Martinez v. COGCC: Colorado Supreme Court Rejects Adverse Impacts Pre-Condition

On January 14, 2019, the Colorado Supreme Court reached a decision in COGCC v. Martinez, ending more than five years of litigation between seven youth activists from Boulder-based Earth Guardians and the Colorado Oil and Gas Conservation Commission (“COGCC”). The Court held that the COGCC appropriately exercised its agency discretion when it declined to undertake a rulemaking that would have conditioned approval of applications for oil and gas drilling permits on a conditional finding of no adverse impacts to health, safety, or the environment.

The facts of the highly publicized case are well known. In 2013, Earth Guardians petitioned the COGCC to promulgate a rule requiring that COGCC withhold issuance of any new drilling permits “unless the best available science demonstrates, and an independent, third party organization confirms, that drilling can occur in a manner that does not cumulatively, with other actions, impair Colorado’s atmosphere, water, wildlife, and land resources, does not adversely impact human health, and does not contribute to climate change.” COGCC declined to undertake the proposed rule-making, finding, inter alia, that the proposed rule was beyond COGCC’s limited statutory scope. The petitioners appealed to district court, which affirmed COGCC’s denial of the petition.

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The Battle over Local Control Heats up Again as Thornton’s Oil and Gas Regulations Challenged in Court

Six weeks following the City of Thornton’s adoption of strict new regulations on oil and gas operations, the Colorado Oil and Gas Association (“COGA”) and the American Petroleum Institute (“API”) have filed suit, in what looks to be just the latest clash in Colorado’s struggle over who manages oil and gas in the state – the Colorado Oil and Gas Conservation Commission (“COGCC”) or cities and towns?

In August, after what COGA described as “an extremely limited stakeholder process,” Thornton’s City Council adopted Ordinance No. 3477 by a 7-2 vote. The ordinance provides for much stricter standards than the rules of the COGCC. Some of the differences are highlighted below:

   Thornton's Ordinance COGCC Rules
Setback from Buildings/Lots Well pad must be at least 750 feet from existing or planned buildings and existing or platted residential lots (Section 18-881.(a)(1), (2)) Well must be at least 500 feet from a Building Unit (Rule 604.a.(1))
Setback from Water Bodies Well pad must be at least 500 feet from the ordinary High Water Mark (HWM) or the edge of the bank of any irrigation or lateral ditch (Section 18-881.(a)(3)) Setbacks only required for Drilling, Completion, Production and Storage Operations within Public Water System Surface Water Supply Areas (Rule 317B)
Surface Disturbance Multiple wells proposed by Operator must be located on a multi-well pad
(Section 18-881.(b)(1))
Operators must consolidate wells on multi-well pads only in Designated Setback Locations and only where technologically feasible and economically practicable (Rule 604.c.(2)E.i.)
Liability Insurance Operator must maintain general liability insurance of $5 million per occurrence (Section 18-881.(y)) Operator must maintain general liability insurance of $1 million per occurrence (Rule 708)
Flowlines  Abandoned flowlines must be removed (Section 18-881.(c)(1))  Flowlines may be abandoned in place if disconnected, buried, and permanently sealed (Rule 1103)

 

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Colorado Legislature Considers Limitations On “Force Pooling”

Rep. Mike Foote (D-Lafayette) and Rep. Dave Young (D-Greeley) introduced House Bill HB17-1336, legislation which would prevent a lessee representing less than a majority of the mineral royalty owners from obtaining a force pooling order. The authors of the legislation argue the intent of the bill is to prevent a mineral rights owner or lessee from forcing adjacent mineral interest owners to lease their minerals and to provide better information to affected parties. In addition, the legislation would provide mineral owners with additional time to decide whether to lease, participate in proposed well(s), or decide not to participate in the drilling of proposed well(s). Proponents of the legislation also argue that under current law, an oil and gas operator has too much of an advantage when it can tell an unleased mineral owner that if he or she does not sign a lease, then they will be force pooled.

The bill was introduced late in the session where rules allow expedited consideration, with the probable strategy being to prevent extended deliberation. The bill appears to conflict with Colorado property and constitutional law. Given significant departures from existing law, a longer time is necessary to fully appreciate how current law would be changed. Here are some of the problems:

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COGCC: A Balancing Act or “Subject To” Protection of Health, Safety, and Environment – A Surprising Decision from the Colorado Court of Appeals

A recent decision from the Colorado Court of Appeals (“Court”) could mean a new focus for the Colorado Oil and Gas Conservation Commission (COGCC). On March 23, a three-judge panel issued a split decision in Martinez v. Colo. Oil & Gas Conservation Comm'n, 2017 COA 37, with two of the three Judges rejecting the COGCC’s assertion that its role under the Oil and Gas Conservation Act (Colo. Rev. Stat. §§ 34-60-101 to -130) (the “Act”), is to balance oil and gas development with other public interests such as public health, safety, and welfare.

