Decarbonizing Colorado: Ongoing Regulatory Overhaul to Unlock New Opportunities, Create Challenges

Carbon management, geothermal energy, and air pollution from hydrocarbon operations are the primary focus of the state regulators.

The state lawmakers and regulators continue to overhaul the regulatory framework to encourage greater emissions cuts and enable decarbonization projects. The oil and gas industry is likely to benefit from the policies and regulations that seek to promote CCUS, DAC, and geothermal developments, but tighter pollution controls are expected to result in higher compliance costs. Colorado’s upstream sector is likely to face continued pressure from lawmakers, local authorities, and activist groups to improve its climate and environmental performance over the near-to-medium term. Meanwhile, the safety track record and environmental impact of oil and gas pipelines is likely to affect public perceptions of any future carbon dioxide pipelines, potentially requiring more stringent regulations and oversight. 

Air pollution from oil and gas operations: a source of regulatory flux 

Colorado’s efforts to comply with the federal air quality standards are expected to fuel uncertainty around the state-level requirements for upstream players over the near term. Under the governor’s directive (2023), Colorado is required to achieve a 30% cut in nitrogen oxides (NOx) emissions by 2025, and a 50% cut by 2030 relative to the 2017 baseline. Nitrogen oxides are precursors of ground-level ozone, an air pollutant that can cause significant health issues. The nine-county Front Range nonattainment zone includes Weld County, where the bulk of Colorado’s hydrocarbons is produced, and the oil and gas sector is estimated to be the major contributor of NOx emissions. In late 2023, the Air Quality Control Commission (AQCC) approved new NOx intensity standards intended to limit ozone pollution. Under the new rules, each producer will need to calculate the projected amount of NOx emissions in the high-ozone season between May and September and cut them by upgrading high-emitting equipment or replacing it with electric equipment.  

However, some lawmakers and environmental activists have criticized the requirements as insufficient as higher hydrocarbon production would still result in more emissions. To address this issue, in early 2024 Democrats proposed several bills in the state legislature that would further tighten permitting requirements and introduce higher penalties for non-compliance with air quality regulations. The proposed measures also include a ban on drilling and fracking operations during the summer season along the Front Range, which is likely to affect work schedules in the region. 

Separately, in January 2024, the Colorado Energy and Carbon Management Commission (CECMC) released its draft rules on cumulative impacts that would address NOx and other GHG emissions from the oil and gas industry. The rules would require operators to calculate and forecast NOx and GHG emissions from all current and proposed projects and come up with a plan to reach the intensity targets. In addition, companies would need to engage in pre-application consultations with local authorities and residents of the affected areas, which could extend project approval timelines. Moreover, the draft proposal would require any permitted pre-production or fracking operations in the nonattainment zone between May and September to be authorized by the CECMC director (starting from 2025). Although it is not an explicit restriction, it would still create an additional level of complexity and drive uncertainty around work plans. While there are instances of successful cooperation between companies, counties and residents under tougher regulations, the lack of consensus among regulators and lawmakers regarding the ultimate form of cumulative impacts and NOx requirements is likely to fuel uncertainty in Colorado’s upstream sector. In addition, failure to align ozone levels with federal standards by 20 July 2027 is likely to prompt an intervention from the federal Environmental Protection Agency (EPA), leading to more stringent oversight and high penalties. 

Geothermal framework could offer new opportunities for oil and gas companies 

Over the past three years, Colorado has launched several policy and regulatory initiatives to advance the development of geothermal resources. In 2023, the General Assembly authorized the CECMC to regulate deep geothermal wells, and the agency is currently working on the enabling regulatory framework, which is expected to be finalized before the end of 2024. Among other things, the rules would allow conversion of oil and gas wells into geothermal wells and geothermal co-production with oil and gas. If implemented, the proposed rules would create an option for oil and gas players to electrify their upstream operations with the use of geothermal resources, should such resources be available at the hydrocarbon site.  

