Look for the down-ballot races and initiatives. It won’t take long. After the choices for White House and Congress, decisions when you vote will be exclusively devoted to state and local matters in a list seemingly as long as, oh, the Atlantic Coast Pipeline.

As far as the oil and gas industry is concerned, much of the real action of concern takes place in races at the state, county and even municipal level.

Which candidate is elected president matters a great deal, but the long-suffering Constitution pipeline project didn’t fail because of a lack of support at the federal level. The project was approved by the Federal Energy Regulatory Commission in 2014, during the Obama administration, and the Trump administration has been a champion of all things fossil fuel.

But the state of New York refused to issue needed water quality permits and, after years of court battles and a price tag that grew from $700 million to almost $1 billion, principal partner The Williams Cos. pulled the plug on the 124-mile pipe in late February.

“When you talk about environmental law and climate change, the states have always had a large role because they take primacy to implement the federal statutes as well as the state statutes,” Jean Mosites, shareholder in the Pittsburgh-based Babst Calland law firm, told Hart Energy in a video interview. “Looking at the real local level, there are task forces, there are climate plans, there are initiatives for electric vehicles and renewables and building codes—whether you can or cannot have gas hookup in new construction. A lot of interesting things going on and it’s certainly not just federal.”

Game-changer in Colorado

New York, where hydraulic fracturing is banned, is mostly a headache for midstream operators. Colorado, however, is a major producing state undergoing a significant legislative shift on oil and gas activity.

In April 2019, Gov. Jared Polis signed the landmark SB-181 legislation, which changed the role of the Colorado Oil and Gas Conservation Commission (COGCC) from a body that fosters oil and gas development to one that regulates it. The commission now consists of professionals representing oil and gas, environmental protection, land use and public health, and a chairman. The law also prioritized the protection of public health, safety and welfare, and the environment, including wildlife, over the production and development of oil and gas.

Read: Ban Fracking? 2020 Election Issues for Oil and Gas Execs to Watch

The second major shift is that SB-181 broadens local government authority over siting and other surface impacts of oil and gas. This is a game-changer—past decisions from the Colorado Supreme Court had restricted local authority when it conflicted with COGCC’s statewide regulation regarding surface impacts.

Among the other aspects of SB-181:

  • The commission must enact rules to reduce emissions from oil and gas facilities;
  • Safety requirements for flowlines must be upgraded;
  • Wellbore integrity rules must be strengthened;
  • Rules must protect groundwater;
  • COGCC must quantify the cumulative impacts in permitting;
  • It must engage in alternative site analysis in urban areas; and
  • It must strengthen financial assurance requirements.

The progress of the new commission mirrors that of many endeavors in 2020. It begins with “We were going to…” and ends with “but COVID got in the way.” Unable to conduct meetings in public soon after the pandemic struck, the commission of volunteers was forced to delay hearings and decisions. The governor did not appoint professional commissioners until late June, and they are still engaged in a massive rulemaking process related to its “mission change.” At the moment, it is too early to reach conclusions on the total impact of SB-181.

“The hope is, with the professionalization of the commission, you’ll have people dedicated full-time to all the issues presented by SB-181 and the evolving conditions, as opposed to a sort of volunteer commission that can’t devote their full attention to those issues,” Fred Yarger, partner in Gibson Dunn’s Denver office, told Hart Energy. “But the mission really was set by SB-181 and the question is how that evolves over time and how that gets implemented, and we’re still really in the middle of it.”

During the bill’s debate in the legislature, questions were raised about whether the oil and gas industry would have sufficient representation on the commission. Yarger, who served as Colorado’s solicitor general before joining Gibson Dunn, noted that, from the government’s standpoint, COGCC staff experts will educate and inform the commissioners. Groups like the American Petroleum Institute and the Colorado Oil and Gas Association will also have input on regulatory issues.

“I think the question is, are they going to get the right information and is that going to translate into regulatory policy that makes sense to the industry, that’s workable, but that also meets the goals of SB-181,” he said. “I don’t know if you can answer the question—‘Is this the right model?’—until we see the result of it. I think that’s going to take a year or so to understand what this means.”

Wary State of Mind

Kathleen Sgamma, president of the Denver-based Western Energy Alliance, already has a sense of how the measure will play out.

“The Polis administration is indeed trying to over-regulate oil and natural gas virtually out of existence except for a few large companies,” she told Hart Energy, adding that she expects that intention to be reflected in COGCC rulemakings in the next year or two. “The result is very bad for Colorado’s economy and moving forward with oil and gas development in the state.”

Sgamma is not alone in her unease over the new law. On the opposite end of the spectrum, the environmental group Colorado Rising sought to place six initiatives on the November ballot requiring oil and gas operations to be set at least 2,500 feet from occupied structures and other sensitive areas. The initiatives proposed were identical to Proposition 112, which failed in 2018. The effort fizzled, however, when the pandemic forced the group to halt its petition drive.

