HOUSTON, April 30 (Reuters) - Colorado's oil producers

are bracing for a new fee associated with their production as

part of a compromise the industry reached with environmental

groups that were pushing for more stringent regulations on

drilling.

Colorado, the fourth largest oil producing state in the

U.S., is a frequent battleground for the oil industry and

environmentalists, who over the years have pushed for tougher

regulations on fossil fuel production.

The deal reached this week will eliminate several proposed

ballot measures targeting the fossil fuel industry ahead of this

year's election, including one that would have halted drilling

in summer months.

As part of the compromise, producers will get hit with a fee

that fluctuates with market prices on every barrel of oil

produced in the state.

"We're not huge fans of the fee dynamic / structure," said

analysts for investment firm Tudor, Pickering, Holt & Co in a

note, adding it is estimated to generate some $140 million in

revenue.

The proposed legislation is supported by environmental

groups including Earthjustice and Earthworks, as well as major

producers in the state including Chevron ( CVX ) and Occidental

.

"We are glad to avoid ballot measures filed by the oil and

gas industry to roll back the climate progress that Coloradans

need and want", said Margaret Kran-Annexstein, Director of the

Colorado Sierra Club.

Chevron ( CVX ) and Occidental deferred to the Colorado Oil and Gas

Association for comment.

"Political and legislative stability and certainty is vital

to our industry's future success here, and we're pleased to see

our state's political leaders share that vision", said Dan Haley

Colorado Oil and Gas Association President and CEO.

The compromise will also fund efforts to cap abandoned and

low producing wells and set new emissions reduction targets.

The state already has some of the country's stiffest

regulations on methane emissions. The prospect of additional

regulations has still drawn some criticism from the industry.

"The Governor needs to give our regulatory systems a chance

to work before agreeing to any more regulations," said Rich

Frommer, retired CEO of Great Western Petroleum, and current

director of two Colorado based energy companies.