If voters ban oil and gas drilling by voting in Prop 112, Colorado’s rosy economic metrics could turn sour in 2019-2021 and beyond

In what may turn out to be a bit of economic irony, Colorado Secretary of State Wayne Williams released a report Monday that “Colorado’s economy is among the best in the country.”

Personal income, wages, GDP, job creation and entity filings all continued to increase throughout the third quarter of 2018. And the secretary’s quarterly business and economic indicators report predicts continued growth into the final quarter of this year and into next.

Last month, Colorado reached its lowest number of jobless claims in over 10 years, Williams’ office reported. And The number of new business filings with the Secretary of State’s office was 31,014 over the third quarter and business renewals were 136,752–both strong increases compared to the same period in 2017, the report said.

Oil & Gas 360 New Report Out Today: Colorado Economy is Outperforming Most of the Country

Edge of the Wattenberg: will drilling die in Colorado courtesy of Prop 112?

But the business confidence index has dropped for Colorado

“The Colorado economy remains on a solid footing, with strong GDP, employment, personal income, and wage growth. However, in the most recent Leeds Business Confidence Index, business leaders expressed reticence looking ahead two quarters, noting concerns about the availability of labor, housing, housing affordability, interest rates, and political uncertainty,” the report says.

Richard Wobbekind, executive director of the Business Research Division, said, “The decreasing optimism came as somewhat of a surprise in an economic environment that appears very healthy in Colorado,” referring to overall growth in GDP, employment, income, and exports.

Economic damage to Colorado from de facto drilling ban includes reduced tax revenues, large job losses, diminished demand for goods, services, real estate

When Coloradans begin to fill out ballots this week, if they mark “Yes” on Prop 112, they could be the unwitting authors of a reversal for Colorado’s economy in 2019 and beyond. Proposition 112 is the mandatory 2,500-foot setback for new oil and gas development that has been described by opponents as a de facto ban on drilling statewide on non-federal land.

The University of Colorado Leeds School of Business’s Business Research Division published a 2015 report that detailed the economic contribution from the oil and gas industry in 2014. Looking at this year’s election, if 112 passes, once the already-permitted wells have been drilled and completed, Colorado’s economic tide could begin to turn pretty quickly in 2019.

What’s at stake for the Colorado economy if drilling stops?

According to the report, here’s a look at what Colorado stands to lose if it loses oil and gas as a result of Proposition 112:

“In 2014, Colorado’s upstream and midstream oil and gas industry includes drilling, extraction, support activities, pipeline construction, and pipeline transportation.

“The industry recorded $15.8 billion in production value, accounting for 38,650 direct jobs with average annual wages in excess of $105,000— twice the average wage of all industries in Colorado,” the BRD report found.

“Collectively, this industry contributed nearly $4.1 billion in employee income to Colorado households in 2014.

The report said: “Examining the multiplier effect of industry spending, or the churn of dollars spent along the industry supply chain and by income earners, the total economic impact of the industry was:

  • $31.7 billion in 2014,
  • supporting 102,700 jobs and
  • $7.6 billion in compensation.”

When will the oil and gas economy in Colorado begin to dry up?

Oil & Gas’s economic contributions to Colorado’s economy would begin to depart right away because if Proposition 112 passes, the current robust demand for oil and gas resources, which takes the form of lease and bonus payments for future resource development, would dry up in Colorado immediately. What is the value of a lease you can’t drill?

The decline speeds up in 2019-20 as the drilling and completion companies wrap up the last wells, place wells on production and move their operations and people to other oil and gas plays outside of Colorado.

Revenue to the state and local governments from production taxes and royalties would be affected at a delayed pace. Normally declining production from thousands of existing Colorado wells would continue but at the wells’ usual decline curves. For the newest wells, the loss of royalty payments and production taxes would simply follow the shale well decline curves, which generally begin a steep decline about two to three years after first production.

“The oil and gas industry contributed to public revenue in 2014, primarily through property, income, and severance taxes and through public land leases and royalties. These revenue streams totaled nearly $1.2 billion in 2014,” the Leeds School of Business 2015 report said.

As to government revenues, once there are no new wells being drilled to replace declining production from older wells, government tax and royalty revenues will begin to decline quickly, likely being felt beginning in 2020 as reduced production taxes, reduced severance taxes. Reduced ad valorem taxes could be as soon as oil and gas assets lose their value–as soon as Prop 112 would take effect immediately following the election.

How much tax revenue is at risk?

“This industry is subject to taxes and assessments beyond what other industries contribute,” the BRD report said.

