Built to Change: Colorado’s Oil and Natural Gas Industry Marches Forward

By: John Glennon and Bill Allison

To put it mildly, Colorado’s oil and natural gas industry has undergone enormous changes over the past few years.

The state — long known as a powerhouse energy producer — has faced daunting political and regulatory challenges along with a flurry of M&A activity that’s brought about sector consolidation. Today’s landscape is very different, reflecting the industry’s focus on adapting and moving forward.

These state-specific challenges have been compounded by the pandemic’s impact on global energy demand. Institutional capital is demanding that upstream companies shift their focus from growth to prioritizing sustainability and free cash flow generation for shareholders. The significant uptick in ESG reporting and related sustainability commitments reflects this emerging investor sentiment.

Energy producers operating across the Centennial State are adapting to meet these new challenges by embracing and pioneering sustainability-focused opportunities. They are investing in technology that manages emissions (especially related to methane) and water usage, partnering with utilities to purchase more renewable energy to power their operations, actively engaging with their most critical stakeholders, including the communities in which they operate, and enhancing their governance and risk mitigation structures.

Colorado’s rigorous regulatory structure, along with the need for extensive outreach to communities near operating locations, has helped energy companies in the state stay ahead of the curve in this new ESG focused investor reality.

Despite Shifting Political Winds, Support for Energy Industry Remains Strong

For years, Colorado was a true political swing state with state and federal offices moving back and forth between Republicans and Democrats.

That purple tint seems to have faded, however, and Colorado is becoming a Democratic stronghold. The state has gone blue in recent presidential cycles; both U.S. Senators are Democrats, the state legislature is under Democratic control, and Gov. Jared Polis cruised to victory in 2018.

In recent years, a wave of ballot measures, laws and regulations around the industry have come forward. Despite this shift, the state, maintaining its strong western, independent profile, continues to support the oil and natural gas industry.

The same year that Polis was elected, a ballot measure sponsored by activists that would have effectively banned production in the vast majority of the state was defeated by a doubledigit margin. And after Polis entered office, he did not seek to ban fracking as Gov. Andrew Cuomo has done in New York and Gov. Gavin Newsom seeks to do in California.

Instead, Polis, working with the state legislature’s Democratic leaders, focused on passing SB-181 — a regulatory overhaul of the industry that was signed into law in 2019.

The rulemaking process that came out of the law has involved everything from the creation of a full-time professional regulatory body and new rules governing the “flowline” pipes running underground to increased monitoring of wells, and an end to routine flaring and venting, among a host of other changes.

Most notably, that rulemaking process also created an expanded setback zone, requiring 2,000 feet of distance between natural gas and oil operations and homes, schools and other structures. This new setback will no doubt put certain resources in Colorado out of reach for future exploration, but a 500-foot “off-ramp” presents development opportunities for the industry that will require increased flexibility and greater partnerships with local communities.

Along with SB-181, another major law came out of 2019. SB-1261 prompted the creation of the Greenhouse Gas Pollution Reduction Roadmap that lays out a 30-year plan to drastically reduce the state’s emissions footprint and which involves nearly every sector of the economy, including transportation, agriculture, power utilities, and residential and commercial buildings.

In a compromise reached among liberals in the state legislature and Gov. Polis, additional legislation supporting the Roadmap will require the natural gas and oil industry to reduce its emissions by 60% by 2030, meaning that operators in the state will once again need to update their production processes.

With these pledges on the books, it’s really no surprise that many consider Colorado to have rules that are “seen as some of the strictest in the country.”

Consolidation Among Major Players

These past two years, full of new laws and regulations, along with the COVID-19 pandemic, have prompted another major change in Colorado’s industry: A series of mergers and acquisitions that’s resulted in consolidation, which is a top priority for investors focused on capital efficiencies and scale.

Two of the largest independent operators in the country have been acquired by even bigger companies. Anadarko was bought by Occidental in 2019, while Noble was purchased by Chevron in 2020.

Consolidation has happened among smaller companies as well. In 2019, PDC Energy acquired SRC. This year, Bonanza Creek and High Point completed a merger before Bonanza Creek, then merged with Extraction. That new company, Civitas Resources, then acquired Crestone Peak in early June.

A Smart Turn Towards ESG-Focused Operations

These political and regulatory challenges, combined with the surge in M&A activity, align with growing ESG expectations, particularly the focus on climate change. No longer can companies focus solely on expansion-based structures; rather, to remain competitive and to access capital, they must integrate ESG factors into their overall business strategy.

These ESG practices show that companies are working to provide much-needed energy with a lower carbon footprint and ensuring their operations protect the communities in which they oper-

ate. The general investment philosophy is that companies proactively implementing ESG practices can expand their investor base, maximize the efficiency and value of their assets and infrastructure over the long run, lower their emissions profile and costs, advance their permitting, and even create differentiated products and services.

