Aug. 9: This post has been corrected.

As the federal government focuses on strengthening regulations for deepwater drilling, the gas and oil industry is quietly trying to weaken state regulations for drilling on land.

The industry's current targets are regulations passed by New Mexico and Colorado in 2008 and 2009. The New Mexico regulations mandate that the industry use thick industrial liners in the pits that hold its toxic waste. The Colorado regulations tighten controls on just about every aspect of the industry, from the waste pits to air quality.

The industry is challenging the regulations in court and through administrative appeals, arguing that the regulations are unreasonably expensive and are forcing companies to move to states with looser regulations. That argument has also surfaced in the New Mexico and Colorado gubernatorial races, where candidates from both parties have promised to repeal, or at least re-evaluate, the rules.

But the facts lend little support to the industry's -- or the candidates' -- argument.

An examination of drilling rig counts, the most common gauge of the industry's health, shows that the new rules have had little or no impact on drilling activity in New Mexico and Colorado. Rig counts did fall in both states shortly after the rules were established -- but no more than they did in other states as the recession began and then deepened. Now, with the economy slightly improved and gas prices rising, rig counts are soaring.

Nationally, rig counts are up 75.8 percent from June 2009, when drilling nationwide was at its lowest. New Mexico's rig count has rebounded 86.5 percent since then. Colorado's rig count hasn't kept pace -- its rig count is up only 36.4 percent. But that's just a fraction lower than the uptick in neighboring Wyoming -- 38.7 percent -- where regulations are looser.

"It is the price of oil and gas that has by far a greater effect on oil and gas production rates and rig counts, not regulations," said Mark Fesmire, director of New Mexico's Oil Conservation Division, which regulates the industry.

Another gauge of the industry's activity is the number of drilling permits it applies for each year. In 2009, with the recession in full swing, permit approvals in New Mexico dropped 40 percent -- but they also dropped sharply in Wyoming, which saw a 31 percent drop.

Colorado, meanwhile, had only a 14 percent decline -- and this year it's on pace for a 30 percent increase from 2009.

"This would make 2010 the second-busiest year for permitting in the state's history despite the twin impediments of low natural gas prices and decreased economic activity," said Dave Neslin, executive director of Colorado's oil and gas regulatory authority, in a memo to the Oil and Gas Conservation Commission. The state issued 3,112 drilling permits in the first six months of the year, according to the memo.

Deborah Seligman, interim president of the New Mexico Oil and Gas Association, an industry group that has campaigned against the new regulations, concedes that the rig counts have rebounded somewhat. But she said they're still not at the levels they were before the count dropped nearly two years ago. (New Mexico's rig count is 19.8 percent lower than it was in August 2008. But that's better than the national rig count, which is down 20.8 percent.)

"I don't think industry is out there to rape and pillage the world by any means," Seligman said. "Granted, accidents happen. But if there is an accident, if a pit liner leaks, you clean it up. This is like not letting your little boy cross the street, just in case he might get hit."

Gwen Lachelt, project director of the Oil and Gas Accountability Project for the environmental nonprofit Earthworks, said the argument used against pit rules is the same argument she hears in other states every time talk turns to stronger regulations.

"They have always said, 'This is going to drive us out of the state, make it unaffordable and we'll have to go elsewhere.' And it's just not true," Lachelt said. "So now it's the same story in New Mexico."

Colorado: From Friend to Foe

Until its recent reforms, Colorado's regulatory environment for gas and oil drilling was considered one of the loosest in the country. Five of the seven members of the Oil and Gas Conservation Commission, which regulates drilling, were required by law to be from the industry, and many of the state's politicians and regulators had strong oil and gas ties. Before former Gov. Bill Owens began his political career, he headed the Colorado Petroleum Association, a trade group. When Owens left office in 2007, he joined the boards of two energy companies.

Attorney Lance Astrella, who represents surface owners in disputes against oil and gas companies, said that if one of his clients had a case that could go either to court or to the Oil and Gas Commission, "I would have them go to court. I didn't think they could get a fair shake in front of the Commission."

But as gas drilling ramped up during the final years of Owens' governorship, residents became increasingly concerned about the pace of development. After the current governor, Bill Ritter, took office, the number of industry representatives on the Oil and Gas Conservation Commission was reduced from five to three and the commission was expanded to include two members from state regulatory agencies.

