An initiative to expand the setback distance required for oil and gas drilling in Colorado just received a boost, potentially making the November ballot. The stricter drilling requirements could have significant implications for Colorado shale drilling, and the industry is decrying the measure as a “ban” on new drilling.
Initiative 97 would require oil and gas wells to be a minimum of 2,500 feet away from “occupied structures,” which means houses, and “vulnerable areas,” which includes parks, public spaces and fresh water, among other areas. That distance is much greater than the current distance of just 500 feet for “occupied structures,” and 1,000 feet for “high occupancy buildings,” such as hospitals and schools.
In other words, shale drillers would have to place their wells at a much greater distance from local communities.
The campaign to impose stricter drilling requirements on the oil and gas industry gained urgency last year after an explosion from a flow line attached to a vertical well run by Anadarko Petroleum (and drilled by a previous owner) killed two people and injured two others. Earlier this year, Anadarko settled with the victims and survivors on undisclosed terms.
The flow line was thought to be abandoned, but it was uncapped, and the well was only 170 feet from the victims’ house. Following the disaster, Anadarko temporarily suspended operations at 3,000 vertical wells across northern Colorado out of “an abundance of caution,” some of which were subsequently brought back online after inspections. Related: $90 Oil Is A Very Real Possibility
The incident is not directly related to the drilling of new wells within close proximity to houses and buildings, but it sparked ire against the oil and gas industry. An explosion in a residential area, stemming from a gas line, has led to growing opposition to a drilling presence right up against homes and businesses. And because drilling activity has increased so dramatically in recent years, public resistance has also increased in corresponding fashion.
The industry is obviously opposed to the setback measure, but organizers in favor of greater setback requirements apparently secured enough signatures to put the measure up for a statewide referendum in November. “The November election in Colorado is likely an inflection point for the state’s oil and gas industry," according to a July research note from Height Securities LLC. In addition to the ballot measure, control of the state legislature and the governor’s mansion could potentially be in the hands of the Democrats, although what that means for the industry is still unclear. The leading candidate for governor, Congressman Jared Polis, has softened his opposition to oil and gas, after previously supporting bans on fracking.
Nevertheless, the ballot measure requiring greater setbacks could have a dramatic effect. In Weld County, Colorado, where much of the drilling in Colorado’s DJ Basin takes place, the greater setback distances would put roughly 78 percent of the surface land off limits to drilling, according to the Colorado Oil & Gas Conservation Commission, a state regulator. Overall, roughly 54 percent of the state’s total land mass would be off limits. By forcing drillers to move away from buildings and neighborhoods, many fewer locations would be available to drill.
The industry paints the setback requirements in apocalyptic terms. “That is effectively a ban on the industry," Dan Haley, president of the Colorado Oil & Gas Association, told Bloomberg in a July interview. “You’d basically have no new wells drilled in Colorado." Related: The Shale Boom That Will Never Happen
The share prices of companies that are active in Colorado’s DJ Basin are lagging behind some of their industry peers. Goldman Sachs notes that the stocks of companies like Extraction Oil & Gas Inc., SRC Energy Inc., PDC Energy Inc., Noble Energy Inc. and Anadarko Petroleum – all with a sizable drilling presence in the DJ Basin – are underperforming a broader ETF of shale companies by 4 to 12 percent. In fact, Extraction Oil & Gas Inc. and PDC Energy Inc. appear to be the most exposed to this referendum, “based on our assumed value for their undrilled DJ Basin resources as a percent of total company value,” Goldman Sachs wrote in a note.
It is not a certainty that the measure will qualify for the November ballot. Previous initiatives aimed at increasing setback provisions came up short. In 2014 several proposed initiatives were withdrawn after the industry and local and state governments reached a compromise to setup the Oil & Gas Task Force. In 2016, an initiative to grant local communities authorities to institute greater setback distances did not qualify for the ballot after not receiving enough signatures ahead of the deadline.
But after last year’s explosion, the issue is resonating a lot more with state residents. Moreover, the setback provisions will not be the only thing on the ballot. The high-stakes midterm elections promise to turn out a lot of voters, with the enthusiasm more clearly evident on the left of the political spectrum.
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By Nick Cunningham of Oilprice.com
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Regardless, if Initiative 97 passes, it most certainly will have a dramatic economic effect on industry. A lot of private mineral owners will (also) be directly impacted, so I am sure the "litigation bonanza" will go on for years. As a former industry employee and Denver area resident, I am disappointed some form of compromise has not been reached on the set-back requirement. Further, if Initiative 97 is on the November ballot it is now up to a largely uninformed electorate to decide what the rules will be. I see this as a cautionary tale. The industry must do a better job at the grassroots level of educating folks and stop relying (primarily) on trade groups for messaging. That, and if the set-back initiative passes and things start to economically unravel, just keep the names of all the ACTIVIST organizations in mind so you know who to point the finger at down the line...