Colorado and New Mexico officials rescind the welcome mat for oil and gas

The 2019 legislative sessions in many of the bigger oil and gas states ran their course during the first half of the year, with decidedly mixed results for the upstream industry.

In Oklahoma, industry advocates celebrated the end of a relatively quiet session that saw no new taxes on oil and gas, the first time that this has been the case since 2015. Similarly, operators and midstream companies had to be pleased with the outcome of the session of the Texas legislature, where a series of bills, which would have revised the state’s laws governing the exercise of eminent domain by pipeline companies, all ended up failing.

So, that was the good news. For the bad news, let’s talk about what happened in the legislative sessions of Colorado and New Mexico.

COLORADO

One of the most interesting aspects of what took place in Colorado’s legislature this year is that it all happened in the wake of the state’s oil and gas industry having scored a huge win there during the November 2018 elections. In that election, opponents of oil and gas development in the state had forced what became known as Proposition 112 onto the ballot.

The initial Prop 112 defeat. After years of trying, and failing, to convince voters in various Colorado communities to vote to implement outright bans on hydraulic fracturing (fracing), activists constructed Prop 112 as a backdoor effort to achieve the same goal. Basically, Prop 112 would have mandated a 2,500-ft setback distance from any occupied dwelling, school, church, hospital or a subjective “vulnerable area” for any new drilling operation. The inclusion of the undefined term “vulnerable area” would have left regulators and other officials at the state or local level free to deny drilling permits at their discretion, thus placing all future drilling in the state
in jeopardy.

Voters rejected this transparent attempt to kill one of the state’s most productive businesses, resoundingly defeating it by a 57%–43% margin. However, in the very same election, Colorado’s voters also chose to elect long-time industry opponent Jared Polis (Democrat) to serve as their new governor, and also awarded majorities in both houses of the state legislature to the Democratic Party, including many new members who are beholden to the same anti-oil and gas interests who funded Prop 112.

Cheating the voters. Polis and leading Democrats in the state’s legislature predictably took these election results as a mandate to mount their own assault on the oil and gas industry. Soon after the session convened, that assault came in the form of Senate Bill 19-181, a piece of legislation that is carefully crafted, specifically to construct a series of roadblocks to future drilling in the state.

One of the bill’s key provisions reduces industry representation on the Colorado Oil & Gas Conservation Commission (COGCC) and revises its mission from one of preventing “waste” in the efficient development of the state’s mineral resources to one of regulating oil and gas development “in a manner that protects” public health and safety. It further redefines the term “waste” to establish that non-production of oil and gas does not constitute “waste.” It also eliminates cost-efficiency and technical feasibility as considerations in its directive to “minimize adverse impacts.”

In plain English, the COGCC is no longer a traditional oil and gas regulatory body, whose mission is to ensure that the state benefits from the responsible development of its mineral wealth; rather, it is now an activist regulatory body, whose mission is to devise ways to prevent such development, Fig. 1.

Fig. 1. Now that the Colorado governor and legislature have found a way to invalidate the electoral decision reached by voters last November, wellsites like this one may become increasingly rare. Image: United States Geological Survey.

To lay additional landmines in the way of future energy development, SB 19-181 also vastly expands the authority of local communities to regulate oil and gas operations within their boundaries. Despite promises from Gov. Polis, the bill’s sponsors and witnesses who testified during the session that SB 19-181 would not be used to allow these communities to implement drilling moratoria, at least seven different Colorado communities had done exactly that by the end of May.

Local government run amuck. The bill allows these communities to establish their own regulatory structures on a broad variety of industry activities, ensuring that companies will now be forced to comply with an ever-increasing web of local regulations that vary from county to county and city to city. The resulting increase in administrative costs of compliance, alone, will no doubt cause many operators to flee the state entirely in the coming years.

