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How would new regulations impact the oil and gas industry in Colorado? Here’s what we know.

One of the most debated points of the Colorado legislation is its economic impact, but both sides acknowledge they don’t know all the answers

The oil and gas industry holds a rally outside of the Colorado Capitol on March 5, 2019, ahead of the first committee hearing for Senate Bill 181. The legislation would add significant new regulation to the industry and is being brought by Democrats. (Jesse Paul, The Colorado Sun)
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The greatest point of contention in the debate about a monumental rewrite of Colorado’s oil and gas regulations is how it will impact the industry and the state.

The predictions from critics are dire. A misleading new industry-funded TV commercial warns that the legislation would “shut down energy production in Colorado.” The industry claims it could “damage Colorado’s economy for years to come.” And a lawmaker believes the hardship goes even deeper.

“People will lose their jobs, people will lose their homes, people will lose their businesses,” said Sen. Rob Woodward, a Loveland Republican. “As we all know, when this happens, marriages will crumble, suicides will increase. It’s not a pretty picture.”

The bill’s sponsors call this fearmongering, and industry experts say the suggestions of a complete shutdown are baseless.

So what’s the real economic impact? It’s hard to say. But ahead of a legislative hearing Monday in the House, there’s one point where all parties find agreement: The legislation would lead to significant changes, and some will suffer more than others.

“As written, this bill will not shut down industry as a whole, but it likely will prohibit drilling in areas where communities clearly don’t want development, like Broomfield,” said Ethan Bellamy, a senior analyst who specializes in the energy industry at Baird, a financial services firm.

“But since most development in the state is in Weld County or on the Western Slope,” he continued, “that loss should be digestible on the whole but still extremely painful for certain operators.”

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The oil and gas industry estimates its economic impact at more than $30 billion when the ripple effects are taken into account.

Colorado oil production remains at record levels, and the value reached $10 billion in 2018, up 62 percent from the year before, according to an economic report from CU’s Leeds School of Business. The state’s natural gas production valuation is estimated at more than $5 billion.

The industry’s strong position is one of the reasons tax collections at the state and local levels are increasing, according to state economists, and providing more money for health care, education and other programs.

One reason it’s so difficult to know the actual impacts on the oil and gas industry is how the bill is written, according to analysts. The new local and state rules about where companies can drill for oil and gas would come months and years after the law takes effect.

“We won’t really know the impacts until the bill is finalized and the (state’s oil and gas commission) promulgates new rules,” Bellamy said. “And we can’t quantify the impact even then because we will have to see how each city and county responds with its own new rules.”

This is true for the impact to local and state tax revenues. The nonpartisan legislative analysis for the bill concluded: “Since the future actions of state agencies, local governments and business operators are unknowable, a change in (tax revenue) cannot be estimated.”

The oil and gas industry holds a rally outside of the Colorado Capitol on Tuesday, March 5, 2019, ahead of the first committee hearing for Senate Bill 181. The legislation would add signficant new regulation to the industry and is being brought by Democrats. (Jesse Paul, The Colorado Sun)

The industry is sounding the alarm

Even with the uncertainty, the critics of Senate Bill 181 commissioned a study that projected what a 50 percent reduction in production or a complete shutdown would mean for the industry and state.

Not surprisingly, the numbers showed significant impact at both levels. But the guesstimates were not based on any hard data showing either scenario would happen if the legislation took effect, and subsequent changes to the bill quickly rendered the analysis out-of-date.

One major change to the legislation — which is backed by Gov. Jared Polis — made clear that the permit process cannot be put on an indefinite hold, eliminating concerns about a moratorium on drilling. And another stated that local governments must impose only “necessary and reasonable” regulation, easing concerns about de facto bans on drilling.

Chris Brown, the industry study’s author, acknowledged the lack of information makes it difficult to know.

“This is less about the impact of regulation, it’s more about the impact of what cannot be known at the time and the potentiality of very significant disruptions,” said Brown, the director of policy and research at the Common Sense Policy Roundtable, a free-market organization with ties to the oil and gas industry.