Occidental is a strong example of how the industry can operate between these two mandates. In addition to being one of the world’s largest energy producers, the company is also on the cutting edge of commercializing carbon capture and storage and direct air capture technology, which can pull carbon dioxide directly from the atmosphere and permanently bury it deep underground. Last year, the company partnered with LafargeHolcim and others to study capturing carbon at the Portland cement plant in Florence. Occidental has also endorsed the World Bank’s Zero Routine Flaring program.

Cutting-edge air monitoring projects are also coming to market. Project Canary, a Denverbased start-up, partners with energy companies in Colorado and nationally to provide continuous air monitoring for methane emissions at production sites as well as across the midstream and utility value chain. The technology enables operators to instantly mitigate and repair leaks and reduce emissions.

Project Canary’s proprietary Trustwell certification system tracks a robust set of data points aimed at improving the overall sustainability of their operational performance. Taken together, these technologies and real-time data enable energy producers to sell “Responsibly Sourced Gas” at a premium to end-use customers with emissions reduction targets, such as utilities.

Civitas is a prime example of a producer that is shifting its business model to emphasize its ESG performance. The company announced its intention to be Colorado’s first net-zero natural gas and oil producer as part of a broader effort to align its business model completely with shareholders and other key stakeholders such as the communities where operations are located. A key focus of the company will be deriving maximum value from current acreage, reinvesting at a rate consistent with overall demand for oil and gas, and returning capital to shareholders. Civitas will also support the production of community solar facilities and finance a community fund to address community interests.

These trends are not exclusive to the upstream and midstream sectors. Suncor Energy (U.S.A.) Inc., which operates Colorado’s only oil refinery, recently announced a new air monitoring program that will provide real-time data to the public in a partnership with Montrose Air Quality Services. The new program is part of an effort to respond to feedback from the community to have enhanced transparency around the refinery’s operations.

Despite this new landscape, innovation and a willingness to adapt in Colorado show that the industry can still manage profitable and successful operations in the state while serving as a model for the nation

So Goes Colorado, So Goes the Rest of the Country?

Will recent events in Colorado be replicated in other energy-producing states around the country?

The industry should be prepared for it.

Climate change and ESG continue to dominate boardroom agendas as well as investor conferences, and now, these conversations have made their way to government. Oil and natural gas companies in states like Texas, New Mexico and Pennsylvania are likely to face increased pressure from government leaders and investors about how they run their business and mitigate every aspect of risk.

These companies can no longer count on the old business model that placed maximum energy production as the top priority but must focus more on producing their current assets in the most sustainable way as demand for lowercarbon energy soars.

This doesn’t mean that unprofitable times are ahead.

Despite this new landscape, innovation and a willingness to adapt in Colorado show that the industry can still manage profitable and successful operations in the state while serving as a model for the nation.

In fact, it’s put many of these companies on the cutting edge of producing energy cleaner and more responsibly — a strategy and approach that’s sure to pay increased dividends in the future as the pressure from governments, investors and communities continue to grow. About the authors: William Allison and John Glennon advise energy companies as part of the FTI Consulting’s Strategic Communications practice and are based in Denver.

Top 4 Tips When Creating Your Business Continuity Plan

FIND OUT WHY DEVELOPING AND CONTINUALLY MAINTAINING A BUSINESS CONTINUITY PLAN CAN HELP ENERGY COMPANIES BETTER PREPARE FOR UNEXPECTED DISTURBANCES.

By: Katie Albers

Whether natural disasters, cybersecurity attacks or global pandemics, workplace disturbances occur frequently and when companies least expect them. Disaster preparedness and business continuity plans (BCPs) have never held more importance, especially with the events this past year has offered. A wide variety of hazards can occur in the workplace, the most prevalent of which are natural disasters and human-caused, health, and technology-related disruptions. Companies therefore, should be continually monitoring their continuity plans and understand where their risks lie in the case of an unexpected event to better avoid, reduce, and mitigate the impact and loss.

Value of Business Continuity Plans

BCPs are valuable because they focus on proactively planning, developing, testing, and implementing processes and procedures that aim to maintain business operations in the event of a disruption. BCPs define timely and controlled methods to prevent and recover from losses resulting from potential threats such as natural disasters or cyberattacks. It’s important that companies place value in constantly monitoring and updating their BCP. When interruptions do occur, a company can handle them rapidly, cost-effectively, and consistently.

The energy industry is particularly vulnerable to unanticipated events. For example, the cold snap that descended on Texas in February reduced crude oil production by more than 1million barrels per day(bpd). Natural disasters such as Hurricane Harvey in 2017 impacted more than 336,000 customers due to outages reported by leading utility companies.

Natural disasters shouldn’t be the only hazard companies prepare for. Recent health and technology-related continuity scenarios created prolonged issues as well. The COVID-19 pandemic has caused unpredictable trends in demand for oil, as well as fluctuating price indexes, and the recent cyberattack on Colonial Pipeline halted operations sending shockwaves across the entire energy supply chain from the U.S. Gulf Coast to the Northeast.

