Gas Production Under Review -- Even In States With Traditionally Favorable Views
November 13, 2019
In Colorado Passes Anti-Fossil Fuel Legislation; Which Way Will Texas Break? we discussed some of the headwinds natural gas production and pipelines were facing in Colorado and Texas. Today we provide an update on some of those issues, but also look at the review of methane emissions being conducted by New Mexico at the direction of its Democratic Governor. The bottom line is that producers face uncertainty as both New Mexico and Colorado review regulations that will impact the industry. In Texas, the Texas Railroad Commission (TRRC) seems to be siding with producers over pipelines in fights about flaring, and there seems to be opposition by the public to pipelines’ use of eminent domain, at least in some counties. 

While none of these issues have brought the industry to a stop in any of these traditionally gas-friendly states, the environment is getting harder in all three and the following bears watching in each state:

  • Colorado: Development of regulations required by legislation that reoriented the role of the primary state regulator.

  • Texas: Judicial appeal of TRRC decision adverse to the pipeline industry.

  • New Mexico: Development of methane emissions reduction strategies pursuant to the Governor’s executive order.

Colorado

Colorado’s governor signed a bill on April 16, 2019 that required a reorganization of the Colorado Oil and Gas Commission (COGCC) and a reorientation of the COGCC from its traditional role of “fostering” the development of oil and gas resources to an obligation to “regulate” such development. The first step required in that statute was for the COGCC to issue objective criteria by May 16 that would be used to determine whether a proposed drilling permit application requires additional analysis to ensure it meets the mission of the legislation. 

The issuance of these criteria on May 16 led to a brief 15-day interruption in the usual processing of the drilling permits, but the issuance of the permits resumed on May 31. Below we set forth the number and timing for permits issued in the five months leading up to May 16 and the five months since May 31. As can be seen, there has been a substantial reduction in the number of permits being issued, but not in the average time taken for the permits to be issued before and after the brief pause caused by the new regulation.
The statute also granted enhanced authority over land use to local governments, so we also compare below the counties in which the drilling permits were granted before and after May 16. As can be seen, there has not been much of an impact on the geographical distribution, as Weld County remains by far the county in which most of the permits are granted.  
In addition to establishing the objective criteria by May 16, the COGGC is undertaking four separate rulemaking proceedings. The first one concerning flowlines is scheduled for hearings starting next week, with the other three scheduled for hearings in February, March and April of next year. 

Texas

The last time we discussed the issues in Texas we discussed statutory proposals that would have limited the ability of pipelines to use eminent domain. These proposals arose from voter pushback against what was perceived as the cavalier use of the eminent domain right pipelines are granted under Texas law with very limited oversight about a project’s route or need. 

We have been collecting easement information for our monthly Permian Edge report and have accumulated information about the percentage of easements acquired through both voluntary transactions and the use of eminent domain. Across the over 13,000 agreements over 14 projects for which we have gathered easement records, approximately 15% of those interests were obtained through eminent domain. However, the use of eminent domain varies widely from county to county, with some counties requiring no use and others requiring 75% of the agreements to be obtained through the use of eminent domain. The map below gathers this data across all of the projects and presents the percentage that was obtained with the help of eminent domain.
While pipelines are facing opposition from the public about eminent domain in some counties, they are also facing opposition from the TRRC about whether a production well may flare the gas that is associated with crude production rather than capturing that gas and transporting it through a connected gathering system. We previously discussed this problem in A Tale of Two Basins - Permian and Marcellus Pipeline Buildout , where we discussed the potential impact of a fight between a Williams subsidiary and EXCO Operating Company. As we discussed there, the decision by the TRRC to allow flaring in such situations may suppress the need for additional pipeline capacity from the Permian, because the TRRC has separated the economics of the gas stream from the economics of the crude stream. Thus, the TRRC now allows flaring even when a well is connected to a gathering system if the gathering fees offered by the gathering company exceed the expected revenue from selling the gas.

In a companion case, also between Williams and EXCO, the TRRC on October 22 again approved EXCO’s flaring request, over Chairman Christian’s dissent. At that same open meeting, the TRRC also considered Williams’s rehearing request from the prior order. In a unanimous vote, the TRRC denied the rehearing request. Commissioner Sitton, who is up for reelection in 2020, not only found Williams’s rehearing arguments to be unpersuasive but seemed to be offended by the thought that it would encourage further flaring, despite having just approved additional flaring in almost identical circumstances. While Commissioner Sitton may be offended by Williams’s argument, it seems Williams is unlikely to give up the fight, as Chairman Christian voted to deny rehearing so that Williams could appeal the decision to the courts. Williams has until late next week to appeal. If Williams appeals to the courts, any decision by the courts will be significant because it will either drive the market towards reducing flaring or encourage flaring even more. Perhaps Commissioner Sitton is feeling the heat of next year’s election since one of the Democrats running to replace him says that her whole campaign will be focused on flaring. In her announcement video, just a week before the open meeting, she said that the state "might as well be burning cash" and charged Sitton with refusing to enforce laws to curtail the waste from flaring.

New Mexico

We have not previously discussed the regulatory changes going on in New Mexico, which has recently become a major producer of oil and gas. As shown on the chart below, the crude production from the state began to skyrocket in 2012. 
Source: New Mexico Energy, Minerals and Natural Resources Department

Governor Michelle Lujan Grisham took office at the beginning of 2019 and one of her first acts was to issue an executive order on January 29 calling for the Energy, Minerals and Natural Resources Department and the New Mexico Environmental Department to jointly develop, as soon as practicable, a statewide, enforceable regulatory framework to secure reductions in oil and gas sector methane emissions. However, rather than relying exclusively on the advice of groups that may oppose further development of the natural resources, the two agencies created a Methane Advisory Panel (MAP) to dive into technical issues related to capturing methane. 

The MAP process is designed to create a technical background document related to specific oil and natural gas equipment and processes for consideration as they move forward with an enforceable methane regulatory strategy. The MAP consists of representatives from non-governmental organizations such as the Western Environmental Law Center, Environmental Defense Fund, Sierra Club and Earthworks, but also includes representatives from major industry players such as Chevron, Devon, EOG, Marathon Oil, Oxy, XTO and ConocoPhillips. 

The MAP is to complete its work this year and then the regulation writing process is scheduled to take place in 2020. So while New Mexico is working to limit the methane emissions from the entire oil and gas supply chain, the industry has a seat at the table in crafting those rules so that they are achievable. This collaborative approach is almost certain to be watched by North Dakota and Texas to see if it can produce greater reductions in methane emissions and flaring than those two states have been able to achieve. 
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