Collision course? Energy company Crestone Peak and Boulder County prepare for oil field face-off

On a midsummer morning in east Boulder County, a 12-square-mile swath of land south of Longmont along Colo. 52 and U.S. 287 is largely quiet.

Here lie dozens of parcels of county open space and such scenic agriculture properties as the historic Hycrest Farm, homesteaded in 1876.

It is also the site of what is likely to become a battle royale between a new, complaint-plagued oil company that wants to drill 216 wells here and environmentally activist Boulder County.

The project, if it moves forward, will increase the number of wells in the county by more than 70 percent, from 300 to as many as 516.

“All signs are this will be a big fight,” said Patty Limerick, a historian and director of CU’s Center for the American West. Limerick has spent years studying the history of energy development in the West. In 2013 she hosted a statewide series of non-partisan panels on fracking in an attempt to help communities and industry better resolve their differences.

“The question is can it be a better, more productive fight or does it have to be scorched earth?” she asked.

At stake is a roughly $1 billion effort by Denver-based Crestone Peak Resources to drill in a relatively undeveloped, wide-open area.

To do this Crestone is using a new state planning tool known as a comprehensive drilling plan.

Use of a CDP requires oil companies to plan and lay out their production path before they start drilling. The more traditional approach allows development to occur essentially well-by-well, a method experts believe is more costly and potentially more damaging to the environment.

Boulder County officials have described the CDP as a “step in the right direction,” despite big differences between what the state says is OK and what the county has set out in its own, stricter regulations.

And that’s where the clash may occur. Crestone, even if its plan wins the state’s OK, must get its final permits from the county, which recently adopted a stringent new set of oil and gas rules that assert an unusual amount of authority to regulate, or even prohibit, new drilling that doesn’t comply with its rules.

In addition to health, air and water quality concerns, Boulder County Assistant Attorney Kate Burke says another major conflict is looming — how to protect the county’s open space lands and land protected by conservation easements. More than half of the parcels in the drilling area are one or the other, she said.

Colorado’s state Constitution and recent Colorado Supreme Court cases give mineral rights extensive protections.

“Mineral right owners have the right to use the surface. There is nothing we can do about that,” Burke said.

The issue will come down to whether the strict environmental protections built into conservation easements and open space lands will win out over mineral rights.

“There is no way to do both,” she said.

Ironically, Boulder County is also a mineral rights owner because it acquired those rights when it acquired the open space parcels. It could receive royalty payments from Crestone, should the oil and gas development proceed.

Still, Crestone officials believe they have every right to drill and are willing to take on any legal battles that may have to be fought. If all goes well, they hope to begin work in roughly 18 months.

“We have to start this process now,” said Crestone Resources Director of Community and Regulatory Affairs Jason Oates. “We know it’s going to take some time.”

Crestone’s deal with Encana

Boulder County, unlike its neighbors in Weld and Broomfield counties, has long avoided the region’s oil and gas boom.

In 2016, for instance, Boulder County produced just 105,486 barrels of oil, while Weld County produced nearly 1,000 times that at 103,589,340 barrels, according to the Colorado Oil and Gas Conservation Commission.

But the Crestone development could change that.

Formed in 2016 by a giant Canadian pension fund and a Denver-based oil, real estate and transportation conglomerate, Crestone immediately acquired all of the Denver-Julesburg Basin assets of Encana Corp. The basin, which spans thousands of acres in northeastern Colorado and beyond, is one of the richest oil fields in the U.S.

But Encana, like many other oil producers, was hit hard by the oil crash and opted to sell its DJ Basin acreage.

Crestone is backed by the Canadian Public Pension Investment Board, which has a 95 percent ownership stake. Denver’s The Broe Group, owns the remaining 5 percent.

When CPPIB formed Crestone, it bought some 45,000 acres of assets in areas in Weld and Boulder counties. The deal’s price: $609 million, according to CPPIB’s annual report. The investment board declined to be interviewed for this article.

The CPPIB is the independent financial body whose job is to invest Canadians’ pension contributions to ensure enough returns to take care of retirees.

So far, it’s proved remarkably successful. According to its annual report, it generated returns of 11.8 percent in Fiscal Year 2017, ending March 31, on a diversified, worldwide investment portfolio valued at $316.7 billion.

That portfolio, which includes a stake in Viking Cruise Lines among dozens of other companies, also includes an aggressive, long-term investment strategy in oil and gas, mining and energy companies. In 2016, for instance, the Canadian finance giant had natural resource assets of $1.4 billion. By 2017, that stake had surged to $4.1 billion, due in part to its Colorado play in the DJ Basin.

In that same 12-month period, earnings on that portfolio more than doubled, generating a return of 16.8 percent in 2017, up from 7.7 percent in 2016.

 

(Paul Aiken / Staff Photographer)

Mike Drieth works at land planing (leveling) at Paul Schlagel’s farm off Weld County Road on Thursday.

 

But what’s the attraction in oil and gas, where oil prices have remained stubbornly in the $45- to $55-a-barrel range, far below their peak prices of more than $100 a barrel in 2015?

According to Brian Youngberg, an oil and gas analyst who follows Encana and other Canadian companies for St. Louis-based Edward Jones, it’s all about winning international market share and capitalizing on underpriced assets.

