Energy

I was not trying to embarrass the Governor.  It was not meant to be a trick question.  Rather, it was a simple question that most politicians would shrug off with a predetermined in-the-can answer.

The scene was the Colorado Oil and Gas Association’s Annual Luncheon held last November at the Brown Palace.  After a brief 15 minute talk, Gov. Ritter was brave enough to solicit questions from what he knew was a less than adoring audience.  As he scanned the room of over 500 people, no one raised their hand.  So I did, I asked the question. 

“Governor, do you trust the Colorado oil and gas industry?”  In what was later best described as a “pregnant pause-plus-nine months” the Governor froze, obviously weighing his answer.  During his ten-second pause, a State Representative at my table growled loud enough for the neighboring tables to hear, “There’s your answer, John.” An audible murmur grew throughout the audience.  In that brief pause, Governor Ritter’s attitude towards our industry became immediately self-evident to the packed ballroom.

Months later, the oil and gas industry is beginning to see the impact of the Governor’s attitude and how that attitude is mirrored in his appointees’ efforts and the efforts of the Democratic controlled State Legislature. 

A draft set of new oil and gas drilling regulations (160+ pages in length) were released just last week by the Colorado Oil and Gas Conservation Commission (COGCC).  (It should be noted that during the last fourteen years prior to this new 160 pages of regulations, the COGCC’s “word count” on rules has more than doubled.) The new draft regulations were promulgated in response to two bills passed during last year’s state legislative session.  Those bills required a change in the make-up of the COGCC and expanded the Commission’s authority to protect the public health, safety, welfare, wildlife and the environment.

Despite over fifty years of highly professional oversight and enforcement by the Colorado Oil and Gas Conservation Commission (COGCC) and its staff, the Democrats have apparently acquiesced to what some describe as a vocal minority. That vocal minority’s goal is to delay and/or stop the development of natural gas production in Colorado.
 
During the last half century, more than 70,000 oil and gas wells have been drilled in Colorado.  In that time less than two dozen wells have contaminated neighboring water wells.  Those problems were immediately addressed when identified.  Those problem wells represent a miniscule number when compared to the larger number of total oil and gas wells drilled.  Although allegations have been made that oil and gas drilling has had negative impacts on health, there has never been any conclusive evidence that supports that claim. That fact applies to Colorado and anywhere else in our nation.  But those facts are not important in a world governed by political perceptions.  In the virtual political dictatorship that we are currently living under in Colorado, Democrats know that they have the numbers in the State House, the Senate and the Governor’s office to pass whatever laws they wish regardless of their impact on our state and the nation’s economy.

If the new regulations are passed in their current form, they will enshrine in state law Gov. Ritter’s apparent mistrust for our industry, a mistrust that is mirrored by his political appointees.   This is an industry that contributes (according to a Colorado School of Mines study) approximately $23 billion per year to the state’s economy. 

One of the draft regulations could eliminate all drilling in the Piceance Basin of Colorado during a minimum of three months of the year.  With drilling rig demobilization and mobilization, this could amount to upwards of five months of the year when drilling rigs are not productive.  Imagine being told to furlough all of your employees and their equipment, i.e. drilling rigs, service rigs and service equipment for 30-40% of the year.

Last week several of the editorial pages in the state claimed that a “middle ground” had been reached between the environmentalist and the oil and gas companies on the draft regulations.  That claim is premature and inaccurate. 

Some early estimates of the impact of the proposed regulations foresee a potential 30-40% drop in the rig count. That is a company-killing decrease in efficiency and yet no cost benefit analysis has been applied to the proposed regulations.  That basic question whether the costs outweigh the stated or potential benefits has yet to be answered.  If in fact the state of Colorado experiences a 30% decline in the rig count, the state can expect a commensurate decrease in the oil and gas industry’s contribution to the economy.  It’s safe to assume that the proposed regulations in their current form could cost the state at least $8 billion per year.

There are other legitimate industry concerns: 

• Whether the proposed rules are authorized by the governing statute
• Whether existing COGCC rules address the issues in question
• What potential impacts could the regulations have on private contracts and private property rights
• Whether it is administratively feasible to administer the complicated proposed regulations in timely manner
• Whether the proposal pre-empts federal authority

In the greatest of all logical conflicts and moral ambiguities, our Governor and the democratic majority of our State Legislature are contemplating a referendum that would immediately increase the severance tax on what’s left of Colorado’s oil and gas industry.  

If the potential negative impact on the state’s economy was not in itself frightening enough, the potential impact on our nation’s energy security could be crippling.  Colorado and the Rocky Mountains are only one of two areas in North America where we are experiencing a growth in natural gas production.  For the past 100 years, we have truly been “energy independent” on natural gas.  However, that independence is about to change in dramatic fashion. 

Most energy experts agree the United States will need to source at least 20% of our nation’s natural gas demand from overseas within the next seven years.  In the past 50 years, we’ve never purchased more that 1% of our gas needs via imports of liquefied natural gas (LNG).  That factoid of energy insecurity is highlighted by the harsh reality that four countries control approximately 50% of the world’s natural gas reserves.  Those four countries are Russia, Iran, Qatar and Algeria.

We are moving in the wrong direction on energy independence.  First it was oil and soon it will be natural gas.  The pain is definitely self-inflicted, history repeats itself. 

I am deeply concerned about our energy future and I am moved by a retired U.S. Congressman’s observation that some current Colorado politicians seem to be pursuing a tragic game of environmental one-ups-man-ship, all in the name of climbing the ladder to be higher on the “Vice-Presidential short list.”  In his words, all of this effort is being expended “in anticipation of this year’s Democratic National Convention”.

Last year Colorado Democrats removed the phrase “to encourage and promote” from the fifty year old preamble of the COGCC’s mission statement.  No one in the oil and gas industry suffers from any illusion that the state’s current mission is to “encourage and promote” our industry.  Instead, CEO’s at most all of the publically traded companies are trying to measure the “materiality” of the proposed regulations so that they may timely warn their shareholders, per SEC laws, about the changing of the guard in Colorado.

About John Harpole: John Harpole is founder and president of Mercator Energy LLC, a natural gas services, brokerage and research company.  Mercator assists both producers and end users in 12 states in moving 5Bcf of gas a month and conducts research projects for client groups exploring the impact of industry trends on various regional markets.  Harpole is a board member of the Independent Petroleum Association of Mountain States, the Colorado Oil and Gas Association, the Independent Petroleum Association of America and Energy Outreach Colorado.  He also was appointed to the Colorado Energy Assistance Commission by former Governor Bill Owens.