At issue was a petition for rulemaking filed with the COGCC in 2013 by members of the Boulder-based Earth Guardians asking that the COGCC “not issue any permits for the drilling of a well for oil and gas unless the best available science demonstrates, and an independent, third party organization confirms, that drilling can occur in a manner that does not cumulatively, with other actions, impair Colorado’s atmosphere, water, wildlife, and land resources, does not adversely impact human health and does not contribute to climate change.” The COGCC solicited and reviewed a substantial amount of public input on the matter, and later denied the petition, finding, inter alia, that the proposed rule would require it to “readjust the balance crafted by the General Assembly under the Act,” thus making the proposed rule “beyond the Commission’s limited grant of statutory authority.” The petitioners appealed that decision to the Denver District Court, which affirmed the COGCC’s denial of the petition.

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Earthquakes: State Regulation of O&G Injection Wells Is OK Oklahoma Judge Dismisses Federal Lawsuit on Jurisdictional Grounds

On Tuesday, April 4, 2017, Judge Stephen P. Friot, United States District Court for the Western District of Oklahoma, dismissed a nationally significant lawsuit brought over earthquakes linked to oil and gas wastewater injection wells on jurisdictional grounds.  See Sierra Club v. Chesapeake Operating, LLC, et al., No. CIV-16-134-F (W.D. Okla., Order dated 4/4/2017) (unpublished), The court deferred to the expertise of the Oklahoma Corporation Commission (“OCC”), the state body governing wastewater injection wells in Oklahoma. Citing the actions and capability of the OCC, Friot concluded:

Every night, more than a million Oklahomans go to bed with reason to wonder whether they will be awakened by the muffled boom which precedes, by an instant, the shaking of the ground under their homes. Responding to earthquake activity is serious business, requiring serious regulatory action. The record in this case plainly demonstrates that the Oklahoma Corporation Commission has responded energetically to that challenge. Of equal importance, it is plain that the Oklahoma Corporate Commission has brought to bear a level of technical expertise that this court could not hope to match.  The challenge of determining what it will take to meaningfully reduce seismic activity in and near the producing areas of Oklahoma is not an exact science, but it is no longer one of the black arts.  This court is ill-equipped to outperform the Oklahoma Corporation Commission in advancing that science and putting the growing body of technical knowledge to work in the service of rational regulation.

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Nonconsenting Owner in a Colorado Oil and Gas Well Must First Pursue Claim for Payment of Proceeds of Production at COGCC – not District Court

A recent Colorado Court of Appeals decision involves two parts of the statutes regarding the Colorado Oil and Gas Conservation Commission (Commission):  the pooling statute and the statute regarding payment of proceeds of production.  In Grant Brothers Ranch, LLC v. Antero Resources Piceance Corporation, ___ P.3d __ (2016), 2016 COA 178, the court held that the nonconsenting owner was required to exhaust its administrative remedies by bringing its claim at the Commission, and that the nonconsenting owner’s claim brought in district court should have been dismissed without prejudice.

The Commission established two drilling and spacing units to produce oil and gas in Garfield County.  Antero Resources Piceance Corporation (Antero) offered to lease the mineral interest owned by Grant Brothers Ranch, LLC (Grant Brothers) in the units.  Grant Brothers did not lease its interest and also refused Antero’s offers for Grant Brothers to participate in the wells.  After Antero’s requests, the Commission entered orders pooling all nonconsenting interests in the units. 

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The November Ballot Can Still Affect the Energy Industry

For those interested in Colorado’s energy economy, ballot initiatives concerning oil and gas regulation have rightly taken center stage. (See [4/27/16 blog post]). As of today, however, none of those public initiatives appear destined for the ballot this November.  The Colorado Secretary of State found that proponents of the two measures did not collect the requisite number of signatures to make the ballot. Though proponents turned in slightly more than the nearly 100,000 necessary signatures, the Secretary of State must conduct a random sampling of the signatures to assure that those signing are registered voters and the signatures authentic.  The Secretary concluded that both submitted measures lacked enough valid signatures, so they would not appear on the ballot (unless proponents successfully challenge the ruling).

But despite the fact that there will be no explicit challenge to the industry, another initiative could also significantly though indirectly affect regulation of the energy industry via initiative going forward. Initiative 96 would “raise the bar” - to quote the group promoting the measure - that must be cleared to amend the Colorado Constitution through the public initiative process.  If adopted by Colorado voters in November, it would become far more difficult for public initiatives and referendums, including those concerning energy regulation, to supplant or bypass the decisions of the General Assembly and, in this case, the Colorado Oil and Gas Conservation Commission.

