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Industry 'Disappointed' By Colorado's Proposed Oil And Gas Rules

Colorado's oil and gas companies, already reeling from low crude oil commodity prices, got their first good look today at draft rules from the state designed to calm years of controversy over big wells drilled in and around neighborhoods unused to such activity.

Energy companies would be required to discuss their plans with local governments when they want to drill eight or more horizontal wells near homes, or if they expect that the oil and gas coming out of the ground would require 4,000 barrels or more of storage capacity onsite, under one state proposal.

They also might see new state limits on the amount of time they have to drill a series of wells and bring it into operation.

Those and other proposed rules are contained in a draft posted today on the website of the Colorado Oil and Gas Conservation Commission (COGCC).

In early feedback, oil and gas industry representatives said the draft rules go too far, although they didn’t specify the reason for that conclusion.

Other groups representing neighborhoods and communities said the proposed rules don't go far enough.

The groups said the state's proposal as drafted aims to mitigate impacts from large oil and gas facilities built near homes instead of banning them altogether.

"The administration has chosen largely to ignore the needs and concerns of Colorado communities,” said Wendy Highby of Weld Air and Water from Greeley.

“This rule seems designed to accommodate drilling in neighborhoods rather than protecting public health and welfare," Highby said.

The proposals are an outgrowth of the contentious debate over the last few years surrounding Colorado oil and gas operations, and how much of a role local communities should have in regulating the industry.

That debate led to an August 2014 deal by Gov. John Hickenlooper to avoid a multimillion-dollar campaign fight over dueling ballot proposals that some said could have derailed Colorado’s energy industry.

Under that deal, Hickenlooper convened a 21-member task force in September 2014. The group spent months traveling the state and hearing from residents, local officials and energy workers about the impacts of oil and gas operations on neighborhoods and communities.

The task force in February issued nine unanimously supported recommendations to Hickenlooper, leading yo today's draft proposals.

Many of the proposals require legislative action — but the big ones, Nos. 17 and 20 — required the COGCC to draft new regulations on the industry.

No. 17 is intended to increase communication between energy companies and local governments over where big new oil and gas wells and support facilities would be located within their communities.

The draft proposal focuses on such facilities in "urban mitigation areas," or UMA, defined as having 22 homes within 1,000 feet of the wellsite.

Recommendation No. 20 calls for oil and gas companies to share their five-year drilling program with local governments so that information can be incorporated into local plans.

Dan Haley — CEO and president of the Colorado Oil & Gas Association, a big industry trade group — said COGA is still reviewing the draft rules, but already "it's clear the draft rules far exceed the actual recommendations put forward by the Governor’s Task Force."

"We’re disappointed this draft seems to dismiss the hard work of the Governor’s Task Force, which spent nine months deliberating and deciding on these recommendations," Haley said. "The task force worked hard to find compromise on some very contentious issues and most of the recommendations were approved with unanimous votes.”

The task force was convened more than a year ago, and since then the economies of the nation’s oil and gas sector have changed dramatically.

Oil prices, hovering around $45 per barrel, are half what they were a year ago, and are not expected to climb above $60 per barrel for years. Thousands of energy workers in Colorado and nationwide have been laid off from good-paying jobs.

The number of drilling rigs active in Colorado has dwindled to 30 — less than half the 76 operating in October 2014 and the lowest number since October 2003, according to Baker Hughes, an oilfield services company that tracks drilling rig activity.

Some analysts say Colorado’s already strict regulations could deter additional industry investment when times are tough.

Tracee Bentley, executive director of the Colorado Petroleum Council, the local chapter of the American Petroleum Institute, a national advocacy group, said that the oil and gas industry supports a “common-sense regulatory approach that promotes the safe and reliable production of oil and natural gas to benefit Colorado consumers.”

And while Bentley said the group also is still “reviewing the proposals carefully to determine if they improve existing regulations, Colorado needs to take great care that it doesn't more duplicative and costly regulations that could smother investment in the state.

“It is critical that new rules don’t create needless roadblocks to responsible energy production,” Bentley said.

The draft rules to implement the task force’s recommendation No. 17 — which calls for more communication between energy companies and local officials — would be triggered by thresholds related to the length and number of wells that are drilled, or the amount of storage capacity that’s needed to handle the production from the wells.

One one hand, the rules would be triggered if wells drilled at a location total 90,000 feet in length below the surface, including the vertical and horizontal sections of the well. Most new wells drilled in Colorado currently are large, horizontal wells — some of which extend more than a mile horizontally through a rock formation.

The 90,000-foot mark could be reached by eight horizontal wells drilled about a mile horizontally, according to a cover letter explaining the draft rules from Matt Lepore, the COGCC’S director.

Alternatively, the new rules could be triggered if the storage capacity amounts to 4,000 barrels — roughly equivalent to eight 500-barrel tanks or 13 300-barrel tanks. The COGCC’s staff figures the 4,000-barrel storage limit would be reached by the production from four horizontal wells — incentivizing oil and gas companies to invest in underground pipeline systems to move the oil, rather than storing it on site and having trucks ferry the oil out of the neighborhood, Lepore said in his letter.

Under the draft rules, if either threshold is reached, the operator must notify the local government that has jurisdiction over the wellsite at least 90 days before submitting a drilling application to the COGCC.

The notification must include an “offer to consult with the local government concerning siting and best management practices for the facility,” an offer that the local government can choose to waive.

The COGCC also said it’s also encouraging the consultation with city officials to take place before the company reaches an agreement with the landowner about where the new wellpad will be located. The energy company must let the COGCC know that it’s consulted with the local government, or that the offer was waived, or an agreement couldn’t be reached, when it files its application with the state, the proposal said.

The COGCC said it wants feedback from the stakeholders on what role another jurisdiction, such as a county or neighboring town, should have if the large facility is located within 1,000 feet of their city or county border.

As for the actual drilling operation, the COGCC said it wants to make sure the “best management practices” available are used. The draft rules also propose a new time limit be imposed on drilling and fracking operations needed to bring the well into operation.

Lepore said in his letter that time limits are needed because “drilling, completion and stimulation operations typically occur around-the-clock and are unavoidably disruptive, particularly when taking place in a UMA (urban mitigation area).”

The time limits aims to reduce disruptions that can’t be eliminated, Lepore said in his letter, although he acknowledged that the time limit could force the new wells to be drilled in phases, with a “quiet period” between the phases.

The proposal focuses on recommendation No. 20, requiring energy companies to share five-year drilling plans with local officials, starting with a requirement that the oil and gas companies register with city officials by March 1, 2016, and share their drilling plans with local officials upon their request.

As proposed, the rule doesn’t require energy companies to register with county governments.

Beyond the registration requirement, the COGCC asked for input about how a company should determine what information it needs to share. It noted that relying on information publicly traded energy companies provide to the Securities and Exchange Commission won’t cover private companies that don’t file reports with the SEC.

Lepore did say the agency wants more input on companies sharing information on plans inside a city’s existing boundary as well as in “growth management areas” in areas that the city might be looking at for long-range planning purposes.

The drilling plan information provided also could change, Lepore noted in his letter, because oil prices and the available technology influence activities.

As a result, Lepore’s letter said the rule envision the companies sharing estimates about drilling plans that are “made in good faith using reasonable business judgment based on information known to the operator at the time, and that such estimates are subject to change.”

The COGCC will hold meetings at its offices in Denver with stakeholders to gather input on the draft rules Oct. 14-16.

A special hearing on the rules is scheduled for Nov. 16-17 at the COGCC’s offices in Denver.

Lepore said in his letter that the agency wants the rules in effect as soon as possible.

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