The Next Major Flashpoint For U.S. Shale

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By Nick Cunningham

Colorado is overhauling the laws governing how the oil and gas industry operates in the state.

The legislation seeks to put more protections on public health, safety and the environment as it relates to oil and gas development. Colorado has emerged as a major source of shale drilling in recent years, and as new fracked wells proliferate, they have encroached upon denser populations, particularly around the suburbs north of Denver.

As communities come in ever-greater contact with the industry, conflict has increased. Last year, a public referendum on increasing the required setback distance for shale wells from homes and schools became a huge flashpoint. The industry poured money into the vote, vastly outspending proponents of greater setbacks. Expanding setback distances would have put a lot of drilling off limits, so much so that the industry said it threatened to grind oil and gas production to a halt. The vote went down in defeat, and the shale industry breathed a sigh of relief.

But the same election also delivered victories for proponents of more regulation. The new governor is less of an ally of oil and gas interests than the former governor, and Democrats scored gains in the legislature. That brings us to today, where the legislature is looking to overhaul oil and gas regulations, which the industry sees as a threat to its operations. The bill would do several things. First, it would grant more authority to cities and counties to regulate drilling operations in their jurisdictions. This has been a perennial fight in Colorado. Several years ago, a series of bans on fracking in individual cities set off legal battles. The Colorado Supreme Court shot down those prohibitions and drilling accelerated across key parts of the state.

The new legislation would give local communities more say on siting, inspections and other matters – a more modest proposal than the fracking bans and moratoria of years past.

Currently, the state’s interest in developing oil and gas supersedes local interests. The state regulator can, by itself, approve the siting of a drilling operation. Under the proposed changes, drillers would need local permits for siting.

The legislation would also restrict the use of “forced pooling,” which allows a company to drill in an area that has multiple landowners so long as just one of the landowners approves. They can drill even if other landowners in that “unit” are opposed. The proposed changes under consideration would require at least 50 percent of landowners to offer their consent.

Royalty rates would also increase slightly. As it stands, non-consenting landowners receive a 12.5 percent royalty rate. That would rise to 15 percent. The industry says the legislation would threaten to derail shale development. “It all but guarantees the industry could not operate in certain jurisdictions,” Tracee Bentley, executive director of the Colorado Petroleum Council, told a state senate committee. The bill would send the message that “Colorado is closed for business.”

A more fundamental change comes down to the core mission of the Colorado Oil and Gas Conservation Commission, which regulates oil and gas in the state. Currently, the agency has two priorities: Regulating the industry, but also promoting its growth. The new bill working its way through the legislature would revise that mission, elevating health and safety as top priorities.

The bill cleared a legislative committee vote on March 5 and is inching forward. With Governor Jared Polis’ support, and Democratic control of both chambers of the state’s legislature, there are decent odds of passage. On the other hand, even if it passes, the industry will likely try to fight it in the courts. Both sides held rallies this week at the state capitol.

Some of the companies that will be most impacted are Anadarko Petroleum and Noble Energy Inc., the two largest holders of acreage in the state, according to Bloomberg.

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