SB 19-181 makes a variety of other changes to existing law, but the message of the bill is very clear to anyone paying attention: Gov. Polis and the Democratic majorities in both houses of the Colorado legislature want the state’s $30-billion oil and gas industry to die.

All of this as the result of a 2018 election, in which the industry believed it had achieved a major victory.

NEW MEXICO

In September 2018, the federal government conducted what ended up becoming the most profitable Bureau of Land Management (BLM) onshore lease sale in the history of the program. The leases up for sale that day were located in southeastern New Mexico, the area that is home to that state’s portion of the booming Permian basin.

Over the last eight years or so, oil producers, who already held leases in southeastern New Mexico, have gone about testing the same shale formations which underlie West Texas for their potential productivity. As in West Texas, these companies have discovered that they’ve been sitting on a vast sea of black gold. The pace of discovery in this area has escalated rapidly over the past two years, and this was the first BLM lease sale that had taken place there during the Trump administration.

All of these factors combined to make the timing of this lease sale incredibly fortuitous, raising the average per-acre lease bid to an unprecedented $95,000. Neither New Mexico nor the BLM had ever seen anything like it. In all, the sale grossed a record $967 million in lease bonuses, half of which go to the State of New Mexico, whose total state budget for 2018 was $6.3 billion.

One might think that state officials would be thrilled at the fact that they had just gained what amounted to a boost of 8% of their entire budget from a single lease sale, and thus be happy that their state is home to such a healthy, productive industry, which also would pay in billions to the state in the form of taxes and royalties generated by production from those leases in the years to come. Surely, these officials would work to ensure such a productive industry would flourish within their state’s borders, well into the future.

Another election with consequences. But 2018 was an election year in New Mexico, too, and the election there, as in Colorado, ushered in a new, anti-oil and gas governor in Michelle Lujan Grisham, and also beefed up Democratic Party majorities in both houses of the legislature.

Far from enacting policies designed to ensure that the flow of massive funds from the oil and gas industry would continue into the future, the 2019 session of the New Mexico legislature produced a new law, The Energy Transition Act, that will inevitably hamper the production of any new energy resources in the state other than so-called “renewables.” The new law, signed by Grisham on March 22, 2019 (Fig. 2), places unrealistic mandates on the state’s power sector, decreeing that it become 50% “carbon-free” by 2030, 80% by 2040, and 100% carbon-free by the year 2045. Coal and natural gas plants would still be allowed to operate in the state, but only if they are equipped with extremely-costly carbon-capture technologies that realistically do not even exist today.

Fig. 2. It would appear that The Energy Transition Act—signed into law by New Mexico Gov. Michelle Lujan Grisham—along with other measures being taken by her administration, would cancel out efforts by the New Mexico Partnership to attract additional oil and gas investment to the state. Yet, just last month, the Partnership had a booth at the Global Petroleum Show in Calgary. Image: Kurt Abraham, editorin- chief.

Implementation that will cost dearly. In early June, Gov. Grisham ordered her regulators to embark on the construction and implementation of new regulations that would harshly regulate what she calls the “excessive” emissions of methane by oil and gas companies in New Mexico. Given that these companies are already subject to a broad array of emissions regulations at the federal level, it must be assumed that Gov. Grisham envisions a set of regulations that are more restrictive than those already employed by the EPA and the federal BLM.

The June 7 press release by the governor hints at things to come: “Governor Lujan Grisham is fulfilling her campaign promise to protect New Mexico’s children and families from oil and gas pollution, and to crack down on the waste of hundreds of millions of dollars’ worth of natural gas each year. Strong, enforceable methane standards will protect the health and well-being of future generations of New Mexicans, and ensure oil and gas companies don’t waste a resource that costs New Mexico’s schools tens of millions per year in lost tax and royalty revenue.”

Thus, the clear message from officials in New Mexico to the oil and gas industry is the same as it is in Colorado: We don’t like you, and we wish you’d leave. Unless things change, expect many companies to start getting the message and act accordingly in the coming months and years. WO