Specifically, Initiative 96 targets the public constitutional amendment process in two ways.  First, it bolsters the signature requirements by requiring at least 2% of the total ballot signatures come from each of the state’s 35 senate districts.  This component appears to target the increasingly common practice of (often paid) signature collectors standing outside major events like games and concerts in metropolitan areas to generate signatures quickly and easily.  Proponents of the measure allege that such strategies leave rural districts with little input into the public ballot process.  Second, a constitutional amendment would require a 55% majority, not the 50% currently required.

Of course, these procedural changes would make it more difficult for the public to directly regulate the energy industry and, in turn, the state’s economy. As Governor Hickenlooper stated, Initiative 96 “is going to ensure that our constitution is not held captive by the whims of the day.”  Therefore, although it appears that the November 2016 ballot will not directly threaten radical change to the energy industry, the outcome of the election will still have a long-term impact on energy production and regulation in Colorado.

For some background on the use and management of the initiative process see “Citizen Initiatives: Power to the People or More of the Same?”, Rebecca W. Watson & Jennifer Cadena. http://goo.gl/z1zKSv

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More Local Government Control Over Oil and Gas Operations? Colorado House Says No.

Over the past several years there has been an ongoing debate on whether local governments have the authority to limit or even ban oil and gas operations. In 2012, residents of the City of Longmont voted to approve a ban on hydraulic fracturing within city limits. Similarly, in 2013, Fort Collins voters approved a five year moratorium on fracking within city limits. The Colorado Oil and Gas Association challenged both bans, and the cases reached the Colorado Supreme Court. A recap on the case history and oral arguments can be found in a prior blog, “State or Local for Colorado?” A decision is expected from Colorado’s high court in 2016.

The most recent battle between state and local control of oil and gas operations was fought in the Legislative branch. On March 11, 2016, Representatives Mike Foote, Su Ryden, Jessie Ulibarri and Matt Jones of the Colorado House of Representatives (“House”) introduced House Bill 16-1355 (“HB 1355”) in an attempt to provide local governments with control over the location of oil and gas facilities. HB 1355 declares that “governing bodies of local governments are in the best position to determine the appropriate locations for oil and gas facilities and will properly balance . . . the effects on public health, wildlife, and the environment.” The Colorado Oil and Gas Conservation Commission (“COGCC”) currently has authority over the siting of oil and gas facilities in all jurisdictions in Colorado. HB 1355 states that “statewide siting rules provide an ineffective protection for the public . . . [and] local governments are in the best position to determine the appropriate locations for oil and gas facilities.” Although the bill recognized the existing authority of the COGCC, it emphasized that “the oil and gas industry is not exempt from local governments’ authority to control the siting of oil and gas facilities through existing zoning and land use authority just as they do for every other industry.”

In an attempt to gain more supporters of HB 1355, several last minute amendments were made to the original bill. The original bill proposed an addition to Colorado statutes that would require an operator to “ensure that the location of oil and gas facilities complies with city, town, county, or city and regulations.” The proposed addition to the statute authoritatively stated that “nothing in this section impairs or negates the authority of local governments to regulate the location of oil and gas facilities.”

It became clear that the House would not pass a bill providing local governments with such overarching authority to regulate the location of oil and gas facilities, especially with the Longmont and Fort Collins cases pending before the Supreme Court. Accordingly, the morning of the vote, HB 1355 was amended to remove the language giving local governments broad authority to regulate the location of oil and gas facilities. Consequently, the amended HB 1355 merely restated the current law that oil and gas facilities may be regulated by local governments under current zoning regulations.

Colorado Governor John Hickenlooper urged the House not to pass HB 1355, stating his preference that the Legislature wait until the Colorado Supreme Court issues decisions on the pending cases. Ultimately, on April 4, 2016, the watered down version of HB 1355 failed to make it out of the Democratic-controlled House.

Even though HB 1355 was a failed attempt by the Colorado Legislature to provide local governments with the power to regulate oil and gas operations, its introduction is yet another example of the sentiment of many Coloradans that local municipalities should be able to limit or restrict oil and gas operations.
A copy of HB 1355 can be found here.