"The oil and gas industry had been the 800-pound gorilla on the block for a long time," said Pete Maysmith, executive director of Colorado Conservation Voters. "That changed, and with that has come great progress on the environmental front and I think a slow but hopefully increasing recognition that there's a different way to do things in Colorado politically."

In mid-2007 the state began the long process of revamping its oil and gas regulations, with input from the industry at every step of the way. Pit rules were tightened, industry reporting requirements were beefed up and air quality standards strengthened.

When the rules passed in 2009, environmentalists and regulators across the nation saw them as a blueprint for how states could effectively regulate themselves. The rules were lauded by Lee Fuller, vice president of government relations for the Independent Petroleum Association of America, which has long argued that state regulations are so effective that federal regulations don't need to be strengthened.

"The framework that was adopted in Colorado in their regulatory system would probably be a place where most on all sides of this see a structure that makes a lot of sense," Fuller told ProPublica last year.

But even as Fuller made that statement, the industry was setting out to overturn or modify the rules it had helped write.

The Colorado Oil and Gas Association filed a lawsuit in Denver District Court in May 2009 against the Oil and Gas Conservation Commission, asking that the rules be overturned because the state didn't adequately forecast how much it would cost it to implement them or how much they would cost the industry. That lawsuit is still winding its way through court.

The Colorado Petroleum Association, the industry group once headed by future Gov. Owens, has come to terms with most of the rules, according to its attorney, Jep Seman. It wants just one of them overturned: the requirement that companies remove all pit liners when the drilling is done, rather than continue burying them on site.

Environmentalists are taking a "sky is falling approach" that is forcing the industry to comply with an unnecessary and costly regulation, Seman said. "The state allowed this for 15 to 20 years," he said. "The environmental community never complained before."

In a hearing in March with the Colorado Oil and Gas Conservation Commission, Michael Freeman, who represents the Colorado Environmental Coalition, pointed out that every other industry is required to dispose of its pit liners and that this rule just holds oil and gas drilling to the same standards.

Studies have shown that pit waste can include benzene and other known carcinogens used in drilling, along with heavy salts and naturally occurring chemical compounds dredged up during drilling. Studies have also shown that the waste can seep into groundwater, contaminate nearby soil, and kill animals and birds that drink from the pits.

According to a report by the Ground Water Protection Council, a nonprofit consortium of state regulators, regulating the pits is "the most critical element in prevention of shallow ground water contamination."

Both the lawsuit and the appeal are still pending, but the industry's arguments have landed squarely in the talking points of the gubernatorial candidates. Early campaign finance reports show that all three candidates have received contributions from the oil and gas industry.

Republican Scott McInnis promised early in his campaign to overturn the new regulations.

"What those rules and regulations did, frankly, was take Colorado from No. 1 to rock bottom on states that are friendly to do natural gas and energy business in," the former congressman told the Denver Daily News in February. McInnis did not respond to requests for an interview for this story.

McInnis' Republican opponent in the August primary, Dan Maes, has taken a similar position.

"I feel that the 175 pages of new regulations absolutely hurt the Colorado economy," Maes told ProPublica. "Ideally we would sweep them off the table and start from scratch."

Rather than repeal the rules outright, however, Maes he said he would likely work with experts to systematically change them.

Denver Mayor John Hickenlooper, the only Democrat in the race and a former oil and gas geologist, told energy industry executives early in his campaign that some of Gov. Ritter's rules -- including strict requirements for pit liners -- went too far. But when Hickenlooper met with industry representatives last month, he stressed that he wasn't seeking a complete overhaul. Hickenlooper did not respond to requests for comment.

Under Pressure in New Mexico

New Mexico's recent rules governing pit liners are even stronger than Colorado's, and were equally hard fought.

They were inspired by studies commissioned by Gov. Bill Richardson's administration, which found more than 400 cases of industry-related groundwater contamination. The industry argued that some of the contamination didn't come from drilling pits. But the state moved ahead and proposed a set of rules that required, among other things, that oil and gas well operators use synthetic liners in their pits and that the liners be hauled to landfills after drilling is complete.

The proposal quickly became a point of contention between the industry and regulators.

