Two ballot initiatives that may well shape the financial future of the state of Colorado and its citizens will be on the November 2018 ballot. One of those initiatives could determine the future viability of the oil and gas industry in the state.
The two ballot proposals – Initiative 97 and Initiative 108 – have been depicted as contrary measures that are likely to dominate the topic of discussion among Colorado voters in the weeks leading up to election day. Initiative 97 will appear as Proposition 112 on the 2018 ballot and seeks to increase oil and gas facility setback distances on non-federal lands to 2,500 feet. Initiative 108 will appear as Amendment 74 on the 2018 ballot and would require that property owners be compensated for any reduction in property value due to any new governmental law or regulation. Over a two-day stretch, on August 28 and 29, 2018, the Colorado Secretary of State announced that each of Initiative 97 and Initiative 108 has garnered a sufficient number of valid signatures to be included on the state ballot.
Depending on whom you ask, the ballot initiatives either represent a blow for property rights or are a harbinger of impending fiscal doom to the state’s economy. One thing is for sure, the citizens of Colorado will be the recipients of an onslaught of television pitches, radio ads and town hall meetings regarding these two measures over the next 9 weeks intended to educate, sway votes and/or instill fear in the citizenry prior to the November 6, 2018 general election day.
Property Rights or Dispatcher of the Oil and Gas Industry: Ballot Initiative #97.
We have previously discussed the potential impacts of Initiative 97 in prior articles, here and here. Rather than re-state our prior observations, we have prepared a series of questions and answers focusing on various aspects of the initiative. In doing so, we highlight some of the major requirements and expected consequences should Initiative 97 be implemented in Colorado:
1. What is the purpose of Initiative 97?
Language contained in Initiative 97 states that the “[p]roximity to oil and gas development, including the use of hydraulic fracturing, has detrimental impacts on public health, safety, welfare, and the environment.” The proposal takes center aim at the oil and gas industry in the state, seeking to increase the setback distance of new oil and gas development away from occupied structures and vulnerable areas, so as to reduce the threat of such allegedly detrimental impacts.
2. Who are the proponents of Initiative 97?
The advancement of Initiative 97 largely may be traced back to the growth of Colorado in recent years. Colorado’s population has increased at a brisk pace, with the state’s Front Range – an area of historical oil and gas development – experiencing much of that growth. The increased population along the Front Range has resulted in an extension of new residential neighborhoods, schools and other occupied structures into previously rural, agricultural and industrial areas. Now, oil and gas exploration and development activities, once relatively far from towns and established neighborhoods, may find themselves in close proximity to occupied dwellings. Those homeowners and parents of school-aged children with serious concerns over the proximity of oil and gas development to their homes, schools and public areas appear to support Initiative 97.
Additionally, there are some environmental activist organizations that view oil and gas development as largely incompatible with the geographic natural features found in abundance in the state, such as waterways, parks and natural areas. Others believe that the emission of greenhouse gases and other pollutants from these developmental activities contribute to climate change and/or adversely affect the health and safety of local residents. Members of these activist organizations, including members of Boulder-based Colorado Rising, have been a driving force behind Initiative 97.
3. What exactly is the “oil and gas development” that Initiative 97 seeks to regulate?
The term “oil and gas development” is broadly defined under the proposal to include much more than hydraulic fracturing:Initiative 97 does not apply to existing oil and gas development, nor does it apply to oil and gas development on federal lands.
- exploration for oil, gas or other gaseous and liquid hydrocarbons;
- drilling, production and processing of oil, gas, or other gaseous and liquid hydrocarbons;
- the treatment of waste associated with such exploration, drilling, production, and processing; and
- hydraulic fracturing.
4. How “new” must the oil and gas development be in order to be regulated under Initiative 97?
The term “new” is not defined under the proposal. However, Initiative 97 states that the proposal would take effect “upon official declaration of the governor,” which is believed to mean upon official certification of election results. Moreover, Initiative 97 states that the proposal is self-executing, which would appear to mean that it takes effect immediately without the need for any implementing legislation or regulation to be proposed and adopted. The setback distance requirements of Initiative 97 would apply to oil and gas development that is permitted on or after the effective date. While the proposal does not define “permitted,” a reasonable interpretation may be that the term means well-drilling permits, such those permits obtained from the Colorado Oil and Gas Conservation Commission (“COGCC”).
