Countervailing winds are blowing across Colorado’s energy and natural resources space. On one hand, the state has set a goal to reach net-zero greenhouse gas emissions by 2050, which Gov. Jared Polis would like to move up to 2040.
On the other hand, President Donald Trump has expressed a desire to expand the production and consumption of fossil fuels, a significant divergence from the former administration, which put significant emphasis on the growth of renewable energy sources.
Caught in the storm is Colorado’s energy and natural resources industry, which employs around 100,000 people in the state across more than 6,500 companies, according to Colorado’s Office of Economic Development and International Trade.
And even as the state expands its renewable energy capabilities — up to 39% of the state’s total generated electricity in 2023 — it still remains one of the top producers of oil and natural gas in the country. Colorado is the nation’s fourth largest producer of crude oil and eighth largest producer of natural gas.
A Renewable Incentive
As part of the push to reach net-zero emissions, the state has passed several legislative and regulatory efforts to encourage renewable energy development. One of the earliest efforts in the state was a citizen-led initiative in 2004, Amendment 37, that called for the state to up its percentage of retail energy sales that come from renewable energy from 3% in 2007 to 10% by 2015.
“The state has really been a leader in the country in passing legislation promoting the energy transition,” said Jennifer Cornejo, a partner in the environmental and natural resources group at Vinson & Elkins.
She said that the laws ranged from requirements for utilities to submit verified clean energy plans to laws that help local governments with siting and permitting for renewable energy projects. But there was one bill that stood out above the rest for Cornejo, Senate Bill 19-181.
“That law changed the mission of the Colorado Oil and Gas Conservation Commission from fostering energy development to prioritizing health and the environment,” Cornejo said. “So a string of new regulations has been adopted since then to implement that law, and they’re still being adopted today. And that includes allowing local authorities to regulate oil and gas activities and increasing emissions control requirements.”
“This has, I think, encouraged and created opportunities for renewable projects in the state and traditional energy companies are having to figure out how to navigate significant operational and economic challenges that have resulted,” Cornejo added.
Mimi Larsen, of counsel at Brownstein, said that another update to the renewable energy standards came in 2023. It put in goals for the state of Colorado to reduce greenhouse gas emissions. “Right now, the schedule is to have a 50% reduction by 2030 of our greenhouse gas emissions. That increases to 65% in 2035 and then if you look all the way to 2050, the expectation is that we have net-zero emissions of greenhouse gases by 2050,” Larsen explained.
She noted that for power providers in the state, that means moving to predominantly renewable energy sources like wind, solar and geothermal.
James Eklund, partner at Taft and the leader of its water and natural resources practice area, said that a law passed in 2021, SB21-200, has also had a big impact.
“The Air Quality Control Commission [was] directed by Senate Bill 200 back in 2021 to implement sector specific emission reductions and strengthening the renewable portfolio standard was something they were directed to do,” Eklund said. “So that requires utilities to source increasing amounts of electricity from renewables.”
Eklund noted that it also expanded the authority of the Colorado Energy Office, the Colorado Public Utilities Commission and the Colorado Department of Public Health and Environment to implement the reduction goals.
But not all of the work to increase renewable energy production in Colorado comes off of government mandates. Eklund noted that Xcel, one of the largest energy providers in the state, is voluntarily increasing its renewable energy production and commitments.
According to Xcel, 42% of the energy it delivered in Colorado in 2023 was carbon-free, with nearly all of that energy coming from wind and solar sources. Eklund noted that it’s already exceeding the state’s requirements through its own commitments. That goes along with a future goal of 100% carbon-free electricity by 2050 and a $3 billion investment commitment in renewable energy projects.
The Short End of the Dipstick
For oil and gas operators in the state, it has become more onerous to fill the tank.
Larsen said that, as a result of the 2019 legislation and the commission’s shift, the number of permits for oil and gas production have gone down.
“You’re seeing it from a couple different angles,” Larsen said. “You’re seeing it from the state’s policy to encourage zero greenhouse gas emissions by 2050, and then also they’re increasing regulation of oil and gas development and other extractive industries to make sure that if they are producing in Colorado, that they’re producing at the highest standard and making sure that they’re protecting the environment and public health.”
Doug Benevento, a partner at Holland & Hart, said that there’s been disincentive on top of disincentive regarding oil and gas development in Colorado.
“The state has made a determination that they want to move to renewables, irrespective of what impact that has on the grid, which is negative, and also on prices. If you look at prices, utility costs in Colorado have gone up substantially over the past decade,” Benevento said. “It reminds me of, ‘Someone once asked somebody how they went bankrupt. And the person said a little bit at first and then all of a sudden.’ And that’s sort of the way they’ve been disincentivizing oil and gas.”
He said the result of the cumulative regulation is an extremely hostile environment for the oil and gas community. Part of that is legislation and rulemaking around cumulative impacts, according to Benevento. “You can make an argument that cumulative impacts should be looked at, but I think the way that they did it was damaging to one of the biggest industries in Colorado,” Benevento added.
He also noted that legislation that enabled local governments to have more of a say over oil and gas development, along with an emphasis from the PUC on renewable energy, has hindered the industry.
Larsen noted that Colorado was one of the first states in the nation to consider the cumulative impacts of a proposed oil and gas operation on the community. “10 years ago, 15 years ago, that was not something the [Colorado Energy & Carbon Management Commission] took into account,” Larsen said.
Larsen explained that the cumulative impact assessment means that not only are operators having to comply with best management practices that ensure the health and environment of the residents in the immediate vicinity, but they’re also having to examine what other industries, including other oil and gas operators, are set up in the area.
“That is now a new lens that they’re looking at development and whether or not there should be this new oil and gas location added,” Larsen said. “It’s a very different dynamic, and it’s one that is new to the agency and it’s new to oil and gas regulations at the state level in the U.S.”
The impact is particularly significant for smaller operators in the space.
“Right-sized operators, the larger operators that have the resources to invest in the new technologies and the best technologies and to invest in the lawyers that they need to help them through the process and to add to their regulatory staff, they’ve adapted,” Larsen said. “It’s become more expensive for them, it’s become longer for them to get something permitted, but they can still operate.”
“For those smaller operators that made up a decent percentage of operations in the [Denver-Julesburg] basin prior to 2019, you’ve largely seen them go away,” Larsen added. “They just do not have the capital in order to operate to the high standard that Colorado is asking operators to operate at.”
She noted that the price tag for a permit could be more than several hundred thousand dollars.
Cornejo noted that these factors have driven some consolidation in the oil and gas sector, as larger companies and operators are more able to absorb the higher compliance costs.
“In Colorado particularly SB-181 and the subsequent regulations implementing that law have altered energy M&A by making asset retirement obligations and environmental compliance history major factors in transaction valuation,” Cornejo said. “The market has responded with accelerated consolidation.”
She said she’s also seen some transaction structures that have tied contingent consideration to certain regulatory outcomes. “I think this environment favors really sophisticated buyers with stronger balance sheets and environmental expertise,” Cornejo said.