COLORADO OIL & GAS CONSERVATION LAW: THE BASICS — A POP QUIZ

The Conservation Basics
A primary objective of the Colorado Oil & Gas Conservation Act (the “Act”) has always been conservation through prevention of waste and enforcement of efficient drilling and production practices. In other words, traditionally the Act served one important god – the resource conservation god.

Since 1994, however, the Act and those who work with it have had to serve an additional important god — the god of public health, safety and welfare, and this one has become increasingly demanding.

Colorado mineral owners, explorers and producers, and those of us who represent them, all have a duty to make certain that the one god does not eclipse the other – to make certain that the conservation god does not become a second-class citizen in the world of oil & gas exploration, development and production in Colorado.

The Quiz – Test your knowledge of the basics
Which of the following statements are true, false, or close enough?
Question 1: The Rule of Capture…..
1. Allowed old Englishmen to pursue foxes off their land as long as the chase started on their land.
2. Came to this country on the Mayflower and helped Buffalo Bill make his name, but died with the buffalo long before oil or gas were discovered in Colorado.
3. Played a significant role in early oil & gas exploration and production in Colorado.
4. Was eliminated by passage of the Colorado Oil & Gas Conservation Act in 1951.
5. Survived passage of the original Colorado Oil & Gas Conservation Act, but was eroded by subsequent amendments to that Act.
6. Was effectively eliminated from Colorado common law by the 1994 amendments to the Colorado Oil & Gas Conservation Act
7. Has always been and remains a viable part of the Colorado common law applicable to oil & gas exploration and production.
8. With slight modification due to well location rules, applies to any well drilled in Colorado absent an applicable COGCC spacing order.
9. Says I’m entitled to produce and own whatever oil or gas I can find so long as I produce product to which I have a legal right from operations anywhere on lands that I own or have the right to be on.
Answer to Question 1: These statements are true except
• A-2 and A-4 are definitely false
• A-5 and A-6 are the difficult ones. These two are, in principle, also false, but the question is whether under COGCC practice, post 1994, the Rule of Capture has the same stature it used to have. More to the point, does it have the stature it should have if we are to serve the resource conservation god with the same fervor that the god of public health, safety and welfare is served.

Question 2: Waste
Under Colorado law, Waste of oil and gas in development and production operations is NOT which of the following?
1. Prohibited.
2. OK if necessary to protect public health, safety and welfare.
3. Any practice that leaves producible oil or gas in the ground.
4. The improper use or dissipation of reservoir energy.
5. Well spacing that is not sufficiently dense to drain the area drilled.
6. Drilling more than one well where one well can efficiently and economically do the job.
7. Tempered by market demand for produced product, i.e., it’s not waste if there’s no economic market.
Answer to Question 2: With the exceptions of #s 2 and 7, everything listed above is an accurate statement about Waste under the Act.
• 7 is easy to peg as a misstatement; the Act (unlike conservation laws in other states) specifically provides that market demand is not a factor in determining Waste.
• 2 is not so easy. It may be that in a post-1994 direct conflict the god of conservation loses the battle. It is at least food for thought by today’s COGCC practitioners, although maybe it’s not a practical issue because of modern technological advancements in production practices.

Question 3: What’s missing from the above list, i.e., what else does Colorado law categorize as waste?

Answer to Question 3: The abuse of correlative rights. The Act clearly defines abuse of correlative rights to be Waste, and that gets us to 4.

Question 4: True or False?
Protection of correlative rights means if you don’t own 100%…
1. You can still keep what you produce unless your cousin-in-law is the mineral cotenant.
2. You have to account retroactively to the other owners for their share, regardless of whether they participated in the cost of production.
3. You can still keep it all if you get there first because you’re protected by the Rule of Capture.
4. Each owner and producer in a common pool or source of supply of oil and gas is to have an equal opportunity to obtain and produce its just and equitable share of the oil and gas underlying such pool or source of supply.
Answer to Question 4: Statement 1 is definitely false, and Statement 4 is definitely true. However, the answers to Statements 2 and 3 are more challenging. Statement 2 is incorrect because the Act does not require backwards accounting at least for would-be participants who had (reasonable) notice of the drilling and production activity and who elected not to, or failed to, participate. For that reason Statement 3 is arguably correct, at least under the right circumstances. The Rule of Capture is still alive in Colorado, as long as each mineral owner had the same opportunity to produce/participate in production. This is really about the conservation god rewarding the risk-taker and is what is behind the force pooling provisions of the Act which have the effect of penalizing the non-risk taker.

Conclusion
The issues explored above are not pedantic. Nor should they be seen to be the atavistic ramblings of an ancient who worked closely with the COGCC in the old days (before 1994). These three basic concepts — The Rule of Capture, Waste and Protection of Correlative Rights – remain essential to proper conservation of a waning resource. They are grounded in a good scientific and economic understanding of how to maximize oil and gas production while maintaining efficiency.
The irony is that serving this conservation god does not necessarily mean conflict with the duty to serve the god of public health, safety and welfare. Good resource conservation and production efficiency serve both gods. These practices not only incentivize the production of more product at less cost, they also serve to minimize surface and environmental impact in the process.

So, the message continues to be the same – oil and gas conservation basics are important for all of us involved in the Colorado oil and gas industry to understand and apply.