Colorado’s leap into the shale boom sparks a ballot box threat

NEW YORK and DENVER (Bloomberg) -- For Colorado shale drillers, 2018’s been a record-setter for pumping oil and natural gas. It may also end up a banner year for the industry’s political foes.

Spurred on by a fatal gas explosion last year, industry critics are pushing an initiative for November’s ballot that may ban drilling in more than half the state, endangering output from one of the country’s most prolific drilling plays. The contest for governor, meanwhile, features a Democrat, U.S. Representative Jared Polis, who made his name in Colorado politics by bankrolling anti-fracking campaigns.

The contests could mark a turning point in the long-running battle over drilling in Colorado, a politically mixed state where explorers, environmentalists and local residents have clashed as in few other places. With polls showing a “blue wave" of support for Democrats nationwide, Polis and the ballot initiative both stand a good chance, leaving the industry’s future up in the air, according to Height Securities LLC.

“The November election in Colorado is likely an inflection point for the state’s oil and gas industry," Height analysts Katie Bays and Josh Prico wrote in a July 11 research note. That could have “market-moving consequences" for producers with a major Colorado presence like Noble Energy, Extraction Oil & Gas Inc. and Anadarko Petroleum, they said.

As a counterpunch, business groups have pitched their own set of ballot questions that would require property owners be compensated for any loss in the market value of drilling rights due to new regulations. That could hobble local government efforts to clamp down, said Welles Fitzpatrick, an analyst for SunTrust Robinson Humphrey Inc.

All the initiatives face an Aug. 6 deadline to gather enough signatures to make it onto the ballot.

For voters here, the controversy is nothing new.

Advances in hydraulic fracturing and horizontal drilling have propelled Colorado into the upper echelon of oil and gas producers nationwide -- and run smack into the growing population in the Denver suburbs and the Front Range region along the Rockies. The state produced a record 450,000 bpd of crude in April and 149 billion cu ft of natural gas, just shy of the all-time high, according to the U.S. Energy Department.

The industry’s biggest worry this year is Initiative 97, a proposal to expand the buffer zone required between oil and gas wells and homes, schools and other occupied structures. The initiative would mandate a 2,500-foot setback, up from 500 ft today.

More significantly, it would extend the requirement to cover lakes, streams, parks, open space and a variety of other “vulnerable areas." Altogether, more than 54% of the state’s land area would be off-limits to new drilling, according to an analysis by the state Oil & Gas Conservation Commission. In Colorado’s top five producing counties, 61% of acreage would be inaccessible.

“That is effectively a ban on the industry," Dan Haley, president of the Colorado Oil & Gas Association, an industry group, said in an interview. “You’d basically have no new wells drilled in Colorado."

A similar proposal in 2016 failed to gain enough signatures to make it onto the ballot. But 2018 may be different, in part due to last year’s fatal accident in Firestone, north of Denver. Two men died and a woman was injured in a home explosion that was linked to an abandoned gas line.

The tragedy “made people understand the dangers of having toxic, industrial oil and gas operations right in the middle of our neighborhoods," said Micah Parkin of Colorado Rising, a group backing Initiative 97. “Why should the industry get special treatment?"

The proposal wouldn’t end drilling in Colorado, Parkin said. Federal land, which covers about a third of the state, would be exempt from the buffers. And explorers can drill horizontal wells, allowing access to reserves even if the property directly above is off-limits, she said.

Even if the measure wins approval, the state’s legislature could still move to soften the blow. Republicans who’ve generally opposed more regulation of the industry have a slim majority in the state Senate, although that too could change after November’s election.

Energy and natural resources generated more than $13 billion and supported 150,000 jobs in Colorado last year, according to state figures. Initiative 97 is enough of a threat that even Polis, the Democrat who’s championed past drilling restrictions, has come out against it.

The millionaire businessman from Boulder helped finance campaigns in 2014 to tighten regulations on fracking, although they failed to make it onto the ballot. This time around, he’s dialed down some of his criticism as he seeks support across the state. His website trumpets his plans to generate 100% of the state’s energy from renewable sources by 2040. But it makes no mention of fracking, pro or con. Polis declined a request for an interview.

His Republican opponent, state Treasurer Walker Stapleton, also opposes Initiative 97. His website promises he’ll promote a “low-cost energy supply" and avoid “burdensome, job-killing regulations."

Polis led Stapleton among likely voters, 42% to 37%, in a June poll commissioned by a Colorado labor union.

The Democrat understands the state can’t afford to undermine the industry, said Fitzpatrick, the SunTrust analyst.

"He has had his come-to-Jesus moment where he can either pick his crusade against oil and gas or he can pick every other pillar in his platform," he said. “Is he going to shoot himself in the foot because he doesn’t like oil and gas? I find that hard to believe."