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Who Determines What Constitutes a “Reasonable Offer to Lease” When it Comes to Involuntary Pooling? Another Example of Local Governments Attempting to Assert Control

One of the more loosely used terms from Colorado’s Conservation Act and Colorado Oil and Gas Conservation Commission (“COGCC”) Rules, and one of many lawyers’ favorite words to analyze, is the term “reasonable.” When filing for an involuntary pooling application in front before the COGCC, an applicant must comply with COGCC Rule 530, which requires the applicant to, among other things, provide an unleased owner with a “reasonable offer to lease.” In determining whether a lease offer is reasonable, the COGCC shall consider the: (1) date of the lease and primary term or offer with acreage in the lease, (2) annual rental per acre, (3) bonus payment or evidence of its non-availability, (4) mineral interest royalty, and (5) such other lease terms as may be relevant.

Despite the COGCC having been expressly tasked with determining what constitutes a reasonable offer to lease, protesting parties often try to assert themselves as the decider of what is reasonable. This issue recently came to a head. Weld County, as an unleased mineral owner, argued it was the ultimate decision-maker of what is “reasonable” when it comes to a lease offer subject to COGCC Rule 530. Section 30-11-303(1), C.R.S., grants the County the power to lease its oil and gas interests on terms as the County deems to be in its best interest. Accordingly, the County enacted Section 2-2-70, W.C.C., which established the minimum lease terms for tracts of County minerals larger than 40 acres, which are a 3-year primary term, $600 per-acre bonus, and a royalty of not less than 25%. The County therefore argued that any lease terms offered by an operator that are less than those provided in Section 2-2-70, W.C.C., are per se unreasonable because such terms would be contrary to the County’s determination of what is in its best interest. The County went so far as to argue that COGCC should defer to the terms and conditions of Section 2-2-70, W.C.C., as being dispositive as to the issue of whether or not a reasonable offer was made because the terms and conditions were "legislatively determined to be in the best interests of the citizens of Weld County".

In a prehearing order, the COGCC rejected Weld County’s claim that it could determine whether there was a reasonable offer to lease. In denying the protest, the COGCC reasoned that

Weld County cites no legal authority for the proposition that it, and not the Commission, is the appropriate political subdivision of the State of Colorado to determine what terms are just and reasonable in the context of the issuance of an involuntary pooling order. Weld County's position contradicts the plain language of §34-60-116(6), C.R.S., which authorizes the Commission to determine what terms and conditions are "just and reasonable," and §34-60-105(1), C.R.S., which rescinds county authority over all oil and gas conservation and unqualifiedly confers this authority on the Commission. To conclude otherwise would leave to Colorado counties the task of determining reasonableness of terms and conditions of pooling orders. This the legislature did not intend to do, as explained in the discussion in the preceding part of this order, and therefore, Weld County's legal argument is rejected.

Weld County’s protest and assertion that it, not the COGCC, should determine what constitutes a reasonable offer to lease under COGCC Rule 530 and the involuntary pooling statute, Section 34-60-116, C.R.S., are symptomatic of Colorado counties and municipalities desiring to assert more local control over oil and gas operations. As demonstrated by the COGCC’s recent rule making initiated by the Governor’s Oil and Gas Task Force, the counties and municipalities appear to be gaining an additional foothold on oil and gas regulation, which has been and should remain the exclusive jurisdiction of the COGCC. Indeed, allowing each county greater independent authority in regulating oil and gas development would lead to even greater unpredictability for operators, which is detrimental to efficient and economic development of the state’s oil and gas resources.

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State or Local Control for Colorado?

In September, the Colorado Supreme Court agreed to hear two cases that have the potential to settle the state/local battle over fracking regulations. The conflict roots back to 2013, when voters in Longmont passed a ban on hydraulic fracturing, and Fort Collins passed a five-year moratorium. In response, the Colorado Oil and Gas Association (“COGA”) filed lawsuits challenging the ban and moratorium, arguing that they are illegal because case law and regulations give only the state the right to regulate drilling. The legal issue is “preemption” – when state and local laws conflict has the state “preempted” the area of oil and gas regulation invalidating local laws in conflict?

Local communities across the state have exerted limited control over oil and gas operations within their boundaries for decades under their “health, safety and welfare” authority. But, when it comes to the permissibility of fracking, which is essential to the majority of oil and gas development in the state, COGA asserts that Colorado’s state statutes and Colorado Oil and Gas Conservation Commission (“COGCC”) regulation should prevail. The COGCC estimates that more than 90% of the oil and gas wells in that state currently utilize fracking techniques. Indeed, fracking has permitted economic recovery of reserves that were previously too expensive to produce through traditional drilling techniques.

In response to COGA’s challenges, lower courts in Boulder and Larimer counties overturned the ban and the moratorium. Both courts found that the regulation of fracking is under control of COGCC, thereby preempting any local rules. Both cases moved into the Colorado Court of Appeals, where Longmont and Fort Collins asked to have the ban and moratorium restored. In a rare move, the Court of Appeals requested that the lawsuits bypass the intermediary court: “In light of the public interest in and the importance of the subject matter of these cases and of the legal issues implicated, they would seem to be cases as to which certiorari review by the Supreme Court is eminently appropriate.” On Wednesday, December 9, 2015 attorneys argued both cases in front of the Colorado Supreme Court.

