A new report from EnerCom, a Denver-based oil and gas consulting and marketing firm, says that the specter of Proposition 112 is already negatively affecting markets and investment in Colorado’s oil and gas industry, and will likely continue do so even if the measure does not pass.
The report says, “Capital providers also see serious risk to providing new capital to Colorado operators if Proposition 112 passes.”
Glen Parrott, CEO of EnerCom told Complete Colorado that the industry was taken by surprise when Prop 112 made it onto the ballot, and that investors are very concerned that this sort of regulation by the ballot box will spread to other states.
“Investors first took serious notice of 112 when it was announced the measure would be on the ballot in early August,” says the report. “Companies operating in Colorado saw a major decrease in stock price as investors evaluated the potential effects of setbacks. There is a general feeling that while 112 may not become law, it will continue to be a risk for operators in the state.”
Parrot says that even if the measure fails, the degree to which it is rejected, either by a slim margin or overwhelmingly, will have an effect on investor and industry confidence. He says that a slim-margin defeat raises the threat of renewed attempts in two years as well as the threat that the plan of attack on oil and gas exploration could spread to other states.
“A severe setback measure like 112 in Pennsylvania or New Mexico would have wide-ranging effects, cutting off parts of the most important shale basins in the world,” says the report.
“Oil and gas producer Anadarko Petroleum Corp on Wednesday said it may reallocate some resources out of Colorado if voters in that state approve a ballot proposal that limits drilling in populated areas,” said Reuters news agency in an article Wednesday.
EnerCom estimates that the remaining stock of permits will only allow about five and a half years of drilling, after which further exploration of the enormous oil and gas resources in the Denver-Julesburg Basin is unlikely.
“Without a positive business environment, operators will need strong justification for further capital allocation in the state regardless of their permit backlog,” said the report.
The threat has already caused midstream operators, who are the gas and oil processing and transport facilities, to change their development plans.
Of the midstream operators Parrott said, “They’re not going to build beyond what they need to support their client because if their client is just going to slowly wind things down and go to other basins why would you put in the time and effort for that infrastructure?”
While drilling on federal land is exempt, production from federal land only amounts to about 17 percent of Colorado oil and gas production.
For the top five producing counties, Weld, Garfield, La Plata, Rio Blanco and Las Animas, which includes northeast, central and southwestern Colorado, well drilling on 93.6 percent of the non-federal surface area will be prohibited by Prop 112.
Of that prohibited surface area, 22.7 percent is due to “occupied structures” and 59.9 percent is due to “sensitive areas.”
Parrott says that the ambiguity and breadth of the definition of “sensitive areas” in the proposition could make it functionally impossible to produce any oil or gas at all because the definition of “oil and gas development” explicitly includes “flowlines,” which by industry definition are what are used to move oil and gas from the well head to the midstream processing facilities.
It’s impossible to build pipelines from many well heads to a few processing plants that can avoid every possible “sensitive area” as defined in the Proposition by 2,500 feet. If you can’t route pipelines across rivers, under irrigation canals or past reservoirs, lakes, or even intermittent streams, there’s no point in drilling wells.
The cyclical nature of oil and gas exploration has always produced boom-and-bust times but Prop 112 is all bust followed by no more boom.
Kimberly Clemmer, owner of Clemmer Welding in Grand Junction, which is invested in repair and fabrication services for the industry said, “There has always been the hope that if you could cut back and diversify enough to ride out the dip, that when the upturn came through, you would be able to rebuild and grow once again,” said Clemmer. “With Prop 112 that hope is gone.”
Clemmer said, “The need for gas and oil does not go away, the benefits of the gas and oil industry do not go away with Prop 112 – it just goes away from Colorado.”