Here at Spears & Associates we are huge proponents of a state’s right to self-determination. We are also not lawyers and don’t give legal advice – we’re just a few people who try to imagine what might happen next in the oil and gas industry. With that in mind, we trip carefully into the minefield that follows…

Registered voters in Colorado will vote on Proposition 112, which proposes to change state law so that new wells being drilled must be a minimum distance of 2,500 feet from occupied buildings. As we write this, 52% of eligible voters indicate they will approve Prop 112. Since very little land in Colorado’s oil basins is outside that 2,500 foot exclusion zone, it would eliminate most new well drilling from Colorado’s future.

If Prop 112 is approved, what series of events might be triggered? Here’s the dominoes we see falling:

  1. Drilling in Colorado stops because very few sites are farther than 2,500 feet from an occupied building. And if drilling stops, completion work stops as well, which includes hydraulic fracturing.

  2. When drilling and completion activity stops, 5,000-10,000 people lose their jobs (not all of which are in Colorado, but most will be in Eastern Colorado).

  3. Colorado’s oil and gas output will fall sharply a couple months later and continue to fall until all wells are shut in and abandoned. Within 6 months this will create a shortage of oil and, possibly, gas in the US, sending prices higher.

  4. Oil & gas producers who paid bonuses to mineral owners for the right to develop their reservoirs will sue those mineral owners for the return of bonus payments since the assets have been rendered worthless. Some mineral owners, having already spent their bonus payments, will be thrown into bankruptcy or will be forced to sell their now-worthless properties to return the funds.

  5. Mineral owners will sue the state of Colorado for having rendered worthless the once valuable mineral rights on 5 million acres… a form of eminent domain, but without being compensated for rendering these assets unusable. The argument will go to the Supreme Court.

  6. E&P companies who signed natural gas supply agreements will trigger force majeure clauses to escape contracts they can no longer honor.

  7. Oil companies move activities to oil-friendly provinces in Texas, Oklahoma, Louisiana and the Gulf of Mexico, driving up drilling activity, employment, and state tax revenues.

  8. Colorado, its scenery intact but its state budget busted by a Supreme Court decision saying it must fairly compensate the mineral owners holding 5 million acres of worthless mineral rights, goes bankrupt in 2022.

The clear winner is Texas (again). The clear loser? Colorado teachers.