The Colorado Supreme Court has already spoken on the preemptive scope of the Colorado Oil and Gas Conservation Act in a pair of decisions from the early 1990s: Voss v. Lundvall Bros., 830 P.2d 1061 (Colo. 1992); Bd. of Cnty. Comm’rs v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045 (Colo. 1992). These decisions, and the preemption tests provided by each, proved to be the focus of both arguments. Longmont v. COGA, 15SC667, and Ft. Collins v. COGA, 15SC668, essentially differ only by type of regulation. The question for both boils down to what type of preemption analysis the courts must employ.

The cities argue operational conflict is the appropriate test:  Does the local regulation materially impede the efficient and economic production of oil and gas consistent with health, safety, and welfare of citizens? Using the operational conflict analysis, the Colorado Supreme Court in Bowen/Edwards Associates, held that the Colorado Oil and Gas Conservation Act, C.R.S. §34-60-101, et seq. did not entirely preempt a county from exercising its land use authority over any and all aspects of oil and gas development and operations in unincorporated areas.

At oral argument, the cities attempted to distinguish fracking from overall oil and gas operations, arguing that gas production can be achieved as efficiently by other methods including underbalanced production. The cities want the courts to apply the operational conflict analysis so that, on remand, the lower court will have to make certain factual conclusions about fracking including whether valid development alternatives exist.

COGA believes the defining case is Voss. Voss and its progeny set out Colorado’s implied preemption test for state/local regulation issues. There, the Colorado Supreme Court struck down a Greeley home rule ordinance completely banning oil and gas development within the city limits. The court determined that the ordinance was inconsistent with City and County of Denver v. State of Colorado, 788 P.2d 764 (Colo. 1990), which held that, in matters of mixed local and state concern, a home rule municipal ordinance could co-exist with a statute only so long as there was no conflict between the ordinance and the statute. The Voss Court noted that should there be such a conflict, it would be the state statute that would supersede the conflicting local ordinance.

The conflict described in Voss came before the Supreme Court in Colorado Min. Ass'n v. Bd. of County Com'rs of Summit County, 199 P.3d 718 (Colo. 2009). Facing a similar question on which preemption analysis applied, the Court held that Summit County's ordinance banning the use of cyanide or other chemicals in heap or vat leach mining operations for all zoning districts in the county was impliedly preempted by Mined Land Reclamation Act (“MLRA”). Because the general assembly had identified the field of chemical use in mining operations for mineral processing as a matter of significant and dominant state interest, and because the ordinance impeded MLRA's goal of encouraging mineral development while protecting human health and the environment, the court found it to be inconsistent with the general assembly's decision to authorize mining operations that use chemicals for extraction. Thus, the implied preemption analysis resolved the conflict between the MLRA and the ordinance in favor of the state law.

COGA emphasized Summit County at oral argument, analogizing the cyanide situation to the fracking cases in front of the Court, explaining that state statutes regulating an industry dominate when in conflict with local bans or limitations on “techniques” of the industry. As such, COGA argued that under the correct test of implied preemption, summary judgment is always the proper remedy and lower courts need not reach the facts of the case.

Ultimately, the dispute comes down to a supremacy battle involving the most significant energy innovation of the century. Colorado’s high court ruling on the cases will determine what preemption test applies, and consequently whether under certain facts local governments can limit or ban hydraulic fracturing rather than deferring to oil and gas regulation by the state agency.

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Finally – A Policy to Streamline the BLM Communization Agreement Process – IM 2015-124

Dated and effective July 17, 2015, the Bureau of Land Management (“BLM”) issued Instruction Memorandum 2015-124 (“IM-2015-124”). This BLM guidance significantly changes the way federal Communization Agreements (“CAs”) are administered and, for the most part, eliminates some of the cumbersome issues for operators applying for CAs. CAs are used to combine isolated or small federal mineral and/or tribal parcels with fee minerals to form a spacing or proration unit that complies with state law and allows for development of tracts that could not be independently developed or operated on their own.