Additionally, Initiative 97 expressly states that the re-entry of an oil or gas well previously plugged or abandoned is considered new oil and gas development, presumably, if such re-entry occurs on or after the effective date and regardless of whether a permit for that well had previously been obtained.
5. What are current setback distances that would be changed by Initiative 97?
Current setback distances for oil and gas development were established in 2013 by the COGCC. Rules adopted by the agency required setback distances for oil and gas activities of 500 feet from “Residential Building Units,” such as single-family residential homes, and 1,000 feet from “High Occupancy Building Units,” such as schools, hospitals and nursing homes.
6. How would Initiative 97 change current setback distances for occupied structures?
With respect to all new oil and gas development on non-federal lands, Initiative 97 would impose a setback distance of at least 2,500 feet – almost one-half mile – away from newly defined “occupied structures” in the state. Occupied structures are defined to mean any building or structure that requires a certificate of occupancy or building or structure intended for human occupancy. Specific examples included in the proposal are homes, schools and hospitals. Other examples include stores and offices.
7. What facilities other than occupied structures may be subject to Initiative 97 setback distances?
Initiative 97 also would apply to “vulnerable areas” as that term is defined in the proposal. New oil and gas development on non-federal lands would be obligated to remain at least 2,500 feet away from such areas. Vulnerable areas are broadly defined under the initiative to include playgrounds, permanent sports fields, public parks and open spaces, public drinking water sources, reservoirs, lakes, rivers, perennial and intermittent streams and creeks.
8. Does Initiative 97 allow for increased setback distances, beyond 2,500 feet?
Yes, under Initiative 97, the state or local government may require that new oil and gas development be located a larger distance away from occupied structures and vulnerable areas than the 2,500 feet established under the proposal. However, the proposal does not provide any guidance on what conditions must exist before distances greater than 2,500 feet would be required by governmental authorities and thus it would appear that there are no pre-requisites to seeking increased buffer zone distances. In the event that two or more local governments with jurisdiction over the same geographic area establish different buffer zone distances, Initiative 97 states that the larger buffer zone distance governs. For purposes of Initiative 97, “local government” is defined to include any statutory or home rule county, city, or town located in the state of Colorado. Given that a number of cities and towns in Colorado, including Boulder, Broomfield, Lafayette, Longmont and Fort Collins, have attempted in the past – unsuccessfully – to restrict or outright ban hydraulic fracturing, it is not unreasonable to expect that there could be a proliferation of at least localized, if not state, amendments to the buffer zone distances from occupied structures and vulnerable areas, should the initiative succeed.
9. Are the facilities that comprise the terms “occupied structures” and “vulnerable areas” under Initiative 97 fixed or may those terms be revised?
Yes and no. The definition of “occupied structures” is very specific and cannot be changed under the proposal.
However, Initiative 97 has been drafted such that “vulnerable areas” may include “any additional vulnerable areas designated” by the state or a local government. No further guidance is provided on what factors may trigger the classification of a physical feature as a vulnerable area. For example, in Initiative 97, riparian areas are not defined as a vulnerable area, even though riparian areas were included as an “area of special concern” under the previous failed attempt to increase setback distances on new oil and gas development through the 2016 ballot initiative process. Riparian areas are generally considered as interfaces between waterways and lands; typically, where there is vegetation adapted to wet conditions. Under Initiative 97, state or local governments may elect to broaden the vulnerable areas definition to include riparian areas and, presumably, any other physical features that may be deemed worthy of special protection.
10. What is the likelihood that the oil and gas industry could survive in the state under Initiative 97?
Given the severe restrictions that new oil and gas development would incur if voters approve Initiative 97, it would likely be extremely difficult for many operators to sustain long-term operations in Colorado.