The bill’s chief advocate summarily dismissed the industry’s study and questioned other claims, similar to those made in the past, when the industry blasted “job-killing rules.” House Speaker KC Becker, the sponsor, said they didn’t materialize.

“None of that happened, in fact oil and gas took off like crazy right after these rules,” the Boulder Democrat said, holding aloft the industry’s campaign advertisement from 2008 to make her point. “It didn’t happen last time. Why should we believe them this time?”

House Speaker KC Becker, D-Boulder, shows reporters an oil and gas industry advertisement from 2008 that warns of job losses, ones she said never materialized. (John Frank, The Colorado Sun)

The regulations at the time involved protections for wildlife put in place under Democratic Gov. Bill Ritter’s administration, and the industry argues that the measures did have an impact, even if it was obscured by the state’s oil boom and improvements in hydraulic fracturing, known as fracking.

But the industry’s advocates argue that the bill’s quick movement through the process — it passed the Senate Thursday, less than two weeks after introduction, on a party-line vote in the Democratic-led chamber — exacerbates the problem because lawmakers are moving forward without knowing all the facts.

“The problem that we have is that all such economic analysis like this can’t be thrown together in 10 days,” said Justin Prendergast, a spokesman for the Colorado Petroleum Council.

Analysts say investors are exiting

The lack of regulatory certainty for the industry in Colorado — evidenced by two ballot measures that failed in the 2018 election — is one of the reasons the measure’s backers say the bill is needed. But at the same time, it’s giving investors pause.

“Many investors have simply exited Colorado stock positions altogether, believing that the downside risk is unquantifiable and not worth bearing,” said Baird’s Bellamy. “Until we see true policy stability, Colorado oil and gas stocks likely stay in the penalty box for long-term investors.”

Moody’s Investors Service issued a research bulletin March 6 that suggested the legislation could weaken the credit quality for energy exploration and production companies in Colorado.

“The bill would be credit negative for oil and gas operators in the state, raising regulatory risks for oil and gas producers there and possibly impeding production growth and heightening the compliance and operational costs for companies in the Denver-Julesburg (DJ) Basin,” Moody’s reported.

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A spokeswoman for the financial services firm said the outlook remained unchanged even after the industry-friendly amendments to the bill in the Senate.

The industry analysts are particularly concerned about companies that drill closer to neighborhoods in populated areas on the Front Range, such as Extraction Oil and Gas, which was highlighted in the Moody’s research as facing “the greatest risks” from the legislation.

Great Western Oil and Gas, a private Denver-based driller that operates only in Colorado, is one of the companies that could be most impacted. Greg Patton, the company’s senior vice president of finance, told lawmakers at a Senate hearing that the original bill would cut its capital expenditures plans by 53 percent, affecting payroll and the royalties paid to mineral rights leaseholders.

“Something on every page of the bill … impacts our company financially and the state of Colorado as a whole,” he said.

EVRAZ Rocky Mountain Steel, the largest employer in Pueblo, issued its own warning about the trickle-down impacts. The company is a top manufacturer of pipes used in the oil and gas industry.

“When the energy industry slows down, it engages in less exploration,” Ben Lutze, vice president and general manager wrote. “Less exploration means it needs less pipe. It is a very straightforward progression.”

The EVRAZ steel plant in Pueblo, pictured on Dec. 12, 2018. (Jesse Paul, The Colorado Sun)

The bill’s sponsor acknowledges impacts

Senate Democratic leader Steve Fenberg, one of the lead sponsors, said many concerns about the legislation are overblown and not based on the current version. But in an interview after it won approval in the chamber, the Boulder Democrat acknowledged it will have an impact.

“There will be some operators who will have to change their business model … because we think those are the practices that raise health and safety concerns,” Fenberg said, pointing to those who drill near neighborhoods in the ever-expanding Front Range. Those operators will have to change their business model

The vast majority of drilling operations, however, won’t be impacted, he said. And the additional costs associated with new regulations on air quality and inspections are “all reasonable things that you just have to calculate in their cost of doing business.”

“I mean, they are making a lot of profit,” he continued. “I don’t think you can argue that there’s no room for better health and safety standards.”

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