In addition to attempting to “clean-up” the CA Process, IM-2015-124 addresses some questionable jurisdictional issues. Before IM-2015-124 was issued, there were concerns by industry that the BLM was attempting to expand its management beyond its authorized jurisdiction over federal minerals to fee minerals. For example, in some instances, the language in approved CAs appeared to require the operator to account to the BLM not only for federal minerals but for all minerals, including fee. However, IM-2015-124 now limits the CA responsibilities of the BLM to federal minerals and the Bureau of Indian Affairs to tribal minerals. We note that many of the jurisdictional issues the IM attempts to clarify were called into question by the BLM’s recently proposed rule modifying Onshore Oil and Gas Order No. 3. For more information on these inconsistencies, see Western Energy Alliance’s comment letter on the proposed changes to Onshore Order No. 3:

http://cdn.westernenergyalliance.org/sites/default/files/FINAL%2010.9.15%20OO3%20comment%20letter.IPAA_.WEA_.pdf

In any event, until the changes proposed in Onshore Order No. 3 are made final, the components of IM-2015-124 will govern. Some of the notable changes to the CA process in IM-2015-124 include:

1. An operator may self-certify that the necessary signatures have been obtained (working interest owners and record title owners in the Federal and Indian leases). Rather than submit all of the necessary signatures, an operator can submit the certification statement, word for word from IM-2015-124, to the BLM with its CA, and the BLM will rely on that statement;

2. CA: Exhibit A – the operator may identify all non-Federal/non-Indian interests as a single tract;

3. CA: Exhibit B – An operator may aggregate all of the non-Federal/non-Indian interests into a single entry entitled “Other Interests,” with total aggregate acreages; and

4. CA: Exhibit B – Due to the revisions to non-Federal/non-Indian interests in Exhibits A and B, an operator does not need to provide the lease information for those interests.

The BLM’s goal is to have all CAs in place prior to the date of first production. In fact, the BLM has required applicants appearing before the Colorado Oil and Gas Conservation (“COGCC”) to include specific language in spacing orders that addresses CAs and timing for the operator to apply and comply with the CA process. The COGCC order language usually requires an operator to submit a CA concurrent with the filing of an APD or at least 90 days before the anticipated date of first production.

Any operators actively submitting CAs to the BLM should be well-versed in the changes addressed in IM-2015-124 affecting BLM Manual 3160-9 and be prepared to submit a CA prior to production of a well affecting Federal or Indian interests.

IM-2015-124 can be found at:  http://www.blm.gov/wo/st/en/info/regulations/Instruction_Memos_and_Bulletins/national_instruction/2015/IM_2015-124.html

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COLORADO OIL & GAS CONSERVATION LAW: THE BASICS -- A POP QUIZ

The Conservation Basics
A primary objective of the Colorado Oil & Gas Conservation Act (the “Act”) has always been conservation through prevention of waste and enforcement of efficient drilling and production practices. In other words, traditionally the Act served one important god – the resource conservation god.

Since 1994, however, the Act and those who work with it have had to serve an additional important god -- the god of public health, safety and welfare, and this one has become increasingly demanding.

Colorado mineral owners, explorers and producers, and those of us who represent them, all have a duty to make certain that the one god does not eclipse the other – to make certain that the conservation god does not become a second-class citizen in the world of oil & gas exploration, development and production in Colorado.

The Quiz – Test your knowledge of the basics
Which of the following statements are true, false, or close enough?
Question 1: The Rule of Capture…..
1. Allowed old Englishmen to pursue foxes off their land as long as the chase started on their land.
2. Came to this country on the Mayflower and helped Buffalo Bill make his name, but died with the buffalo long before oil or gas were discovered in Colorado.
3. Played a significant role in early oil & gas exploration and production in Colorado.
4. Was eliminated by passage of the Colorado Oil & Gas Conservation Act in 1951.
5. Survived passage of the original Colorado Oil & Gas Conservation Act, but was eroded by subsequent amendments to that Act.
6. Was effectively eliminated from Colorado common law by the 1994 amendments to the Colorado Oil & Gas Conservation Act
7. Has always been and remains a viable part of the Colorado common law applicable to oil & gas exploration and production.
8. With slight modification due to well location rules, applies to any well drilled in Colorado absent an applicable COGCC spacing order.
9. Says I’m entitled to produce and own whatever oil or gas I can find so long as I produce product to which I have a legal right from operations anywhere on lands that I own or have the right to be on.
Answer to Question 1: These statements are true except
• A-2 and A-4 are definitely false
• A-5 and A-6 are the difficult ones. These two are, in principle, also false, but the question is whether under COGCC practice, post 1994, the Rule of Capture has the same stature it used to have. More to the point, does it have the stature it should have if we are to serve the resource conservation god with the same fervor that the god of public health, safety and welfare is served.

