In Colorado, the Regulatory Noose Tightens for E&Ps

Colorado regulators, supported by a progressive Democratic governor and state legislature, are steadily tightening regulations on E&P companies to address voter concerns about pollution and the safety of drilling projects close to population centers.

The methodical ratcheting up of state regulation, begun after passage of a watershed law in 2019, is raising compliance costs and sparking consolidation as some large players diversify by buying oil assets in other states or seek economies of scale to deal with higher expenses, say industry representatives and financial analysts.

The proximity of rapidly growing and politically progressive Denver to Colorado’s most prolific oil and gas play has been a key driver of industry regulation, say regulators, industry representatives and environmentalists.

Its westward growth constrained by the Northern Front Range of the Rocky Mountains, the Mile High City has sprawled eastward on land atop the Denver-Julesburg (D-J) Basin, where oil has been produced since drillers sank the region’s first well in 1901.

Residents of Denver and its suburbs decry air pollution exacerbated by drilling and production activities, and grass-root groups emboldened by state laws authorizing local regulation of the industry have successfully blocked the location of oil and gas infrastructure near suburban homes and businesses.

“We’ve seen the Denver metro area development and housing development that have gone up very close to operations that existed or were planned to be developed by our industry,” said Lynn Granger, the new president and CEO of the Colorado Oil and Gas Association (COGA). “The closer you are to humans’ [dwellings], the more difficult it is to operate in an industrial setting.”

Donald Trump’s 2024 victory is unlikely to change Coloradoans’ attitudes toward oil and gas exploration, despite his vow to eliminate regulations governing E&P. Colorado hasn’t gone for a Republican presidential candidate since the 2000 election, and its politics are solidly progressive.

While concerns about oil industry safety and pollution span decades in Colorado, two high-profile accidents and the growing strength of the state’s progressive Democrats eroded industry support and helped bring the passage of landmark legislation, Senate Bill 181 (SB-181), in 2019.

The law, a long-sought and hard-won victory for state environmentalists, rewrote the rulebook for Colorado oil and gas production and paved the way for increased regulation, Granger said. The change was so dramatic that regulators have taken years to ramp up, and some are still in the early stages of developing rules, Granger said.

“I believe they were overwhelmed” by the scope of the law’s requirements, Granger said.

SB-181 granted local governments broad authority to regulate industry activities. It also changed the mission of the agency set up to regulate oil and gas operations, then known as the Colorado Oil and Gas Conservation Commission.

The regulator’s old mission was promoting economic growth. The current mission is to “regulate in a manner that protects public health, safety, welfare, the environment and wildlife resources.”

In 2023, the Legislature added authority to regulate carbon capture and geothermal operations in the state and changed the agency’s name to the Colorado Energy and Carbon Management Commission.

SB-181 included requirements for more than a dozen sets of rulemaking processes that are taking years to complete and “unfortunately what has happened since passage of SB-181 is additional pieces of legislation that continue to require additional rulemakings,” Granger said.

Anti-fracking sentiment

Debate of SB-181 came as two deadly and highly publicized 2017 incidents involving oil and gas production in Weld County were still at the forefront of voters’ minds.

In April 2017, a home in Firestone, north of Denver, exploded, killing two people and severely burning two others. The National Transportation Safety Board (NTSB) ruled that the explosion was caused by natural gas that leaked in from a pipe connected to a non-producing well nearby. The abandoned well was in a field operated by Anadarko Petroleum.

The small-diameter pipe appeared to have been damaged during the building of the home in 2015. NTSB investigators determined that the pipe had not been properly abandoned and that local authorities approved construction near the wells without first obtaining complete maps from Anadarko of gathering system pipelines from nearby wells. Anadarko paid an undisclosed settlement to the families of the victims.

In May 2017, one worker died and three more were injured when an oil tank exploded in Mead, near Firestone. Anadarko, which Occidental Petroleum bought in 2019, was also one of the companies cited by federal regulators in that incident.

SB-181’s backing of local oil and gas regulation has emboldened communities that say they fear such accidents and mishaps near their homes.

In May 2023, Boulder County announced it had won a five-year battle to prevent Extraction Oil & Gas, now a unit of Denver-based Civitas Resources, from undertaking a 32-well development called “Blue Paintbrush” that would have drilled horizontally from Weld County to Boulder County gas deposits.

Drilling-friendly Weld County had approved the project, as had state regulators. Boulder County, in contrast, has been a hotbed of anti-fracking sentiment and refused to authorize the plan.

More recently, the Energy and Carbon Management Commission in November blocked a request by Civitas’ Extraction Oil & Gas unit to drill under Erie, a growing suburb of Denver that has bucked pro-industry advocates in Weld County and opposed nearby oil and gas operations. The 26-well operation was known as the Draco pad.