Oil prices are down and major producers in other countries, such as Venezuela and Mexico, are producing less because they have older assets. That means U.S. producers, who have access to newer assets, such as the field in eastern Boulder County, can produce more and win market share from international competitors.

“Think of how Berkshire Hathaway does things,” Youngberg said. “Warren Buffet is not out there buying anything at rich prices. He’s buying assets that are in bankruptcy.”

CPPIB has done the same thing with Crestone.

“It’s a bit of a gamble for them. But they’re hopeful they bought during the bottom. They will hold it for years and it will become a profitable investment,” Youngberg said.

Residents’ complaints

Despite Crestone’s strong cash position, it has a troubled history in the area. It has been in near constant conflict with residents of Erie over its drilling practices. The Erie area is just across the county line from the area the company plans to drill in Boulder County.

Since Crestone officially took over operation of the former Encana drilling sites last year, residents, almost all from Erie, have filed more than 500 complaints. And the count is climbing almost daily, with residents protesting most often about noise and odor and less frequently about lighting, traffic and regulation requirements.

In contrast, companies such as Anadarko Petroleum, Noble Energy and Extraction Resources have received few if any citizen complaints. As of last week, Anadarko had none, according to the state’s complaint data base; Noble had two, and Extraction had 63 during the same period.

 

(Jeremy Papasso / Staff Photographer)

A Schlumberger Oil Field Services employee works on a Crestone Peak Resources Woolley Becky Sosa location on Wednesday in Erie.

 

Crestone’s Oates said the company is concerned about and investigates each complaint, and none have proved to be an actual violation of state regulations.

And the company has vowed to include Boulder County in the writing of its comprehensive drilling plan, due to the state next February.

“We’re trying to ask now, ‘What are the constraints, how do we prioritize issues around wildlife, homes and flood plains?'” Crestone’s Oates said.

This type of comprehensive approach to drilling, where planning is done ahead of time, is a new one in Colorado. And Oates said he believes ultimately it will be better for the county and Crestone.

“We have a pipeline that already extends to the Boulder County line. So our well pads there will be virtually tank-less and that means no storage, less traffic and a smaller footprint,” he said.

In addition, he said Crestone would weigh, in concert with Boulder County officials and residents, how to implement the drilling plan.

“If we were to drill 24 hours a day, seven days a week, 365 days a year, we would be able to complete the project in 6.7 years,” he said.

But it’s not clear yet what the community wants. If residents decide they prefer no drilling at night and on weekends, it will take longer to complete the process, he said.

‘People in Boulder County are asleep’

Crestone’s plans to mitigate the impact of its activities have done little to soften the position of the county’s anti-fracking activists.

Boulder County Protectors, along with East Boulder County United, plan to fight for a no-drill decision when the plan comes before the county.

“People in Boulder County are asleep. They are busy climbing and doing yoga and raising their families and they don’t like to be brought down to face this stuff,” said Stuart Paul, a member of Boulder County Protectors. “But our opinion is that it cannot be made safe. There should be no drills and no pipelines in Boulder County.”

Matt Lepore, executive director of the Colorado Oil and Gas Conservation Commission, said he’s pleased Crestone opted to pursue a comprehensive drilling plan, despite the company’s complaint-plagued record.

“I’m a little bit troubled that they are getting as many complaints as they are,” Lepore said. “But I’m also under no delusion that drilling in Boulder County is going to be a popular activity.”

 

(Jeremy Papasso / Staff Photographer)

Schlumberger Oil Field Services employees work on a fracking site at the Woolley Becky Sosa location on Wednesday in Erie.

 

This month the state laid out a timeline for the CDP approval process, but few other rules have been written because it’s never been used before.

“The rule (adopted in 2008-2009) does not give us procedures to follow so we are having to make up a process as we go along,” Lepore said.

Still, he said, “The CDP process is absolutely more efficient, probably less costly and hopefully less intrusive in a way that minimizes the felt and observed impacts to people. It also gives other stakeholders a greater opportunity for participation in all of these questions, and that certainly includes Boulder County.”

Crestone must submit its CDP application to the state in late January.

County Attorney Burke had requested that Crestone bring its plans to the county first, before going to the state for its drilling approvals.

But Crestone’s Oates and COGCC’s Lepore said the state will approve everything first.

Burke said that may create problems right off the bat.

“There is a potential for conflict between what the state approves and what we would approve,” she said.

In the 50 pages of regulations that the county signed into law this spring are a number of rigorous requirements around air quality, water quality, prohibitions on the use of toxic fracking fluids and the use of underground injection sites.

Lepore said he reviewed the county’s regulations and though he believes some of them clearly infringe on the state’s authority, he’s not going to challenge them until he sees how the county plans to implement the regulations.

“We identified two or three things that caused us to raise our eyebrows,” he said. “Our decision was to wait and see.”

If Crestone’s CDP gets through the county’s special review, the county commissioners will then vote on whether it should move forward.

“Ultimately it is the (county commissioner’s) decision,” Burke said. “If it were to be denied, after it is approved by the state, it will be an interesting and complicated situation.”

Correction: An earlier version of this story misstated the magnitude of oil production in Weld County. It is 1,000 times greater than that which occurred in Boulder County in 2016. In addition, CDP was incorrectly defined. It is a comprehensive drilling plan.

Jerd Smith: 303-473-1332, smithj@dailycamera.com or twitter.com/jerd_smith