Question 2: Waste
Under Colorado law, Waste of oil and gas in development and production operations is NOT which of the following?
1. Prohibited.
2. OK if necessary to protect public health, safety and welfare.
3. Any practice that leaves producible oil or gas in the ground.
4. The improper use or dissipation of reservoir energy.
5. Well spacing that is not sufficiently dense to drain the area drilled.
6. Drilling more than one well where one well can efficiently and economically do the job.
7. Tempered by market demand for produced product, i.e., it’s not waste if there’s no economic market.
Answer to Question 2: With the exceptions of #s 2 and 7, everything listed above is an accurate statement about Waste under the Act.
• 7 is easy to peg as a misstatement; the Act (unlike conservation laws in other states) specifically provides that market demand is not a factor in determining Waste.
• 2 is not so easy. It may be that in a post-1994 direct conflict the god of conservation loses the battle. It is at least food for thought by today’s COGCC practitioners, although maybe it’s not a practical issue because of modern technological advancements in production practices.

Question 3: What’s missing from the above list, i.e., what else does Colorado law categorize as waste?

Answer to Question 3: The abuse of correlative rights. The Act clearly defines abuse of correlative rights to be Waste, and that gets us to 4.

Question 4: True or False?
Protection of correlative rights means if you don’t own 100%...
1. You can still keep what you produce unless your cousin-in-law is the mineral cotenant.
2. You have to account retroactively to the other owners for their share, regardless of whether they participated in the cost of production.
3. You can still keep it all if you get there first because you’re protected by the Rule of Capture.
4. Each owner and producer in a common pool or source of supply of oil and gas is to have an equal opportunity to obtain and produce its just and equitable share of the oil and gas underlying such pool or source of supply.
Answer to Question 4: Statement 1 is definitely false, and Statement 4 is definitely true. However, the answers to Statements 2 and 3 are more challenging. Statement 2 is incorrect because the Act does not require backwards accounting at least for would-be participants who had (reasonable) notice of the drilling and production activity and who elected not to, or failed to, participate. For that reason Statement 3 is arguably correct, at least under the right circumstances. The Rule of Capture is still alive in Colorado, as long as each mineral owner had the same opportunity to produce/participate in production. This is really about the conservation god rewarding the risk-taker and is what is behind the force pooling provisions of the Act which have the effect of penalizing the non-risk taker.

Conclusion
The issues explored above are not pedantic. Nor should they be seen to be the atavistic ramblings of an ancient who worked closely with the COGCC in the old days (before 1994). These three basic concepts -- The Rule of Capture, Waste and Protection of Correlative Rights – remain essential to proper conservation of a waning resource. They are grounded in a good scientific and economic understanding of how to maximize oil and gas production while maintaining efficiency.
The irony is that serving this conservation god does not necessarily mean conflict with the duty to serve the god of public health, safety and welfare. Good resource conservation and production efficiency serve both gods. These practices not only incentivize the production of more product at less cost, they also serve to minimize surface and environmental impact in the process.

So, the message continues to be the same – oil and gas conservation basics are important for all of us involved in the Colorado oil and gas industry to understand and apply.

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Summary of The Colorado Oil and Gas Task Force Final Report

The Colorado Oil and Gas Task Force submitted its Final Report on February 27, 2015 making nine recommendations to the Governor that received two-thirds of the vote of the Task Force members as required by Executive Order 2014-005 to constitute recommendations of the Task Force.

1. Collaboration of local governments, the COGCC and Operators relative to oil and gas locations and urban planning.

    The Task force recommended that the COGCC should initiate rule-making to define and adopt a process of enhancing local government participation during the COGCC application for Permit to Drill process concerning locations of “Large Scale” oil and gas facilities in “Urban Mitigation Areas.” The recommendation contemplates giving local governments an opportunity to address location of right-of-way for pipelines, facility consolidation, access routes and mitigation measures within an Urban Mitigation Area and would require operators to consult with the local government. Operators would be required to indicate whether such consultation has taken place when submitting Form 2A, Oil and Gas Location Assessment, and to state whether there has been local government approval. A local government’s request concerning location should be based on an established set of reasonable standards or criteria. COGCC staff and local government liaison would be charged with convening meetings to consider alternative locations and encourage locations that consider distances between building units and/or high occupancy units. If a compromise cannot be reached, the Operator may offer to engage in mediation with the local government which process shall conclude within 45 days. If no agreement is reached, the COGCC will conduct a hearing and hear evidence from the local government, the Operator and the staff before the Oil and Gas Location Assessment may be approved.