Moreover, in 2023, the state legislature approved tax credits for geothermal developers to further incentivize the nascent sector. A refundable tax credit was created for an expenditure in connection with a geothermal energy project intended to evaluate and develop a geothermal resource for the purpose of electricity production. The aggerate amount of the tax credit is capped at $5 million for all income tax years in which the credit can be claimed per each geothermal project. The second refundable income tax credit equals to $3 per MWh of geothermal electricity produced in Colorado in the tax year, up to the maximum of $1 million. Both schemes are effective from 1 January 2024 through 31 December 2032. Any delays in the geothermal rulemaking process will likely limit the timeframe for the potential geothermal project developers to capitalize on the existing fiscal incentives. 

Carbon management framework is moving forward 

Colorado is betting big on CCUS and DAC to decarbonize its economy and has recently initiated the development of a comprehensive policy and regulatory framework. In 2023, the CECMC was granted the authority to regulate the CCUS sector, and the agency is preparing state-level Class VI rules, so that Colorado could apply for Class VI primacy. The rules are expected to be finalized before the end of 2024, and the state is likely to file an application with the EPA some time in 2025, meaning that Colorado is likely to obtain Class VI primacy in the later part of the decade.  

Meanwhile, the General Assembly is considering draft legislation (House Bill 24-1346) that would further clarify regulatory requirements for CCUS projects, such as pore space ownership and unitization. Specifically, the bill would confer pore space ownership rights on the owner of the overlying surface and allow unitization if and when the unitization plan is approved by the persons that collectively own at least 75% of the geologic storage resources included in the geologic storage unit area. In addition, the proposed legislation preserves the right of local authorities to introduce additional and/or more stringent requirements for carbon dioxide storage projects within their boundaries. While the provision could create challenges for CCUS project developers, efficient and transparent stakeholder engagement coupled with robust compliance is likely to mitigate any potential risk of delays, restrictions and public opposition. 

Moreover, HB 24-1346 would empower the CECMC to regulate DAC facilities and pave the way for the DAC regulatory framework in Colorado. Importantly, the draft would require the proponents of a CO2 storage or DAC project to submit a cumulative impact analysis if the proposed facility is located in a disproportionately impacted community. In case such proposal is found to have net negative cumulative impacts on the disproportionately impacted community, the regulator would be instructed to reject the proposal. 

Pipeline safety concerns could signal trouble for CCUS projects 

Regulators in Colorado are under growing public pressure to improve the oversight of gas pipelines and introduce more stringent requirements for their operators. According to the state audit, between 2017 and 2022, the Pipeline Safety Program within the Public Utilities Commission (PUC) did not inspect pipeline operators as required or did not have records to provide it had; its inspectors also did not have adequate training. Moreover, the audit found that 95 of 303 pipeline accidents reported to the National Response Center (NRC) by operators in Colorado in 2017-22 were due to pipeline strikes, resulting in two deaths, two injuries and more than $2 million in property damage. The PUC has already amended its regulations, including the requirement for operators to submit an annual leak report and a detailed map of the location of their pipelines. However, local authorities, landowners, and environmental groups are pushing for further changes stipulated by the previously adopted legislation, such as the requirement for operators to use advanced leak detection technologies.  

Given the findings of the state audit and ongoing public concerns about the state regulators to ensure adequate oversight of gas pipelines, local residents could have similar suspicions about any potential carbon dioxide pipelines in Colorado. Public opposition to gas pipelines is strong in other parts of the United States, and the experience in fighting gas infrastructure could be also replicated to impede the buildout of CO2 transport infrastructure. The state regulators in Colorado will likely need to accelerate the adoption of more stringent safety standards, improve enforcement and boost compliance in order to bolster public trust and their credibility. Robust oversight of gas pipelines is likely to demonstrate the ability of the PUC to provide the similar level of control over CO2 pipeline infrastructure and mitigate the risk of lawsuits against operators and/or regulatory bodies.