Increased regulatory scrutiny has both killed projects and raised drilling costs for approved projects. The annual costs to oil companies of complying with state E&P regulations put into place between 2018 and 2023 totaled about $590 million a year, COGA estimated in 2024.

As the regulatory process ramped up after the passage of SB-181, producers had to devote resources to keeping up and complying with new requirements, Granger said. Some smaller, older companies had to hire staff to manage regulatory matters for the first time, she said.

More costs are being added regularly as regulators tighten emission rules and seek revenue sources for projects that will reduce pollution and demand for fossil fuels. In December 2024, the Colorado Air Quality Control Commission approved rules that would, for the first time, require emissions reductions for midstream oil and gas operations. The projected cost to the sector is $86 million a year.

‘Colorado oil wars’

Production expenses have risen enough that it is affecting profitability goals, especially at smaller companies, Granger said. That’s led some players to scale back or eliminate Colorado operations, either through the sale of assets to better financed and large competitors or a shutdown of production activities, she said.

Bigger producers are responding by diversifying into the Permian Basin or other oil and gas fields, said Vince Piazza, senior equity analyst covering energy companies for Bloomberg Intelligence. Civitas is trying to sell $4 billion of D-J holdings and may pick up Permian Basin assets, he said.

“Senior players in the (D-J) region have looked across to the Permian Basin, and I think that clearly indicates where they think the best opportunities will be,” Piazza said.

Prairie Operating, which already operates in the D-J Basin, is acquiring more assets from privately-held Bayswater Exploration & Production in a $602.75 million transaction, the companies said in February. Bayswater said it plans to keep its Permian holdings while maintaining a smaller footprint in the D-J.

Though Colorado industry lobbyists have successfully opposed many measures proposed by environmentalists and urban interests at both the regulatory and legislative levels, the trend toward tighter oversight remains, and the politics are both aggressive and ongoing.

Democrats took undisputed control of state government for the first time since 1936 with the election of Jared Polis as governor and the expansion of majorities in both houses of the Colorado General Assembly in 2018.

In addition to the governor, the other four statewide elected officials (attorney general, treasurer, lieutenant governor and secretary of state) were Democrats after the 2018 election. Legal and regulatory power in Denver, the state capital, is expected to remain solidly in Democratic hands for at least the next three years.

During 2024’s “Colorado Oil Wars,” both energy and environmentalist factions used the threat of direct-to-voters ballot initiatives to pressure their opponents into compromise, including an environmentalist proposal to place a ban on fracking by 2030 on the ballot.

Another environmentalist initiative would have held oil and gas companies strictly liable for environmental damage they caused, and created a private right of action to seek enforcement of environmental rules.

Democratic legislators also introduced bills aimed at reducing Denver’s high ozone levels by pausing oil and gas drilling in summer months, setting caps on miles driven in gasoline-powered cars and increasing pollution fines directed in part at energy facilities such as refineries.

Ozone formation from pollution in the Denver area is unacceptably high, especially in the summer, the Environmental Protection Agency (EPA) says. The mountains trap pollutants that summer heat turns into ozone. Denver ranks sixth among U.S. cities for ozone levels and is regularly out of compliance, the EPA says.

Willing to compromise

At the same time Democrats were pushing for tighter air quality rules in the General Assembly, the oil industry backed voter initiatives for November that would have blocked state government bans on home usage of natural gas in favor of electric appliances and on gasoline-powered lawnmowers, and other equipment powered directly by fossil fuels.

Saying he wanted to avoid the risks of voters approving ballot initiatives that hindered good government, Polis announced a “Grand Compromise” among environmentalists and oil industry supporters.

In a statement, Polis said representatives on both sides agreed to drop their ballot initiatives and reached agreement on legislation that would fund the capping of orphan wells, reduce oil-industry nitrogen oxide emission standards by 50% by 2030, and have oil and gas companies pay an estimated $136 million a year in fees, 80% of which would be earmarked to fund mass transit projects championed by the governor.

Polis is trying to expand both passenger rail and bus service along the Rocky Mountains’ Front Range in central Colorado.

In addition, both sides agreed to hold off on new legislation governing fracking and other oil and gas production activities until 2028. Polis’ office said the region’s biggest producers such as Occidental, Civitas and Chevron were party to the agreement, as were major environmental groups.

“The deal is, no new legislative restrictions on the industry until the next election cycle in 2028,” said Gabriele Sorbara, managing director and senior equity analyst at Siebert Williams Shank & Co. “That should allow E&P companies to permit their wells and go about their business a little more smoothly.”

The compromise won’t stop regulatory efforts already underway. For example, the Legislature created the Colorado Produced Water Consortium in 2023 to come up with rules aimed at reducing the use of fresh water in fracking operations and reuse water that is generated by oil and gas production. Rules are now up for comment and discussion with approval possible early in 2025.

