New financial rules could bring major reform to Colorado oil and gas industry

State regulators will begin deliberations this week on a rule change that could fundamentally rewrite the financial bargain that Colorado strikes with oil and gas companies that seek to drill within its borders, potentially altering the course of the industry’s economic future amid rising uncertainty and concern about fossil-fuel-driven climate change.

The latest phase of the Colorado Oil and Gas Conservation Commission’s rulemaking on financial assurance, also known as bonding, kicked off with a round of public comment last week. More than 160 members of the public weighed in over two days of testimony.

Mandated by a 2019 Colorado law that dramatically overhauled the state’s drilling policies, including the makeup of the COGCC itself, the rulemaking comes after repeated delays and three different drafts of new rules proposed by commission staff in 2020.

“We’ve been digging around the edges of the financial assurance rulemaking for over a year now,” COGCC chair Jeff Robbins said at a Jan. 20 hearing. “We appreciate all the attention, and all of the dedicated work from everybody.”

Financial assurances are the security deposits that oil and gas operators provide to cover potential cleanup costs in the event that a drilling site or other facility is abandoned, or “orphaned” to the state, typically as a result of bankruptcy.

Environmental groups have long criticized the amounts required by current COGCC regulations as inadequate. So-called “blanket bonds,” for example, allow oil and gas operators with hundreds of wells statewide to cover their portfolio with a bond of just $100,000. That’s despite the fact that the cost to “plug” and reclaim hundreds of wells — a process that drastically reduces the potential for safety or environmental hazards — would run into the tens of millions.

Ahead of the COGCC’s rulemaking, which will unfold over the next several weeks, a coalition of environmental and community groups has launched a TV ad calling on Gov. Jared Polis’ administration to act decisively to reduce the risks of “thousands” of additional orphaned wells.

“If the state doesn’t step in now, we’ll be left footing the bill,” warns the ad from Protect Colorado Taxpayers, a group that includes the Sierra Club, ProgressNow Colorado and Colorado Rising. “Gov. Polis, we’re counting on your administration. Please, stand up for families and taxpayers before it’s too late.”

Industry’s long-term future at issue

Nearly three years ago, Colorado lawmakers gave the COGCC a lengthy to-do list with the passage of Senate Bill 19-181, instructing the agency to update its rules on everything from permitting procedures to wildlife protections. It also mandated new bonding rules to “require every operator to provide assurance that it is financially capable of fulfilling every obligation imposed” by the new law.

More than any previous rulemaking under SB-181, the extended debate over new financial assurance rules has put a spotlight on sharp disagreements over the long-term future of the oil and gas business.

Industry groups have consistently downplayed the need for any significant changes to bonding requirements at all. They point to Colorado’s relatively low number of orphaned wells — 236 as of this year, compared to thousands in states like Texas and Pennsylvania — as proof that the state’s requirements are adequate.

“We have less than three hundred (orphaned) wells, out of 50,000 (active) wells,” said resident Chris Nelson during the COGCC’s Jan. 20 public comment period. “The bonds and funds to take care of these orphaned wells is well-funded. I don’t see any point in raising the cost and complexity of government control of this industry that is well-controlled already.”

But supporters of stronger rules say the industry’s arguments ignore the growing relevance of climate change and the global transition to clean energy. They want the COGCC to reduce the risks of greenhouse gas emissions, including methane leaks from abandoned wells, and to prepare for the industry to enter a sustained decline as the world shifts away from fossil fuels in the coming decades.

“This is a task on par with the Marshall Plan and the Manhattan Project, in its complexity and in its necessity,” Greg Poschman, a Pitkin County commissioner, told the COGCC. “I recognize these rules will bring financial challenges, but we cannot avoid working toward realistic and concrete solutions.”

COGCC staff released a third draft of their proposed rule changes last month, and are expected to release a fourth draft as the rulemaking enters its final stages over the next several weeks.

The agency’s proposals have largely revolved around increased bonding requirements for certain wells that are deemed to be at higher risk of abandonment. But the final details are yet to be determined, and much will depend on key criteria and technical definitions of terms like “single well financial assurance,” which, under the latest proposal, spells out certain conditions in which a well must be covered at a higher cost.

“You do not have an enviable task deciding how best to define this,” COGCC executive director Julie Murphy told commissioners, referring to the proposed bonding amounts. “I think that everybody agrees it needs to be defined, but how to do it has been a little bit elusive.”

More than 103 parties, ranging from environmental organizations and industry lobbyists to local governments and agricultural groups, are signed up to give formal presentations to the commission on the new rules in the coming weeks. Robbins, who led the COGCC as director before being appointed commission chair by Polis in 2020, noted that except for minor changes approved in 2008, the new rules represent the first major reform of Colorado’s bonding requirements in nearly 30 years.

“The last time we overhauled our financial assurance rules pursuant to legislation was following the 1994 legislative (session),” Robbins said. “We have a great deal of attention on this rulemaking, which is excellent. It’s a great path for Colorado to have a lot of informed people excited about the work that we going to undertake.”