During 2018, the COGCC conducted a geographic information system (“GIS”)-based impact assessment for Initiative 97. The 2018 report does not directly analyze the extent to which mineral development would be impacted by the decrease in surface acreage available for new oil and gas development facilities or hydraulic fracturing activities. Rather, the COGCC relies upon GIS assessments to focus on the effects of the proposed setback distance on land surface. The 2018 study found that if the 2,500-foot buffer sought under Initiative 97 were implemented:
- if federal lands are considered, an estimated 54% of Colorado’s total land surface would be unavailable for new oil and gas development; and
- if the focus is placed solely on non-federal land in Colorado, an estimated 85% of the non-federal lands would be unavailable for new oil and gas development.
Focusing on the top five oil and gas producing counties in the state – Weld, Garfield, La Plata, Rio Blanco and Las Animas counties – adoption of Initiative 97 and its 2,500-foot buffer would remove from new production 61% and 94% of the respective total land surface and non-federal land surface available in the combined five counties:
Removal of the indicated total surface area and non-federal surface area lands across Colorado, and in the five top producing counties in the state in particular, from new oil and gas development would have a significantly adverse impact on the oil and gas industry in the state. There are public reports indicating that, in an attempt to stave off the adverse effects of the proposal should it pass in November, operators in the state are filing applications for new drilling permits at or near record rates. Obtaining those drilling permits now would beat the effective date for new oil and gas development under Initiative 97; however, in the long-term, once previously obtained drilling permits have been utilized, there exists serious doubt as to those companies’ continued substantive presence in the state under the 2,500-foot setback requirement.
11. What are some reported adverse consequences should Initiative 97 pass in November 2018?
In the event that Initiative 97 were to pass in November and exploration and production companies are unable to sustain drilling and production activities at pre-Initiative 97 levels, the expectation is that there would be a significant loss of jobs and decreased tax revenues for state and local governments. Additionally, there is likely to be a trickle-down effect that will adversely affect other business segments that are dependent in large measure on the oil and gas industry in the state, including pipeline transport and motor carrier logistical services, well support and wastewater injection activities, and the myriad of hotel, restaurant and retail services that indirectly cater to the industry. Putting numbers on expected losses vary, but one study issued by the Common Sense Policy Roundtable projects the elimination of 100,000 industry jobs and a reduction of more than $1 billion in tax revenue annually. In another study, the Colorado Alliance of Mineral and Royalty Owners determined that increasing setbacks to 2,500 feet would strand $180 billion worth of resources, costing mineral rights owners as much at $26 billion in lost royalties.
12. What are the political considerations at the state level with respect to Initiative 97?
Incumbent Democratic Governor John Hickenlooper is term-limited and cannot seek reelection to a third consecutive term. Democratic gubernatorial candidate and current U.S. Representative Jared Polis and Republican gubernatorial candidate Walker Stapleton have both expressed opposition to the passage of Initiative 97. Representative Polis’ position appears to be a change from his prior support of a similar measure in 2014.
Property Rights or Pillager of Local Economies and Zoning Restrictions: Ballot Initiative #108.
Also on the November 2018 ballot is Initiative 108, which we have previously discussed in a prior article, here. This initiative is viewed as a response by the oil and gas industry to Initiative 97. A series of questions and answers focusing on various aspects of this initiative are set forth below.
1. What is the purpose of Initiative 108?
Initiative 108 seeks to amend Article II, Section 15 of the Colorado Constitution, known as the state “takings” clause. Presently, Section 15 states that:
“Private property shall not be taken or damaged, for public or private use, without just compensation.”
Initiative 108 would revise Section 15 by providing an alternative for recovery:
“Private property shall not be taken or damaged, or reduced in fair market value by government law or regulation, for public or private use, without just compensation.”
Initiative 108 is touted as a “property rights” measure, with the purpose of providing an equal playing field for private property owners seeking just compensation when state or local government takes any action diminishing the fair market value of their properties.
