Colorado Passes Anti-Fossil Fuel Legislation; Which Way Will Texas Break?

In Beware the Ides of March - Will Colorado Effectively Ban Gas and Oil Development? and This Land is My Land - Texas Landowner Resistance to Permian Pipeline Projects , we discussed pending legislation in Colorado and Texas that is opposed by the fossil fuel industry. The Colorado legislation, which focused principally on providing local governments with new authority to regulate oil and gas in the upstream market, was amended and later signed into law. While the impact of the new law is still being sorted out, one provision, which involves the creation of new criteria for determining whether a drilling permit requires additional analysis, is due to be finalized tomorrow, May 16, and will offer some initial insight into the ultimate impact of the law.

The Texas legislation was driven by the need to reform eminent domain laws, given the recent groundswell of landowner concerns over the use of eminent domain by pipeline companies to build the historic levels of capacity needed to bring production to market. This legislation was also amended before it was approved by the Texas Senate, but will die in the Texas House if it is not approved by the end of this month. Meanwhile, a group of plaintiffs, including a county, a city, and a number of individual landowners have filed a lawsuit against the Texas Railroad Commission (TRRC) and Kinder Morgan opposing the use of eminent domain by Kinder Morgan’s Permian Highway project. The issues have yet to be adjudicated, but it appears unlikely that the plaintiffs will prevail.

Today, we provide an update on the proposed legislation and discuss how it may impact the oil and gas industry in these two states that have traditionally been pro-energy infrastructure development.

Colorado

Some of the key provisions that were included in the law that was signed by Governor Polis on April 16 included the following:

Revising the mandate of the Colorado Oil and Gas Commission (COGCC) from an obligation to “foster” the development of oil and gas resources to an obligation to “regulate” such development;
Granting local governments new power to regulate oil and gas development, including enhanced authority over surface activities, which may induce some local governments to attempt to ban all such development;
Changing the makeup of the COGCC by reducing the number of commissioners from nine to seven, five of whom will be full time, and reducing from three to one the number of members who have experience in the oil and gas industry;
Requiring, by May 16, the COGCC director to establish “objective” criteria that will be used to determine whether a proposed drilling permit application requires additional analysis to ensure it meets the mission of the legislation;
Amending the state’s mandatory pooling rules to require the consent of the owners of 45% of the relevant mineral interests, and prohibiting producers from using the surface land of a non-consenting owner for operations; and
Clarifying that “waste” under the statute does not include oil and gas left in the ground to the extent deemed necessary to protect public health, safety and welfare, the environment or wildlife resources.

Key Actions By the COGCC

Many in the industry had argued that an early version of the bill would have allowed the COGCC to establish a moratorium on drilling that could have lasted for months as it worked on the new regulations required by the bill. The COGCC has made it clear, though, that the final bill does not authorize any blanket hold or moratorium on pending or future well drilling permits. However, the director of the COGCC has issued a draft of the “objective criteria” that will be applied to determine whether a drilling permit application “requires additional analysis.”

This proposed list of objective criteria will require a review of any permit application that meets one of approximately 20 different criteria, including all applications for drilling within 1,500 feet of a residence, or within 2,000 feet of a school’s property line, or within 1,500 feet of a municipal boundary, or in certain sensitive areas, such as a flood plain or a sensitive water source area.

The COGCC has also issued a guidance manual for production companies that requires them to provide evidence for any pending or future drilling permits that indicates whether the applicant has applied for a siting permit from the local government, or evidence that the local government has not issued siting regulations. If the local government has a siting rule, the COGCC will not act on that application until it knows the disposition of that local permit application.

Weld County is Still Key

As we indicated in Beware the Ides of March - Will Colorado Effectively Ban Gas and Oil Development?, the key county for production in the state is Weld County. As seen below, the number of pending drilling applications in Weld far exceeds the number pending in the second and third most active counties.

