State proposal to expand carbon capture authority also proposes changes to the Oil and Gas Conservation Act
As part of a bill revising aspects of the Colorado Energy and Carbon Management Commission’s (ECMC) (f/k/a Colorado Oil and Gas Conservation Commission) authority over carbon capture and sequestration, the Colorado General Assembly proposes to modify the Oil and Gas Conservation Act through HB24-1346. The legislation’s stated goal is to help Colorado achieve net-zero emissions by mid-century. While the bill is focused on low-carbon technologies and infrastructure, it would affect all industries regulated by the ECMC if signed into law. In this alert, we summarize the top three aspects of the bill that will affect or could affect oil and gas exploration and production (E&P) operators.
1. Oil and Gas Conservation Act statute of limitations changes. First, the proposed legislation would directly impact E&P operators by expanding the statute of limitations in the Oil and Gas Conservation Act from one year to three years. This is a significant change in its own right, as it materially expands the universe of conduct that could be subject to an enforcement action. The increased potential for enforcement is significant against the backdrop of ECMC tightening its enforcement policy in January 2024 and strengthening its enforcement rules in 2020. Moreover, as of 2021, ECMC rules take into consideration an operator’s history of compliance in determining whether an operator’s financial assurance is sufficient. If the legislation passes, operators should consider conducting internal compliance audits to determine potential liability and inform broader compliance strategies.
2. Removal of ECMC enforcement officers’ discretion. Second, the bill specifies that the duration of any violation continues for each day that it is not corrected. This change could be interpreted to extinguish ECMC enforcement officers’ discretion not to seek penalties for each day a violation continues, e.g., remove ECMC enforcement officers’ ability to use the “duration matrix.” Because duration is frequently the largest driver of penalty amount, this change could be quite consequential.
3. Underground pore space (the “sequestration estate”) ownership follows the surface owner. Third, the legislation would formally adopt the majority common law position that underground pore space in Colorado—what the legislation terms the “sequestration estate”—is owned by the surface owner, unless expressly severed from the surface estate. Positively for mineral owners, the legislation specifies that the mineral estate is dominant over the sequestration estate, but the bill doesn’t specify how the mineral estate, sequestration estate and surface estate should work together. For mineral estates, Colorado enacted the “reasonable accommodation” doctrine in 2007, which recognizes that some surface use is necessary to access the mineral estate and requires the mineral owner to restrict its use of the surface to the amount reasonable and necessary to access the mineral estate and minimize intrusion upon and damage to the surface. Because whether an operator’s use of the surface estate is reasonable and necessary is a fact-intensive inquiry, most operators in Colorado execute surface use agreements to delineate the rights and responsibilities of each party. It is unclear whether an operator would be required to follow the reasonable accommodation doctrine with respect to sequestration estates, if severed or unsevered from the overlying surface estate. Until the relationship between a mineral rights owner and sequestration estate owner is clarified, Colorado E&P operators should consider entering into separate surface use agreements with the sequestration estate owner and surface estate owner.
Until 2023, the ECMC regulated only oil and gas operations. It now has authority to regulate deep geothermal operations, underground natural gas storage, and carbon sequestration, as well as a mandate to research hydrogen transportation and storage. Because the General Assembly is revising the Oil and Gas Conservation Act to regulate emerging technologies and industries, but several of those changes also impact oil and gas operations, E&P operators should monitor direct or indirect spillover impacts on the oil and gas industry.