2. Who are the proponents of Initiative 108?
Initiative 108 was initially filed by the Colorado Farm Bureau, one of the state’s largest agricultural organizations, and a Colorado farmer. The Colorado Farm Bureau has indicated that the measure was filed as a means of protecting the state’s farmers and ranchers in response to Initiative 97. The expressed concern is that increased setback distances would greatly diminish new oil and gas development in the future, which would endanger royalty payments that farmers and ranchers have historically relied upon to supplement their income. The Colorado Farm Bureau has reported that more than $600 million in royalties were paid in 2012. In a more recent study, the Colorado Alliance of Mineral and Royalty Owners determined that increasing setbacks to 2,500 feet would strand $180 billion worth of resources, costing mineral rights owners – including farmers and rancher – as much at $26 billion in lost royalties. However, make no mistake, Initiative 108 is fully backed by the oil and gas industry in Colorado, with some oil and gas companies reportedly spending $1 million or more to campaign in support of the ballot initiative.
3. How is “fair market value” determined under Initiative 108?“
Fair market value” is generally viewed as an estimate of the market value of a property, based on what a knowledgeable and willing buyer would be expected to pay to a knowledgeable and willing seller in the market.
The proposed measure does not define how fair market value is determined. However, the absence of guidance in how such value is determined is not a significant impediment, as traditional means exist for determining fair market value in the real estate market. One manner of determining this value is by the “comparative market analysis,” whereby the property targeted for acquisition is evaluated to comparable properties currently on the market, or other comparable properties that have recently sold. Another way for determining the fair market value is to hire an appraiser experienced in the sales of like properties. In the event that Initiatives 97 and 108 both pass, real properties that previously were leased for oil and gas exploration and production activities that no longer can be used in whole or in part due to the 2,500-foot setback requirement could consider past or current leases and associated royalties paid on oil and gas produced to obtain a determination on the fair market value of the property damaged as a result of implementation of the more stringent setback requirement.
4. What kinds of property interests may be covered under Initiative 108?
Initiative 108 does not elaborate on the types of property interests that are covered under the measure but, undoubtedly, it would be expected that all manner of property interests that are already eligible for coverage under the state’s Section 15 taking clause would equally be covered under the measure. It is expected that minerals, oil and gas, and water rights are among the types of private property interests that Initiative 108 is targeting should those rights be diminished or terminated as a result of the more stringent setback requirements imposed under Initiative 97.
5. What are the adverse consequences of Initiative 108?
Governmental authorities, local ones in particular, are extremely concerned over the financial fallout and associated inability to adopt new land use restrictions resulting from Initiative 108, should it pass in November. In particular, the concern is that under the pretext of protecting property rights, Initiative 108 would result in a torrent of civil actions brought against governmental authorities by affected private property owners who claim that a law or rule implemented by the government damaged their private property interests. Worries over a multitude of lawsuits brought by private property owners – not only farmers and ranchers but corporations, including oil and gas companies – for any decrease in the value of their property, including, for example, loss of profits, could severely impair or potentially bankrupt the financial budgets of small towns or even large cities. As a consequence of those concerns, governmental authorities could elect to “do nothing” and avoid adopting new laws or rules that could result in costly claims for compensation.
Another view being advocated is that Section 108 would effectively eliminate new land use or zoning restrictions, by deterring local governments from preventing undesirable establishments such as landfills, sexually oriented clubs, and heavy industry to be located in close proximity to residential neighborhoods, schools and hospitals.
What to Expect in the Coming Months.
The Colorado Secretary of State’s placement of Initiatives 97 and 108 on the November 2018 ballot as respective Propositions 112 and Amendment 74 signaled not the end, but only the beginning of the race. Over the next 9 weeks, Colorado citizens are likely to experience an onslaught of television pitches, radio ads and town hall meetings, the likes of which have not been encountered in recent memory, as proponents and opponents of the two initiatives jockey for position to get their message across and, more importantly, get every citizen’s vote. These initiatives are also likely to be watched closely on the national level, as a harbinger of public sentiment regarding governmental regulation of industrial activity and private property rights.