“Ad valorem taxes, for instance, are 3 times higher for oil and gas production than for commercial property within the state and 11 times higher than residential property,” the report said.

  • “Oil and gas property taxes exceeded an estimated $400 million in 2014;
  • Severance taxes paid by the industry totaled $330 million in 2014;
  • The industry also paid $315 million in royalties, rents, and bonus to federal government in 2014;
  • ~$160 million in state royalties, rents, and bonuses.”

When will the losses begin to hurt Colorado schools and other services supported by state and local governments that rely on oil and gas tax revenues?

Drilling and employment decreased in 2015 because of lower oil and gas prices, according to the BRD report. But interestingly, overall production continued to increase through mid-2015 primarily due to new production coming online in Weld County, the report said. But if 112 passes, new production in Weld County will be over.

With a return to $50-$60 per barrel oil prices, the industry generated a major bump in drilling and development activity. Combine more new wells with 2017-18’s higher oil prices and the state is likely to be looking at record revenue from oil and gas production in 2018 and into 2019 as the final permitted wells are drilled and completed. But if Proposition 112 does pass, once all permitted wells are drilled and completed, revenues from oil and gas operations for governments will begin to drop.

One important factor for schools is the State Land Board royalty payments. Approximately 95% of the State Land Board’s assets are managed to benefit the state School Trust.

School Trust funds benefit K-12 public schools through allocation in the state’s annual budget for public education, as well as through the BEST (Building Excellent Schools Today) fund, directed by the Treasurer’s office to support capital improvements to school facilities across the state.

The State Land Board calculates that Proposition 112 will eliminate $230.3 million of funding for Colorado’s schools from state trust lands over a three-year period. This amount only covers direct revenue from oil and gas leasing and royalties. It does not cover revenue from well pad surface use agreements, or road and pipeline right-of-way fees.

If 112 passes, school funding from trust lands will be reduced by 60%, the Board said. The Land Board calculates that Proposition 112 would impact 89% of oil and gas wells that generate income from trust mineral estate.

Backlog of permit applications with Colorado Oil & Gas Conservation Commission

In early October, the COGCC reported more than 4,500 approved permits issued in Colorado in the past 12 months. And there are 5,700 pending permits for which applications have been made to the COGCC.

The pending permits that have not been issued to drillers before Governor Hickenlooper certifies the Nov. 6 election would be void according to the language in Proposition 112, if it passes. According to Colorado law, the election must be certified no later than 30 days after election day.

Is a reversal in the offing if Prop 112 passes?

There is a legitimate question as to how successful a legislative effort would be that tries to reverse, delay or amend the new law enacted into Colorado statutes by the people in the form of Prop 112.

The Colorado Democratic Party platform fully backs the 2,500-foot setback proposed by the backers of Prop 112. At present the Democrats have the majority in the state house. Republicans hold the majority in Colorado’s senate. But there is an election in three weeks with seats in both houses up for grabs.

 

As to support for a reversal by a newly elected governor, Democratic candidate Jared Polis, a strong supporter of previous setback and local control initiatives, has already said he would not support a reversal of 112. “No, when the people have spoken, the will of the people needs to be honored,” Polis said in a televised debate.

Oil & Gas 360 New Report Out Today: Colorado Economy is Outperforming Most of the Country

Left to right, Colorado 2018 gubernatorial candidates Jared Polis (D) and Walker Stapleton (R).

Walker Stapleton, Colorado State Treasurer, is the Republican candidate for governor of Colorado. In the same debate, Stapleton said: “I would pursue every redress possible for that job-killing measure.”

It’s pretty clear that a Polis victory for governor likely means a veto for a law put forth by the state legislature to reverse the setback rule, in the event that 112 passes.

And what would a replacement bill look like that would be able to gain enough bipartisan support to make it through both houses of a split control state legislature? It might have an expanded setback from homes, schools and hospitals that would still allow oil and gas development in the state’s oil and gas basins. But in order to not create another drilling ban, it would be mandatory to remove any provisions that push drilling 2,500 feet away from any water source or irrigation ditch wet or dry, any public open space, and allows the State or any local government to declare any area vulnerable at anytime, and then issue its own setback of 2,500 feet or more from the newly declared vulnerable area.

Oil & Gas 360 New Report Out Today: Colorado Economy is Outperforming Most of the Country

Text of the changes to Colorado state statute – from Proposition 112 – establishing a mandatory minimum 2,500-foot setback for all new oil and gas development. The vote will be counted Nov. 6, 2018.

 

 

 


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