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All You Need to Know About Colorado's New Oil & Gas Rules

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The Colorado Oil and Gas Conservation Commission (“COGCC”) recently gave approval to a statewide initiative that would require new oil and gas wells to be drilled at least 2,000 feet from most buildings, quadrupling from the current requirement of 500 feet. The stringent restrictions, which won preliminary approval in September, are set to take effect Jan 15.

The new setback distance falls under the Senate Bill 19-181 (SB-181) — a breakthrough legislation passed in 2019 that changed the way oil and gas drilling permits are issued in Colorado.    

The push for the industry’s overhaul gathered momentum after a deadly house explosion and fire in Firestone killed two people and badly injured another in April 2017. The fatal event was traced to the seepage of an odorless gas from a line owned by Anadarko Petroleum, which has since been acquired by Occidental Petroleum (OXY - Free Report) .

The Senate Bill 181 Explained

The hotly debated and controversial measure is part of SB-181 passed last year and referred to as ‘the most sweeping oil and gas reforms’ the state has seen. It marked a comprehensive overhaul of Colorado’s oil and gas development regulations by expanding the authority of local government/communities over drilling sites. The bill also strived to address concerns about climate change, pollution and threat to wildlife from drilling operations, while protecting the interests of unwilling mineral rights owners. Finally, the law aimed to rewrite the mission of the Colorado Oil and Gas Conservation Commission – the state agency overseeing the energy industry – from economic gain to public safety and environmental protection.     

As expected, the new setback rule has triggered a heated and polarizing debate.

Those in Favor Highlight Health and Safety Provisions

Proponents of the measure and environmental groups in particular argue that the new setback rule is a decisive step toward protecting Colorado residents’ health, safety and welfare. Its goal is to ensure that state regulators prioritize citizen welfare while ensuring the responsible development of the local oil and gas industry. Moreover, the proposition — that claims to have dwelled upon evidence and testimony from varied stakeholders — looks to protect wildlife resources and the environment of the fifth largest U.S. oil producing state. Seeking to dispel apprehensions, there are certain exceptions in place to allow shorter setbacks depending on favorable topography or advanced technology. 

Opponents See the Rule Dealing a Severe Blow to the Industry

People who are against the initiative, along with industry groups, argue that the rule changes, would have an overwhelming economic impact on the entire state. Terming the recommendation “completely arbitrary, not based on science”, they fear a crippling blow to the state’s energy landscape. Moreover, with the Colorado economy depending heavily on oil and gas industry for tax revenues, funds for infrastructure and welfare projects could be hit as the increased setback requirement will keep a large portion of the region’s land surface off-limits to new production. They warn that the move could potentially lead to job losses and economic hardship at a time when the commodity price plunge and the impact of coronavirus have wreaked havoc on the industry through layoffs and production cuts.

Why Does the New Regulation Matter to the Companies?

The new rules within Senate Bill 181 are expected to be a real concern for the energy operators in Colorado — a state that produced 444,000 barrels crude per day in August.

Oil and gas explorers who are exclusively focused on the state’s Denver-Julesburg (or, DJ) Basin including HighPoint Resources , Bonanza Creek Energy (BCEI - Free Report) , Extraction Oil & Gas and PDC Energy (PDCE - Free Report) among others could be in for some rough time. Biggies like Occidental Petroleum, which is invested heavily in the prolific D-J Basin following last year’s Anadarko acquisition also stands exposed to an element of uncertainty. This Zacks Rank #4 (Sell) company is the region’s top oil and gas producer holding approximately 650,000 net acres in the DJ Basin.      

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Energy infrastructure providers like DCP Midstream (DCP - Free Report) , which is involved in gathering and processing operations in the DJ basin, will also be affected by the stricter rules.

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