Colorado’s Proposition 112: What is it, and Why do Midstream Investors Care?

Energy analysts and investors have been closely monitoring the political climate in Colorado as Election Day approaches on November 6th. Proposition 112 (or Initiative 97) will be on the ballot and could have implications for the future of energy production in the state if it passes. Portions of the Niobrara-DJ Basin and Piceance Basin are located within Colorado, and the state is a significant oil and gas producer. Last year, Colorado was the sixth-largest oil-producing state and the eighth-largest for natural gas production, and the production value generated by oil and gas development in Colorado was estimated at $10.9 billion.

Any potential impact to oil and natural gas production has repercussions for midstream companies providing pipeline takeaway capacity from Colorado as well as gathering and processing and water services in the state. Today, we’ll discuss what Proposition 112 is, what companies have said about it, and which midstream companies have exposure to Colorado.

What is Proposition 112?
Colorado’s Proposition 112 “proposes amending the Colorado statutes to require that new oil and natural gas development be located at least 2,500 feet from occupied structures, water sources, and areas designated as vulnerable” (source). This distance is often referred to as a setback. Today, wells must be 500 feet from a home or occupied building or 1,000 feet from high-occupancy buildings like schools or hospitals. Proposition 112 does not apply to federal land, which accounts for 36% of the land in Colorado. Of the non-federal land in the state, 85% would become inaccessible if the 2,500-foot setback was implemented, according to an impact assessment from the Colorado Oil and Gas Conservation Commission (COGCC), which is a division of Colorado’s Department of Natural Resources. In Colorado’s top five oil and gas producing counties combined, 61% of the surface acreage (94% of non-federal land) would become unavailable.

Initiatives like Proposition 112 are not new in Colorado. In 2016, a 2,500-foot setback rule (Initiative 78) did not receive enough signatures to make it on to the ballot. Proposition 112 has made it to the ballot, but will it pass? A simple majority is required for passing, and the industry has spent prolifically to prevent that majority from materializing. Based on numbers from Ballotpedia, campaign contributions opposing Prop 112 amounted to over $21 million as of earlier this month compared to just over $1 million raised in support of the measure. Both gubernatorial candidates oppose the measure, but the governor does not have veto power when it comes to initiatives voted on in a referendum.

If passed, Proposition 112 would apply to oil and gas activity permitted on or after the effective date. Likely as a precaution, permitting activity in Colorado has noticeably increased in recent months, as shown below.