Colorado air-quality regulators on Friday approved the state’s first emissions-reduction rules for the midstream sector of the oil-and-gas industry — rules that officials acknowledged will be expensive to comply with but said are necessary to curb pollution.
During a two-day hearing, energy companies warned that the 20.5% reduction in emissions versus 2015 levels come at too high a price — an estimated $86.3 million per year in sector-wide compliance costs that would rise if the sector experienced significant growth. Meanwhile, environmental groups argued that the rules fell short of achieving the emissions cuts called for in the state’s Greenhouse Gas Pollution Reduction Roadmap and don’t guarantee substantial help for disproportionately impacted communities.
In the end, the Colorado Air Quality Control Commission made only small changes from the Air Pollution Control Division proposal that had seemed to rankle both sides in the debate. Instead, they approved a hard cap on the emissions coming from the sector, kept in place a credit-trading program supported by business but hated by environmentalists and ignored requests to exempt remote Western Slope operations from the regulations.
“As a society, I think we all need to figure out how we shoulder the cost of climate issues,” AQCC member Martha Rudolph said before joining her fellow commissioners in approving the rules, which go into effect next year, unanimously. “I recognize that requiring midstream in this rulemaking to shoulder so much of the costs is tough. How difficult this is is not lost on us. But we’ve got to make movement here, and we’ve got to find the 20% (cuts).”
New rules part of increasing regulations to lower emissions
Officials preceded this rulemaking in recent years by increasing regulations on the upstream segment of the sector — well sites — by requiring reductions in nitrous oxide intensity, moving wells back from homes and limiting impacts on DICs. They also will consider new rules in 2025 to reduce air toxins from industrial and manufacturing sources, even as a recent study commissioned by the Colorado Chamber of Commerce noted that the recent proliferation of regulations has hurt the state’s economic competitiveness.
But the increasing regulations come also as the Northern Front Range contains to be a severe violator of U.S. Environmental Protection Agency ozone standards, requiring the state to boost regulations around everything from cement plants to transportation. These new rules largely are the result of legislators seeking to speed up the pace of emissions cuts, with a goal of getting to net-zero emissions by 2050 against a 2005 baseline.
The newest regulations target the sector responsible for moving natural gas from wells to the processing plants that put the resource into a form where it can heat homes and power engines. This midstream segment includes compressor stations and pipelines, and the rules require emissions cuts specifically from fuel-combustion equipment — largely engines, heaters, turbines and boilers.
The 20.5% emissions reductions that about 30 impacted companies must achieve against a 2015 baseline by 2030 can be accomplished by cutting emissions coming from equipment and, when that is no longer feasible, by buying credits from other industrial and manufacturing companies that have exceeded their reduction goals. About 60% of the onsite reductions will come from electrification and the other 40% from operational adjustments and efficiencies, said Stefanie Shoup, acting APCD deputy director of regulatory affairs.
How the midstream rules work
Before midstream companies can buy credits, they must get 45% of their reduction mandate through on-site emissions cuts, and they must prioritize making cuts in DICs — a state designation for communities that are poorer, more heavily minority or more polluted. Shoup argued that while the state understands the high cost of electrification and other pollution reductions, it believes the path it’s set forward is the most cost-effective one.
Oil-and-gas companies argued otherwise, however, and said that some of the mandates border on technically infeasible, particularly given that it can take three years to procure a transformer and two to 10 years to complete electrification of far-flung drilling sites. Colorado Oil & Gas Association attorney Chris Colclasure called the five-year timeframe “extremely aggressive,” and University of Wyoming professor Timothy Considine said this rule alone will require a 3.1% increase in statewide electricity production.
To illustrate just how stringent the mandates are, Colclasure noted that compliance strategies suggested by APCD include idling or shutting down equipment — “very unusual” measures that he said could cost jobs. Industry leaders got some small changes to the rules — including an explicit callout that APCD intends to include the midstream sector in a fee fund it is developing to help manufacturing companies comply when on-site changes aren’t feasible — but said that compliance will be difficult.
“This has been a challenging rulemaking for these companies in particular,” said Jeff Schwarz, an attorney representing DCP Operating Co., one of the largest players in Colorado’s midstream sector. “What we’re trying to do is get as good a rule as we can get and determine how we will comply.”
Environmental groups also unhappy with midstream rules
Western Slope operators, which typically are smaller companies, said the rule uniquely disadvantages them because of the remoteness of their drilling sites and the expense of running transmission lines for more than 10 miles through sometimes pristine wilderness. Bret Sumner, outside counsel for West Slope COGA, asked the AQCC either to exempt the West Slope from the rulemaking or to give operators more exit ramps from having to electrify to comply, but commissioners said that was not an acceptable idea.