On the day Governor Polis signed the bill, the County Commissioners of Weld County issued an open letter “to our oil and gas families” stating that “we have your back, and we will do all we can to minimize the negative impacts this new law will have on you.” That is perhaps why the reaction by the industry has not been as severe as some were anticipating. As reported in the press, the top four oil and gas companies remained decidedly optimistic as represented by their public statements:

PDC Energy Inc. -- “We plan to invest around half a billion dollars in Weld County in 2019, with a similar level of activity expected in 2020.”
Noble Energy: “We will continue working closely with Weld County . . . and do not foresee any substantive changes to this development plan.”
Extraction Oil & Gas: “For now, nothing has changed in the way we look at Colorado.”
Anadarko: “We remain confident in the long-term value of our acreage position.”

Texas

The fight in Texas isn’t over the exploration and production segment of the industry, but over the use of eminent domain by pipeline companies to build the increased pipeline capacity to bring the production to market. As we discussed in our prior Insights, a bill, SB 421, introduced by a state senator representing the Hill Country of Texas would have required pipelines to:

Participate in a public meeting held by the local court, presumably in every county through which the pipeline runs;
Use a specific form to be prepared by the Attorney General for the acquisition of the easement;
Pay additional compensation of up to 35% if the initial offer is substantially below the final award in the condemnation action.

The Texas Pipeline Association has stated that the original draft of SB 421 would wreak havoc and “create one of the most onerous processes to constructing oil and gas infrastructures in the nation.”

Not surprisingly, given the importance of the oil and gas industry in Texas, the bill was substantially modified as it progressed through the State Senate, and the form in which it was finally passed by the Senate contained none of these more onerous provisions. Instead, the bill as passed required certain disclosures, mandated certain provisions in easement documents and required a private meeting for landowners. Despite being substantially modified in the Senate, the bill has been stuck in a committee in the State House since it was referred to that committee on April 8, 2019. The legislation would need to pass by the end of this month, when the legislature adjourns, but there is substantial doubt as to whether it will be voted on by that time -- which would mean it would die in the committee.

Part of the problem may be that Hays County, unlike some other counties in Texas, is simply not used to having the infrastructure necessary to support the oil and gas industry imposed on them. This simple map from the Texas Railroad Commission that shows the difference in the number of pipelines in Hays County versus Nueces County demonstrates that the burden of infrastructure is not borne equally across Texas:

Source: Texas Railroad Commission

Perhaps because of the bill’s lack of movement in the legislature, Hays County has joined with the City of Kyle and a coalition of landowners to file a lawsuit against one of the projects that was generating opposition, Kinder Morgan’s Permian Highway. As we reported in This Land is My Land - Texas Landowner Resistance to Permian Pipeline Projects, Kinder Morgan’s use of its eminent domain authority in its Gulf Coast Express project has been more robust than that for a similar pipeline, and so it could be that which is underlying the concerns in Hays County with respect to Kinder Morgan’s second project.

The lawsuit filed in late April is against the TRRC, Permian Highway Pipeline, LLC and Kinder Morgan Texas Pipeline, LLC. The plaintiffs are asking the court to impose a temporary and permanent injunction against the Permian Highway project’s exercise of eminent domain authority until the TRRC adopts a legally sufficient process for the review and approval of the pipeline’s route, including the consideration of viable alternatives.

The lawsuit alleges that the TRRC has implemented “toothless rules” that have no guiding standards, which allows pipelines to obtain the necessary permits to trigger the right to eminent domain, in violation, assertedly, of the Texas Constitution. As argued by the plaintiffs, the Texas Constitution requires there to be enforceable standards before there can be a delegation of the legislative authority to exercise eminent domain.

Not surprisingly, Kinder Morgan has moved to dismiss the entire proceeding.

If the plaintiffs’ arguments were to succeed, the entire Texas pipeline routing review process would need to be reformed and would put the TRRC in a position similar to that of FERC, which is required to consider the appropriateness of a proposed route, including the consideration of potential alternatives. Basically, the suit asks that the TRRC establish a process that is fair, transparent and allows the community to have a say.

To date, there has been no stay imposed in the lawsuit and it would be surprising for a court to find that the TRRC has authority over the siting of a pipeline in Texas. So for now, the suit appears to be a minimal risk to pipelines in Texas -- but it bears watching until it is dismissed.

Insights Coming Soon

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Oil pipeline rates market based rates vs. cost of service