Incidents like these can have lasting impacts if the disaster isn’t handled in a timely and orderly way. That’s why having an established BCP can help save companies time and money while also preserving brand reputation and customer satisfaction.

The following are four helpful tips when creating an effective BCP: • Identify Critical Pain Points and Risks. • Create a Plan with Involvement from

All Departments. • Integrate the Plan with Proper Training and Testing. • Consistently Update and Monitor the BCP.

1. Identify Critical Pain Points and Risks

A good first step when creating a BCP is to identify areas within your company that are most at risk if a major unforeseen circumstance were to occur tomorrow. If the company has an existing enterprise risk management system, this would be a good place to look for data when identifying risks. Conducting surveys is also a great way to gain information and insight on where employees believe weaknesses lie within the company. Understanding where these critical pain points lie, their impact on certain processes and personnel if they were interrupted, and the total impact they would have, such as loss of time, money, and data, are important factors to consider when building your BCP.

When a disaster occurs, the organization isn’t going to be able to run business as normal. Organizations need to prioritize critical functions such as protecting the revenue cycle, supply chain efficiencies, external financial reporting, and month-end close. Calculating these risks and prioritizing areas that would affect the company most is the best place to start when deciding how to approach your recovery strategies.

2. Create A Plan With Involvement From

All Departments

To create a successful BCP, it’s recommended that leads from each department of the company come together to collaborate on the continuity plan. Each department lead should highlight areas they believe are at most risk within their specific business unit and communicate these to the group. Having a space to explain their own risks and how they could affect other parts of the company will create an awareness of where crucial dependencies exist within your organization. For example, the accounts payable and finance team will benefit most from the BCP if they create the plan together. By working together, both teams understand their critical processes, how they are interdependent, and the approach they will take in the event of a disturbance. Encouraging collaboration and communication between departments when building a BCP will create a sense of teamwork, interdependence and strengthen the overall continuity plan.

3. Integrate the Plan With Proper Training and Testing

Once the plan is created, it’s important that all employees are made aware of the BCP and what their duties would be in the event of an unforeseen disruption. The plan should be simple and clear for the ease of employee un-

derstanding. During a disaster, business operations aren’t running normally, so if the continuity plan is overly complex, it will ultimately add to an already chaotic situation. Integrating the plan requires proper training at all levels of an organization. The goal is to have a collective understanding and preparedness of specific actions to take during an unexpected event.

Training should occur as part of the onboarding process after creating the continuity plan and should be reviewed at least once a year by all employees. Along with proper training, employees should have easy access and know where to find BCP documents when required. Keeping physical and electronic copies within each department allows team members to quickly review roles, responsibilities, and tasks in case the main server is down.

Testing is also an important step when creating a sustainable continuity plan. Initial and periodic testing should be performed based on the specific needs of the business. Testing the continuity plan helps validate the effectiveness of the BCP and identify problem areas within the organization in the event a disruption occurs. Rehearsals, tabletop exercises, and simulations further create valuable opportunities for cross-functional teams to step through the plan together, practice processes and reinforce communication channels.

4. Consistently Update and Monitor the BCP

Companies should consistently monitor the business and operating environment, looking for changes that necessitate an update to the BCP. Beyond yearly updates, other events such as the implementation of a new enterprise resource planning (ERP) or energy trading risk management (ETRM) system or a reorganization of one or more departments are good examples of triggers for when companies should update the BCP. Consistently checking in with identified department leads and understanding emerging risks across the organization will help proactively maintain the health of the continuity plan.

For example, a leading utility company that Opportune has advised specifically for business continuity has seen positive results from putting a strategic plan in place. A tactic Opportune has advised clients on is the creation of a “Business Continuity Board.” Dedicating specific leaders within the company to be held responsible for maintaining and continually updating the continuity plan will ensure the BCP is being looked after and thought about from all aspects of the business.

Summary

Business continuity and disaster planning have never been more important. With continuous economic, social, and environmental changes, it’s important that businesses expect the unexpected and have an established continuity plan for when disturbances eventually occur. Having a methodical and sustainable plan, ensuring proper training throughout the organization, and seeking advisory help are all crucial to surviving and thriving business operations in an uncontrollable environment.

BCPs are valuable because they focus on proactively planning, developing, testing, and implementing processes and procedures that aim to maintain business operations in the event of a disruption

About the author: Katie Albers is a Consultant in Opportune LLP’s Process & Technology group based in Houston. Prior to joining Opportune during her collegiate studies, Katie gained experience in international brand relations and business marketing while serving as a Digital Product Intern at Hilton International in Dallas and an International Marketing Intern at Vestri in Florence, Italy. Katie graduated from the University of Oklahoma with a B.S. in Supply Chain Management and a minor in Marketing.