Bob Gallagher, then the director of the New Mexico Oil and Gas Association, wrote an op-ed piece for the Albuquerque Journal, saying that the rules were unnecessary and expensive to implement and that the study that inspired them was misleading and inaccurate. Joanna Prukop, cabinet secretary of the Environment, Minerals and Natural Resources Department at the time, fired back with a piece accusing Gallagher of "manipulating the facts by providing unfounded and distorted numbers" and of trying to get the rules weakened by publicly attacking state regulators.

Estimates of the cost of complying with the rules varied widely. In a letter Prukop wrote to a state senator at the time, she said one independent producer testified at a hearing that the rules would cost him $38,500 and reduce his expected return on investment from 29 percent to 24 percent. She said his figure was far below the $150,000 to $250,000 per well estimate being circulated by the industry.

The clash between industry and regulators continued in state budget hearings.

"The Senate Finance Committee tucked cuts into its version of the state budget that would essentially punish state agencies [OCD and NMED] that have the audacity to hold oil and gas companies accountable for New Mexico's environment," said a Feb. 4, 2008, entry in a blog from Richardson's office. "Effectively, such a move would weaken the state's ability to enforce environmental regulations and allow those who contaminate our water, pollute our air, and abuse our land to go unregulated."

As the rules edged toward approval, the departments that helped create them took a hit. The Oil Conservation Division's budget was cut 19.4 percent, from $11,136,800 in 2007 to $8,976,100, even though the Environment Department's budget grew by 3.5 percent. About $500,000 of that reduction came from the agencies and departments that regulate the industry, including the Oil Conservation Division's legal staff, which prepares cases against companies that violate environmental regulations.

The Permian Basin Petroleum Association, an industry association in New Mexico and Texas, expressed its satisfaction with the cuts.

"Industry has had some success in having input on the state budget," Ben Shepperd, the association's executive vice president, wrote in the group's magazine. "With respect to the budget, $275,000 will be cut from both the Oil Conservation Division (OCD) and New Mexico Environment Department (NMED)."

Despite the industry's dire warnings that the pit rules would drive companies out of New Mexico, there was no mass exodus.

When the rules took effect in June 2008, New Mexico had 78 active drilling rigs. Over the next few months, that number climbed into the 90s, where it hovered through the first week of November. In December 2008, as the recession took hold, the rig count started to decline -- but by then it was declining in nearly every other drilling state, too.

Today the industry is rebounding, especially in New Mexico. But Susana Martinez, the Republican candidate for governor, said in July that the pit rules should be overturned because they drive jobs out of state.

Gov. Bill Richardson's administration "did create jobs -- in Texas and Oklahoma," she told New Mexico business leaders at a roundtable discussion.

The Democratic candidate, current Lt. Gov. Diane Denish, told ProPublica that she won't repeal the rules, but is willing to "revisit them."

"Revisiting the pit rule means reviewing it to determine the exact impact it has had on jobs and whether the rule has achieved the desired outcomes since being implemented," Denish said in an e-mail. "In addition, such a review would also need to determine the impact the decline in the price of natural gas has had on New Mexico's oil and gas industry."

Early campaign finance reports show that the industry has contributed $574,600 to New Mexico's gubernatorial candidates, according to the nonpartisan National Institute on Money in State Politics.

Industry donations account for more than 13 percent of the $2,154,432 Martinez, the Republican, has raised as of early August. The industry has given Denish, the Democrat, $65,950, accounting for 2.1 percent of the $3,177,223 she has raised to date.

Deborah Seligman, of the New Mexico Oil and Gas Association, said she doesn't think the industry's donations will influence the politicians' votes.

"I would hate to think that as a citizen of the state of New Mexico that it would take money in order to have my voice heard," she said. "The thought process is beyond me."

As the candidates weigh in on the pit rules, the oil and gas industry is filing appeals with New Mexico's First Judicial District Court, asking that they be overturned.

The Independent Petroleum Association, an industry-lobbying group, has argued that the cost of complying with the rules is prohibitively high. A coalition of 16 of the state's largest independent producers has filed a complementary appeal.

Mark Fesmire, the Oil Conservation Division's director, thinks the pressure being placed on New Mexico's regulations is likely to crop up elsewhere.

"Industry is making the same claim in Colorado," he said, "and will probably make similar claims as other states update their rules and follow New Mexico's lead to protect groundwater."