One of the issues surrounding Proposition 112, the ballot measure to increase the setback for oil and gas drilling to 2,500 feet, is the potential that Colorado taxpayers could be on the hook for billions of dollars worth of claims that the state has unconstitutionally taken away the property rights of mineral owners and lessees.
Speaking of the fiscal impact to the industry not including impacts to schools, infrastructure and tax revenues, Craig Kaiser, President of PetroValues, an oil and gas tech company that specializes in the valuation of minerals said, “We came up with a dollar amount of $470 billion dollars that will be lost. We calculated what each one of those [potential] individual wells would look like if they were taken away.”
“I think it’s very clear that a mineral estate or a mineral lease is a property right that is capable of being taken under the Colorado or U.S. Constitutions, so I think to the extent that Prop 112 deprives a mineral estate owner or a lessee of its right to access minerals, then yes, I think that could constitute a taking,” said oil and gas attorney Wayne F. Forman of the law firm Brownstein Hyatt Farber Schreck.
University of Denver Associate Professor of Law Kevin Lynch disagrees, saying, “The industry, although they claim otherwise, have never put this issue to the test and in fact they have taken a lot of actions such as supporting Amendment 74 and supporting a number of takings bills in recent years at the state legislature that would have explicitly made restrictions on oil and gas a taking, which to me indicates that under existing law they agree with me that it wouldn’t be a taking.”
But the industry seems to have been trying to secure its future in the face of ongoing activism intended, they say, to completely shut down as much oil and gas exploration as possible. Appealing to the state legislature to put a stop to what they see as anti-fracking obstructionism doesn’t equate to an admission that mineral rights are not property rights protected by the state and federal Constitutions.
“While no court in Colorado has come out and explicitly said that the takings clause applies to a severed mineral interest, Colorado has already recognized that it is a property interest that is susceptible to a taking,” Forman said. “I think that’s consistent with most other courts, including Michigan and Ohio, they’ve even been more explicit and have literally stated that severed mineral interests are property rights under the 5th Amendment and corresponding state laws.”
Kaiser says that the raw value of the minerals that the private owner gets from leasing to an extraction company that would be lost, some 20 percent of the total, comes to about $59 billion. The investment-based expectations that the leasing companies have in returns on investment in leases is another $59 billion or so. The rest of the $470 billion Kaiser mentions are financial impacts to the industry outside of the raw value of the minerals.
This potentially means that taxpayers will have to compensate owners and lessees in the Wattenberg oil field alone to the tune of $118 billion or more, ignoring the rest of the state for the moment, should 112 pass.
Investment–based expectations are a “key factor in determining whether a taking has occurred,” said Forman.
Don Phend, a CPA and treasurer of the Colorado Alliance of Mineral and Royalty Owners (CAMRO), whose expertise is in valuing mineral estates said, “If [oil drillers] purchase leases for dollars and invest capital and say ‘Okay, I have this much sunk into my leases already. I expected to get a 20% rate of return on this project’ I think I will use that as a benchmark about damage to an operator.”
But aside from the profits oil drillers hope to make are the needs and expectations of ordinary people who own the minerals and hope to be able to sell them to augment their income.
“We can show you people who put their kids through college because of a modest royalty that paid enough to cover tuition costs,” said Phend. “We have one former board member who put both of her sons through college on her royalties. These are common ordinary people that have a real property interest that they have a right to, that has some potential real life–changing benefits.”
Phend thinks Prop 112 isn’t really about safety, it’s about stopping oil and gas development in Colorado. “It’s a means to an end. If local control didn’t work, then maybe a state–wide ballot initiative will,” said Phend. “The effect is to stop development.”
“I guess the way I would look at it is just about anybody would say anywhere but my backyard. If you gave local control to the entire state, the entire state would always say, ‘Somewhere else.’ That would effectively be a drilling ban,” Phend continued.
Dealing with that “not in my back yard” attitude on the part of people who don’t own the minerals beneath their property is one of the reasons the Colorado Legislature restructured the Colorado Oil and Gas Conservation Commission (COGCC) in 2007.
It was endowed with exclusive jurisdiction “over all persons and property, public and private,” necessary to provide “responsible, balanced development, production, and utilization of the natural resources of oil and gas in the state of Colorado in a manner consistent with protection of public health, safety, and welfare, including protection of the environment and wildlife resources.”
Proponents of Prop 112 have been stymied in their efforts to pry local control away from the COGCC on several occasions and are trying to achieve their goal by overruling the Legislature with this ballot issue.
Another consequence of Prop 112’s ban on “hydraulic fracturing” is the potential that existing wells may have to be prematurely abandoned if the well-head is inside the 2,500-foot protection zone.
Phend said, “I’m not an attorney but my reading of the proposal seems to consider hydraulic fracturing as one of the defined oil and gas operations. My understanding is that with many of these wells, you see multiple frackings during their productive life.”
“[The existing older] vertical wells were only recovering anywhere from a quarter to about 1% of the hydrocarbons in the ground,” said Kaiser. “Even with horizontal wells, the recovery factors are still only around 4 to 10 percent. If you cannot come in and redo [fracking], that drastically shortens the lifetime of a well.”
“I think fracking is pretty obviously a nuisance and meets the definition of nuisance that the Colorado courts have set out in numerous opinions,” said Lynch.
In response, Forman said, “In Colorado oil and gas development is not only tolerated, but as a matter of legislative policy has historically been encouraged. It’s awfully hard to say that the legislature has consciously encouraged a nuisance. If you read the Colorado oil and gas act, that’s exactly what it says. I just don’t find it credible that a legitimate mineral operation in accordance with state rules and regulations is something that could fall within the nuisance exception.”
Kaiser says that we have barely scratched the surface of the mineral wealth available in Northeastern Colorado’s Wattenberg oil field alone.
“The vast majority of money and revenue and tax revenue that’s going to come from Wattenberg Field is still going to come in the future,” said Kaiser.
“As far as Wattenberg Field and what the future holds, it really is what the state wants to do. It’s an amazing resource. And there’s a heck of a lot of oil and gas still to be made there, but it’s up to Colorado voters whether or not they want that resource to be developed,” he continued.
“It is inevitable that if this does happen there are going to be major, major lawsuits,” said Phend. “Either individual or class action lawsuits, and they will be far beyond anything the state of Colorado could possibly hope to compensate for.”
CORRECTION: According to the PetroValues study, the $59 billion mentioned for the loss to leasing companies should actually be cited as $97 billion of after-tax revenue lost to investors.