacts while considering cost-effectiveness and technical feasibility, the new standard in SB 181 omits this language and requires the COGCC to regulate oil and gas operations in a reasonable manner to prevent and minimize adverse impacts to public health, safety, welfare and the environment. This change could marginalize considerations of cost-effectiveness and technical feasibility and lead to the imposition of development prohibitions or operating requirements due to environmental effects that are insignificant as compared to the larger financial impact on the operations.
4. Commission Changes: The commission makeup has changed and will change again no later than July 1, 2020. The most significant change for the industry is that the previous commission had three commissioners with oil and gas experience, and the new commission will have only one commissioner with such expertise.
The other two members that were formerly required to have oil and gas expertise must now instead have expertise in wildlife protection and public health. No later than July 1, 2020, the commission will change again — the number of commissioners will drop from nine to seven; the directors of the Department of Natural Resources and CDPHE, or their appointees, will serve only as non-voting members; and the commissioners will serve for the first time as full-time, paid employees of the state. Again, only one of the five voting members is guaranteed to have oil and gas expertise. The remaining four voting members must have expertise in wildlife/environmental protection, public health, land use, and another area “that will aid the commission in making sound, balanced decisions.”
5. Rulemaking: The COGCC must initially undertake rulemaking on four subjects: the new environmental protection standard; an alternative location analysis process; the evaluation of cumulative impacts; and requirements for flowlines and inactive, temporarily abandoned and shut-in wells.
Either at a later date, or simultaneously, the COGCC must also undertake rulemaking on financial assurance, wellbore integrity, worker certification requirements and permit application fees. Rulemaking may also be required on additional topics because SB 181 is inconsistent with current COGCC rules regarding definitions, APDs, mitigation, drilling units, pooling and hearings. In fact, the COGCC has already noticed its intent to modify the 500 series rules relating to COGCC hearings and evidentiary requirements for pooling, drilling and spacing unit applications. These rulemakings collectively are likely to impose additional application, operational and notification requirements, which could increase operating costs.
6. Permit Delays: The COGCC director is authorized to delay action on selected permit applications until the initial rulemaking is completed and the new rules become effective. Given the number and complexity of the issues to be addressed by the initial rulemaking, the resulting delay could last a year or more.
The COGCC has published draft objective criteria for exercising this authority, which focus on permit applications for locations near a residence, high occupancy building, or subdivision, within a municipality or environmentally sensitive area, or that have received opposition from a government agency or public group. The director must finalize the objective criteria by May 16.
7. AQCC Rulemaking: The Air Quality Control Commission now has explicit regulatory authority over a broad range of oil and gas facilities, and the agency must develop new rules and revise existing rules to minimize certain air impacts from oil and gas operations.
How Will These Changes Impact Colorado Operators?
The impact of these changes on the Colorado oil and gas industry will depend on where an operator is in the permitting process, the location of operations and the outcome of the various rulemakings. Because SB 181 applies prospectively, not retroactively, facilities that were approved as of April 16 may proceed as permitted and existing facilities may continue to operate.
It is important to note, however, that these approved and existing facilities may face still face new operational requirements depending on the rules that are adopted by the COGCC.
Pending and new permit applications may be delayed depending on how the director applies the objective criteria and other factors such as whether the controlling local government engages in its own comprehensive land use process and the extent of opposition to the project.
The new rules adopted by the COGCC may also impose additional state requirements for pending and future permit applications, including alternative siting evaluations, more comprehensive cumulative impact analyses and other requirements to increase protection for public health and the environment.
This could force operators to amend or refile pending applications and increase the documentation required for future applications.
Operators also may face additional local requirements. While many jurisdictions may choose not to exercise its new expanded land use authority, other jurisdictions may exercise this authority to control, limit or prevent oil and gas development.
In these jurisdictions, in addition to the new state requirements, operators will also become subject to local land use requirements on well siting, environmental protection, nuisance prevention, reclamation, financial assurance and other matters.
Next Near-Term Steps
• The governor must act to appoint new COGCC commissioners, with expertise that meets the criteria of SB 181. The COGCC expects to seat the new commission before the next commission hearing on May 20.
• The director must finalize and publish the objective criteria by May 16.
• The COGCC has noticed its intent to immediately modify its 500 series rules to conform the rules to SB 181’s new requirements for COGCC hearings and pooling, drilling and spacing unit applications.
• Also, in the near term, the COGCC must engage in rulemakings to address the new environmental protection standard, the evaluation of alternative well sites, cumulative impacts, and requirements for flowlines and inactive, temporarily abandoned, and shut-in wells.
This process will likely take at least a year, if not longer, to complete. The public, including industry, will have an opportunity to participate in the various rulemaking proceedings.
— Dave Neslin and Michelle DeVoe are of counsel at Davis Graham & Stubbs in Denver.