Like voters across the country, voters in Colorado will be going to the polls on November 6. There they will face two initiatives--Proposition 112 and Amendment 74--that could have a significant impact on oil and gas development in the state that is the nation's fifth largest producer of natural gas and seventh largest producer of oil. The outcome of the voting on these initiatives is being closely watched.
Proposition 112: Increase Setbacks
The first of these initiatives would substantially increase the distance that new oil and gas wells and other forms of oil and gas infrastructure must be located from homes, schools, public open space and water bodies, among other things. In 2013, the Colorado Oil and Gas Conservation Commission ("COGCC") established the current state setbacks for wells and production facilities, which include setbacks of 500 feet from homes and other occupied buildings and 1,000 feet from certain high-occupancy buildings such as schools, hospitals and child-care centers as well as neighborhoods with at least 22 buildings. However, residential areas on Colorado's Front Range have continued to expand while oil and gas development in the Denver-Julesberg Basin continues at a brisk pace, bringing the two increasingly into close proximity. This has led a number of groups to press for even greater setbacks. Initial attempts to get the issue before the voters in 2014 resulted in a compromise that involved the creation of a task force appointed by the governor to try to address conflicts between expanding populations and oil and gas development. Dissatisfied with the resulting task force recommendations, some groups tried again in 2016 to put the setback issue in front of voters but failed to gather enough signatures to qualify for the ballot. After a 2017 flow line explosion in Firestone, Colorado that killed two people brought renewed focus to oil and gas operations and their proximity to residential areas, a third effort this year has succeeded in getting the setback issue on the ballot.
Proposition 112 (the language can be found here) would amend current state law to increase setbacks for "occupied structures"; and "vulnerable areas" on non-federal lands to 2,500 feet, while allowing the COGCC or local governments to require even greater setbacks. "Occupied structures" would cover any building intended for human occupancy and would specifically include houses, schools and hospitals. "Vulnerable areas" would cover a wide range of features, including playgrounds, public parks and open space, public drinking water sources and various surface waters such as lakes, rivers and perennial and intermittent streams, with the state or local governments having the ability to designate additional areas as "vulnerable." The setback requirement would apply to all oil and gas development activity permitted after the effective date of the measure and would cover oil and gas exploration, drilling, hydraulic fracturing, and production and processing of oil, gas or other gaseous or liquid hydrocarbons, as well as flowlines and waste treatment. Unlike current requirements, there is no provision allowing a waiver from these setbacks, even where a property owner consents to a smaller setback.
The impacts of Proposition 112 on oil and gas activity in Colorado would be substantial. As one measure of the impact, a setback of 500 feet around a home (the current standard) covers about 18 acres, while a setback of 2,500 feet around a home would put approximately 450 acres--an area 25 times greater--off-limits to new oil and gas development. The COGCC has estimated that Proposition 112 would make 54% of the state's land surface off-limits to new oil and gas development, including 85% of non-federal lands. The impact would be even more acute in some parts of the state. For example, the COGCC has estimated that among the top oil- and gas-producing counties in the state, 78% of Weld County would be unavailable for new oil and gas development, as would 86% of Los Animas County.
Amendment 74: Just Compensation for Reductions in Property Value
The other initiative affecting oil and gas operations that will be before the Colorado voters on November 6 is widely seen as a response to the potential impacts of Proposition 112. Amendment 74 (the language can be found here) would amend the state constitution (as opposed to state statutes) to expand the circumstances under which property owners may be entitled to compensation if the government takes private property. The Colorado Constitution currently provides that private property should not be taken or damaged for public or private use without just compensation. Amendment 74 would add a trigger for just compensation, i.e., reduction in fair market value by government law or regulation.
According to supporters, Amendment 74 is intended to address interpretations of the current constitutional language by Colorado courts (reflecting federal court interpretations of similar language in the U.S. Constitution) that limit recoveries of just compensation for "regulatory takings" to situations in which a government action has deprived property of most of its value. In particular, supporters of Amendment 74 have pointed to the en banc decision of the Colorado Supreme Court in Animas Valley Sand & Gravel, Inc. v. Board of County Comm'ers of the County of La Plata, 38 P.3d 59 (Co. Sup. Ct. 2001), in which the court held that compensation for regulatory takings is limited to those whose property has been reduced in value by government actions to "slightly greater than de minimis" or less. In contrast, supporters of Amendment 74 indicate that its intent is to provide compensation in situations involving lesser reductions in property value so long as the other requirements for obtaining just compensation are met.
Opponents of Amendment 74--including numerous municipal officials throughout the state--argue that, unlike Proposition 112, the effects of Amendment 74 would not be limited to oil and gas development. Rather, opponents express concern about the potential impacts of Amendment 74 on the ability of the state government and local governments to regulate in a wide variety of areas. They also argue that Amendment 74 could have unintended consequences and could put regulators in "no win" situations, e.g., where denial of a drilling permit could lead to a claim for compensation by the operator while approval of a permit could result in a claim by nearby property owners if their property values have been reduced as a result of the approval.
The prospects for both Proposition 112 and Amendment 74 remain uncertain. Because it is a statutory measure, Proposition 112 needs only a simple majority to pass. While a wide variety of environmental groups and other non-governmental organizations support the measure, a number of current and former state legislators and officials have expressed opposition. Most notably, both the Democratic and Republican nominees for governor have expressed opposition to Proposition 112. Opponents of the measure are outspending supporters by a substantial amount. Polling has been somewhat inconclusive, with one recent poll showing support at 43% of voters and opposition at 47% (with 10% undecided), while another poll taken about the same time showed support at 52% and opposition at 48% (although the participants in the latter poll skewed more Democratic than the overall electorate).
The prospects for Amendment 74 are likewise uncertain. As an amendment to the state constitution, Amendment 74 would need to pass with 55% of the vote in order to be adopted. The same two polls noted above also showed differing results for Amendment 74, with one poll indicating 50% support while the other showed 63% support. A further element of uncertainty that applies to both measures is how the overall dynamics of the election in Colorado and nationwide may affect voter turnout and therefore the prospects of Proposition 112 and Amendment 74.
Both Proposition 112 and Amendment 74 could substantially affect oil and gas operations in Colorado if adopted. Supporters and opponents of both measures are sure to remain active in the final days leading up to November 6, and both measures will undoubtedly maintain a high profile until then. The current uncertainty is likely to continue after the elections. For example, regardless of the outcome of the vote on Proposition 112, when it convenes in January the state legislature is expected to address setbacks and related issues in response to the concerns highlighted by the measure and its placement on the ballot. As for Amendment 74, there are a number of unanswered questions regarding its scope and the standards to be applied to claims for compensation under it, and if it passes, there will be a period of significant uncertainty as the state courts determine how to apply the amendment in practice. In short, challenges remain ahead for Colorado's oil and gas industry.
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