Meanwhile, environmental advocates led by the Environmental Defense Fund and GreenLatinos said the proposed rule both fell short of statewide emissions-reduction needs and failed to prioritize DICs as state law requires. However, like industry leaders, they were largely unsuccessful at getting the AQCC to make any changes to the proposal.
Under the rule, midstream operators must make onsite improvements either in DICs or in areas impacting DICs, specifically a nine-county area from the Wyoming border south to Douglas County it designated as the Front Range Protection Area. Shoup noted that 68% of Coloradans live in that area, which also includes 59% of the state’s midstream facilities and 57% of the sector’s carbon emissions, and she argued that reductions there would impact numerous DICs located throughout the area.
But Patricia Garcia Nelson, the Colorado fossil fuel just-transition advocate for GreenLatinos, noted that only two of the nine FRPA counties contain midstream facilities — Adams and Weld — and said that none of the on-site improvements are mandated in DICs. And even though 45% of emissions from midstream facilities occur in DICs, even APCD estimated that only 34% of the health benefits will accrue in those communities, said Sarah Judkins, an attorney for the Environmental Defense Fund.
Finding a balance between environment, economy
Both organizations stated their opposition to allowing midstream operators to participate in a credit-trading market authorized as part of a 2023 rulemaking on large manufacturing facilities to reach compliance, and they said they don’t feel the rule is protecting DICs. Plus, they questioned whether the rule’s focus on companies lowering emissions in the FRPA would leave DICs on the Western Slope overlooked.
“When we passed the Environmental Justice Act, it was about reducing harm to communities, not allowing loopholes for trading or for pay-to-play,” GreenLatinos state director Ean Thomas Tafoya said of the 2021 law requiring special protection for DICs. “They want to see emissions reduced where they are.”
But Gary Arnold, an AQCC member who’s also the business manager for Denver Pipefitters Local #208, pointedly asked Garcia Nelson if the commission would be following the law if it passed restrictions that led to job cuts in areas that already are economically challenged.
“If the rule takes away economic opportunity or has a negative effect on the socioeconomic issues that have identified these areas as disproportionately impacted communities, does that meet the intent of the EJ Act?” Arnold said.
Will midstream rules cut emissions enough?
EDF senior analyst Katie Schneer argued also that while the rule meets the 20% emission-reduction rates mandated by law, it falls short of expectations in the GHG Roadmap that sector emissions will fall 47% by 2030 with the rule in place. She and other officials asked that the AQCC set interim reduction goals requiring emissions cuts in the years before 2030 and pass new restrictions if the sector isn’t on pace to meet them by 2026 or 2027.
Industry leaders, APCD staffers and the Colorado Energy Office all pushed back against that idea, saying that it will take significant planning and years-long investments to achieve these long-lasting reductions, meaning short-term requirements are infeasible. Commissioners rejected that idea and requests to bar participation in the carbon-trading market by sector companies, with Colorado Energy Office senior program manager Wil Mannes saying carbon trading is the best way to achieve quick reductions, as it incentivizes companies to exceed their mandates and begin selling credits.
In the end, even the commission’s staunchest oil and gas advocates said that while they are concerned about the costs to operators and their potential impact on jobs and investment in this state, they believe the proposal is the most cost-effective one possible. AQCC member Curtis Reuter pointed to the carbon-trading market, the fee fund and allowances for operators to exceed their cap if there is not adequate electric supply to allow them to achieve their reductions, and he said the rule is needed to follow state law.
“Extraordinary implementation challenges”
“It is hard to ask any entity to bear costs greater than the benefits of the action, and there are some electrification projects out there where the costs clearly appear to outweigh the benefits,” Reuter said. “How do we socialize those costs more broadly than asking some of the actors to bear all of the costs disproportionately?”
COGA President/CEO Dan Haley issued a statement after the ruling saying that while the midstream sector will work diligently toward the “ambitious targets,” he believes it will face “extraordinary implementation challenges.”
The one company that expressed the most frustration seemed to be Zen Midstream, a subsidiary of Bison Oil & Gas seeking to build a compressor station in Weld County to help transport gas from new wells planned for the Sandy Bay area.
Because the new rules have a hard cap on emissions, they require any new entrants to the midstream sector either to be fully electrified by 2030 or to buy carbon credits to offset any emissions coming from their project. Bison CEO Austin Akers said that creates a “cartel of existing operators and an anticompetitive atmosphere,” but commissioners only added a statement to the rules encouraging new entrants to use the credit-trading market and other available mechanisms for help.