2. Including future oil and gas drilling and production facilities in existing local comprehensive planning processes.

   The Task Force recommended that operators register with Local Government Designees (LGD), and upon the request of the LGD, submit operational information for purpose of incorporating potential oil and gas development into local comprehensive plans. The Operator would be required to provide the LGD a good faith estimate of the number of wells that the operator intends to drill in the next five years in the municipal jurisdiction, corresponding to the operator’s internal analysis of reserves classified as “proved undeveloped” for SEC reporting purposes, along with a map showing the location of the operator’s existing well sites and related production facilities, sites for which operator has made application for COGCC permits, and sites identified for development on the operator’s current drilling schedule for which it has not yet made application for COGCC permits. The plan may be changed at the operator’s sole discretion and shall be updated by the operator if materially altered. The Local Government Planning Department will prepare a comprehensive map of potential future drilling and production sites within its jurisdiction, and identify sites that it considers compatible with the current and planned future uses of the area, sites where minor issues may need to be resolved by negotiation, and sites where it anticipates significant conflicts with current and planned future uses as indicated in the Comprehensive Plan.

3. Enhancing Local Government Liaison and Local Government Designee Roles and Functions.

    The Task Force recommends the COGCC should undertake a review that would include outreach to local governments to better understand barriers to greater utilization of the LGD/LGL functions, enhancing education to local governments on how to engage the LGD/LGL process, expanding on LGD comment period on APDS and appropriate Conditions of Approval to 60 days, offering financial and other support to train LGDs, and apply for Energy and Mineral Impact Assistance Funds to assist local governments with the creation of LCD positions.

4. Increase COGCC full time staff, including inspectors, field operations, enforcement and permitting staff.

    The Task Force recommend the General Assembly should authorize COGCC to hire 12 additional full time employees to inspect wells, conduct environmental investigations and response actions, conduct intake of and track citizen complains, process permit applications, and perform data analysis to respond to data and information requests from the legislature, media, public, industry, and other stakeholders.

5. CDPHE staffing, a health complaint line, a human health risk assessment and a mobile air quality monitoring program.

    The Task Force supports the Colorado Department of Public Health and Environment’s (CDPHE) request to the General Assembly to convert five temporary employees to permanent status to continue its air monitoring and leak detection activities and to establish a health complaint and information line. The Task Force also encourages CDPE to seek funding for mobile air quality monitoring unit and funding to conduct a human health risk assessment in compliance with current scientific standards.

6. Creation of an Oil and Gas Information Clearinghouse

    The Task Force recommends the establishment of a clearinghouse on a user-friendly interactive website to communicate information regarding Colorado’s oil and gas industry that would be available to local governments, the general public, oil and gas operators and other interested persons, including information on permit review and consultation, drilling and completion practices, testing and monitoring practices, regulatory enforcement, repository of memorandums of understanding, and impact studies and analysis.

7. Recommendation to reduce truck traffic for oil and gas activities.

    The Task Force recommends that COGCC and CDOT take the lead to convene a working group to investigate any and all steps that can and should be taken by government and industry to reduce the use of large trucks and trailers in oil and gas activities.

8. Recommendation regarding air quality rules.

    The Task Force recommends the General Assembly continue the new state air quality regulations for oil and gas methane.

9. Compliance Assistance Program

    The Task Force recommends the COGCC should implement and emphasize a compliance assistance program to help operators comply with operating rules and policies, and to assure that inspectors are enforcing those rules and policies in a consistent manner.

The Minority Report. Other proposals considered but not receiving the two-thirds approval necessary to become recommendations of the Task Force are encompassed in the minority report, and include recommendations (1) to require residential drilling plans; (2) to coordinate Local government land use processes with issuance of state oil and gas permits; (3) to create a statutory oil and gas dispute resolution panel ; (4) to acknowledge local government siting authority; (5) to change standing and notice requirements (6) to allow local governments to assess fees to fund inspections and monitoring of the oil and gas industry; (7) to facilitate planning for oil and gas development and provide flexibility in locating wells; (8) to amend COGCC Rules and the Oil and Gas Conservation Act to acknowledge local government regulatory authority; (9) to enact legislation to improve the operational conflict preemption standard; (10) to clarify the balanced responsibilities of the Commission and acknowledge the important role of local government land use regulation; (11) to encourage the use of memoranda of understandings; (12) to amend comprehensive drilling plan rules to harmonize state and local authority; (13) to expand the statutory procedure for notification and consultation with mineral owners/lessees when significant surface development projects are being prepared for local land use approval; (14) to conduct a review of the negative health impacts from fracking and drilling, (15) to provide adequate compensation to affected surface owners; (16) to provide public disclosures of chemicals used in oil and gas operations and removing trade secret protections; (17) to require disclosure of hydraulic fracturing process; (18) to allow counties to regulate noise associated with oil and gas operations and to amend existing rules regulating noise; (19) to require down-gradient groundwater water quality and soil monitoring for oil and gas processing facilities; and (20) to delay further rulemaking in subject areas recently studied or which new rules have already been adopted.

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