Much of the water now used for fracking is injected back into deep wells rather than cleaned up and recycled, said Hope Dalton, director of the Produced Water Consortium.

Like all efforts at rules governing the use of water in arid Colorado, regulation of recoverable water is complex, the number of interested parties is large and conflicts are almost inevitable, Dalton said.

The 31 members of the consortium represent state and federal agencies, research institutions, environmental groups, industry, local governments, environmental justice groups and disproportionately impacted communities.

“At the first meeting, there was no love lost between everybody, but now they really respect each other and they want to come to a solution that meets Colorado’s needs,” Dalton said.

The initial proposal is to implement the rules starting in 2026 by setting the requirements at the current levels of 4% of recoverable water being recycled. By 2038, oil drillers would have to invest in technology and infrastructure that would raise the amount of water recycled to 38%.

A $50 billion business

In another regulatory move that raised drillers’ expenses, the Colorado Orphan Wells Mitigation Enterprise (OWME) Board is charging oil companies an annual fee of $115 per well to fund the plugging of so-called abandoned wells in Colorado. The fee takes effect in April. Colorado also has increased its bonding requirements for drillers to help pay to cap wells.

Environmentalists decry the state’s orphan well efforts as woefully inadequate, given that Colorado has more than 48,000 unplugged oil and gas wells that will cost billions of dollars to cap and clean up, according to Carbon Tracker, which calls itself an “independent financial think tank” that focuses on the energy transition.

Oil production has peaked in Colorado and many small companies are tapping marginal wells that don’t provide enough returns to pay for plugging when their production runs out, said Dwayne Purvis, who wrote a report on Colorado’s unplugged wells for Carbon Tracker.

“Renaissance and ongoing development is concentrated in a portion of only one of the basins in the state,” the D-J Basin, Purvis said in a statement. “Attempts to redevelop other areas with modern drilling and fracturing technology did not succeed, and wells from the western slope to the eastern plains have continued their decline.”

Polis and Democrats in the Legislature realize they can’t immediately shut down the state’s E&P industry, political and financial analysts say.

Though energy production doesn’t rank high as a generator of GDP in Colorado’s highly diversified economy, it does generate $50 billion in economic activity and, directly or indirectly, is responsible for the creation of 300,000 jobs in Colorado, says analyst Piazza of Bloomberg Intelligence. Interest in the D-J is far from over, he said.

“In general, it seems that some capital that is being redirected elsewhere,” Piazza said. “That doesn’t mean that the area will be forgotten. There is a lot at stake. [The D-J] will soldier on.”

Weld County secession?

Empowerment of local government in permitting under SB-181 can benefit oil producers in areas where drilling is welcomed, Piazza said.

“The most important oil region in the state of Colorado is rural Weld County,” Piazza said. “As long as you have some power at the county seat level, you have a degree of control.”

Hydraulic well-fracturing has made largely rural Weld County the epicenter of Colorado oil production. More than 80% of Colorado’s oil production and more than one-third of its gas output in recent years comes from that one county, according to U.S. Energy Information Administration figures released in May 2024.

Counties like Weld used to be the typical areas of operation for Colorado E&Ps, Granger said. In the past, oil drilling was conducted away from urban areas and “many people didn’t even realize that Colorado was an oil producing state because much of our operations were rural,” Granger said.

U.S. Census data show that Weld County’s population climbed 42% to more than 359,000 people from 2010 to 2023 as drillers helped make Colorado the fourth-biggest oil producer among the 50 states.

Still, the hot, arid county’s population density of 83 people per square mile is one quarter of the density one hour away in the Denver metropolitan area.

While grassroots efforts near Denver aim to combat climate change, Weld County activists have made the news several times over the last two decades by calling for voter initiatives that would allow the county to secede from Colorado because of its policies governing agriculture and oil and gas production.

The last effort in 2021 was a push to make the county part of Wyoming, which activists said is more drilling- and agriculture-friendly than Colorado. Secession efforts have failed, so far, though the last effort was not rejected outright by Wyoming’s governor.

Meanwhile, the Denver metropolitan area, already home to roughly half of Colorado’s population, continues to expand its financial and political influence, U.S. Census figures show. The area regularly ranks among the fastest growing in the United States.

New, younger residents coming to Denver for jobs in finance, health care and information technology have been more progressive and less comfortable with the oil industry than those in rural Colorado counties and western states, polls show.

Accordingly, Polis has instituted policies designed to reduce pollution and climate change, like the “Roadmap to 100% Renewable Energy by 2040 and Bold Climate Action” currently touted on his official website.

Because of the “Grand Compromise,” the oil industry is hoping for no surprise legislation until the General Assembly ends its session in May, Granger said. That doesn’t mean the trend toward tighter regulation is over.