Two other initiatives, 284 and 304, were also proposed by Protect Colorado, a political group backed by oil and gas companies. Those proposals would have stopped local governments from limiting natural gas hookups in new buildings and required fiscal impact statements to be attached to future ballot initiatives.

Then in July, Polis announced a cease-fire of sorts. Protect Colorado and three environmental groups agreed to not add ballot initiatives through 2022 and allow SB-181 an opportunity to work.

Concerns linger, though. During the Colorado Oil and Gas Association’s Energy Summit on Aug. 18-19, one of the questions to the SB-181 panel read: “It sounds like 181 has left some legal questions in limbo. Should industry have filed some type of lawsuit already, or what might happen, legally, after the rulemakings are done?”

Panelists urged patience, noting that it would be premature to file a pre-emptive lawsuit contesting rules that don’t yet exist.

“I certainly wouldn’t want to speak for industry on this one but it seems to me that it would be best to wait and see what happens with the COGCC rules,” said Elizabeth Paranhos, an environmental attorney. “They may be quite happy with where we end up after this rulemaking is over.”

Yarger said he was encouraged by the commission’s recent adoption of a mill levy increase based on industry input. The levy is assessed on the market value oil and gas sold in the state, and the funds cover about two-thirds of the commission’s budget. The previous rate had been 1.1 mills and COGCC sought to boost the rate to 1.7.

“It ended up at 1.5 because that was the amount, given slightly increased oil and gas prices, that could support the commission’s operations,” he said. “It looks like what’s going on is what you would hope: a dialogue between oil and gas interests, and the commission and other stakeholders. They’re trying to come to reasonable decisions about what the policy is going to be.”

Beau Stark, partner-in-charge of Gibson Dunn’s Denver office, detected relief among the firm’s energy clients.

“There may be industry players who feel differently about this, but the clients that we deal with are really not that interested in trying to create legislation or regulation through ballot initiatives,” he told Hart Energy. “I don’t think they believe that’s the right way to regulate a very complex and technical industry.”

Rules are Everywhere

As complex as the Colorado energy regulatory ecosystem might be, it is bound by the borders of the state. Elsewhere in the country, oil and gas players must wrestle with varied compliance structures.

“The action at the state level has been … inconsistent because of resources and interest levels,” Mosites said. “In Pennsylvania, though, Gov. (Tom) Wolf has had an agenda to address greenhouse gas, to address methane emissions, to propose cap-and-trade, to join the Regional Greenhouse Gas Initiative, and all of those have been going steady and strong in Pennsylvania despite the pandemic. So there really is no slowdown here on those types of things.”

The Regional Greenhouse Gas Initiative is a 10-state program to cap and reduce CO2 emissions from power plants. Another regional group, the Transportation & Climate Initiative, consists of 12 Northeast and mid-Atlantic states and the District of Columbia dedicated to advancing electric vehicles and reducing carbon emissions in transportation.

“There are a lot of initiatives at the state level that are pretty important because they will affect, on the ground, the industries and the activities in the states,” she said.

There is only one state ballot initiative, Ballot Measure 1 in Alaska, that will be contested in November. Also known as the Fair Share Act, the initiative proposes a 10% tax on crude oil produced when the price is less than $50 per barrel (bbl). When the price is $70/bbl and higher, the rate would rise to 15%.

Supporters contend that producers in the North Slope oil fields of Alpine, Kuparuk and Prudhoe Bay are subsidized by up to $2 billion per year in tax breaks and that Alaskans are not sharing in the wealth derived from the state’s production.

Opponents, which include the Alaska Oil and Gas Association, ConocoPhillips Alaska and Exxon Mobil, argue that the taxes would discourage investment and innovation, and possibly convince companies to move operations to the Lower 48.

Predictability is Key

“If you look at what states were doing before and after the pandemic (hit), it did have an effect,” Mosites said. “Some of them had executive orders or created task forces or adopted legislation a year or two ago and then it slowed down this year because of the effect of the shutdowns.”

And those slowdowns translated into something of a breather for those in the industry who navigate the regulatory environment.

“One thing that’s important to understand is, given where commodity prices are and how companies were structured, people’s focus right now is on making sure they have the right capital structure, that they can be sustainable just as a producer,” Stark said. “The pressure to get permits lined up so that you have a good inventory to go out and drill is significantly lower than it would be, absent COVID and really, more absent the economic impacts of COVID in the fall-off in demand.”

The impatience the oil and gas industry typically displays while waiting for clarity in regulations has been tempered by the need to defer drilling plans, he said. Those plans are still being processed and pursued, but the urgency is on hold.

“Frankly, the last thing you want to do is go get a permit that has a limited shelf life and you’re not sure whether you’re going to go drill the next few years,” Stark said. “So, in some ways, it’s taken the pressure off.”

The key for the industry, Yarger said, is predictability and understanding what the rules are.

“A lot of the rules and the focus, obviously, of SB-181 is environmental and public health protection,” he said. “I think the more important thing is you understand them, they’re predictable, and they’re easy to build into your thinking and also to communicate to the public’s understanding of exactly what’s going on.”