Shale Policy Outlook: Battleground Colorado

BMI View : We believe recent public referendums to suspend and/or ban fracking in several Colorado municipalities will have little immediate impact, noting that the predominately urban areas that passed the measures had very little unconventional activity to begin with. However, the votes do signal a growing division within the state on this issue. This suggests that come the November 2014 mid-term election - where we expect to see an attempt to introduce a state-wide moratorium - Colorado could become an important litmus test for the oil and gas industry.

We believe recent events are setting Colorado up as a key battleground on fracking ahead of the US 2014 midterm elections. In the state's recent November 5 th local elections, three of the four municipalities that had fracking bans or moratoriums on the ballot voted in favour of the measures. Indeed, resolutions calling for a five-year moratorium in Fort Collins and Boulder received considerable backing, passing with 56% and 77% support, respectively. This came despite the fact that Fort Collins City Council had approved a resolution opposing the moratorium, in an attempt to steer citizens away from voting for it. Meanwhile, Lafayette, which already has a three-year moratorium in place on fracking saw 58% in favour of banning the practice. Only Broomfield said no to a suspension on fracking, narrowly rejecting the moratorium with 50.0% of the vote against the measure (though a recount is likely).

Promising Play

Big Wins In Boulder and Fort Collins
Colorado - 2013 Municipal Election Results: Place/Extend A 5-Year Moratorium On Fracking?

Shale Policy Outlook: Battleground Colorado

BMI View : We believe recent public referendums to suspend and/or ban fracking in several Colorado municipalities will have little immediate impact, noting that the predominately urban areas that passed the measures had very little unconventional activity to begin with. However, the votes do signal a growing division within the state on this issue. This suggests that come the November 2014 mid-term election - where we expect to see an attempt to introduce a state-wide moratorium - Colorado could become an important litmus test for the oil and gas industry.

We believe recent events are setting Colorado up as a key battleground on fracking ahead of the US 2014 midterm elections. In the state's recent November 5 th local elections, three of the four municipalities that had fracking bans or moratoriums on the ballot voted in favour of the measures. Indeed, resolutions calling for a five-year moratorium in Fort Collins and Boulder received considerable backing, passing with 56% and 77% support, respectively. This came despite the fact that Fort Collins City Council had approved a resolution opposing the moratorium, in an attempt to steer citizens away from voting for it. Meanwhile, Lafayette, which already has a three-year moratorium in place on fracking saw 58% in favour of banning the practice. Only Broomfield said no to a suspension on fracking, narrowly rejecting the moratorium with 50.0% of the vote against the measure (though a recount is likely).

Big Wins In Boulder and Fort Collins
Colorado - 2013 Municipal Election Results: Place/Extend A 5-Year Moratorium On Fracking?

Promising Play

While not as well known as some of the other major US natural gas and liquids producers, Colorado is home to the potentially quite prospective Niobrara shale play. The formation spreads through Colorado, Kansas, Nebraska and Wyoming, with the vast majority of the play's resource potential concentrated in Colorado's Denver-Julesburg Basin. At present reserve projections vary widely, from the EIA's estimate of 1.6 trillion cubic meters (tcm) of recoverable natural gas and 4.1bn barrels ofrecoverable oil (including the Denver, Piceance and Powder River Basins) to 7bn bbls of recoverable oil according to other sources, which would put Niobrara roughly on par with Bakken.

While exploration of the state's hydrocarbon resources has been going on for over a century, unconventional commercial production had proved challenging in recent years. Indeed, despite considerable promise, the complex geology of the Niobrara formation had seen a number of early disappointments. However, in recent quarters we have seen expanding production from the play - with average growth of 25.7% year-on-year (y-o-y) in 2012 and 29.0% y-o-y in the first eight months of 2013 - and a corresponding uptick in optimism from companies such as Noble and Anadarko. Indeed, Noble indicated plans to put in US$1.7bn into the Denver-Julesburg basin in 2013 alone.

Pushing Higher
Colorado - Monthly Production

Little Impact…

In the short term, we see little immediate impact from the recently passed municipal bans. Indeed, while production in Colorado has climbed steadily in recent years, hitting 5.5mn bbls in August, the four areas in question have little hydrocarbon sector activity, holding only 141 of the states' greater than 51,000 active wells. Moreover, there are serious questions about the legality of the moratoriums, with the ability to regulate the oil and gas sector lying primarily with the state, not local bodies. Indeed, in a similar case, the city of Longmont tried to ban fracking late last year and is now being sued by the state. While there has been no verdict in that case as of yet, we believe that given the long history of states being the primary actors in hydrocarbon regulation, the recently passed measures will ultimately be settled by state-level courts.

…Lots Of Implications

That said, the implication of the votes is potentially quite significant for E&P companies undertaking unconventional activity in Colorado, and potentially even the US at large. Specifically, victory against fracking in three out of the four localities is likely to embolden anti-fracking activists, bolstering efforts toward putting forward a resolution for a state-wide ban in the November 2014 mid-term election.

It is not currently our core view that we will see a full fracking ban in Colorado for several reasons.

  • First, while measures to delay or ban drilling passed handily in left-leaning centres like Lafayette and Boulder, there is likely to be far more significant pushback from Colorado's rural population, suggesting that a state-wide referendum may have a different outcome. Indeed, we highlight that while Boulder, Broomfield, Lafayette and Fort Collins were considering fracking moratoriums, 11 rural municipalities were voting on a motion to succeed from the State of Colorado -a PR stunt done in part to draw attention to their dependency on unconventional activity in the face of the growing urban population's disapproval of it. Indeed, Weld County Commissioner Sean Conway has stated that a ban on fracking - something he sees as likely to be introduced onto next year's ballot - would be tantamount to an "attack on [rural communities'] way of life" and livelihoods.

  • Second, we highlight the huge economic benefits fracking has brought to the state, potentially encouraging some voters which may be on the fence to allow unconventional activity to continue. Indeed, while local urban municipalities can vote to ban drilling in their own area, safe in the knowledge that it will have little detrimental effect, a state-wide ban would have a far more significant impact. According to a study by the University of Colorado, the oil and gas industry contributed US$6.5bn in employee income and US$1.6bn in public revenues in 2012. We see this as likely to sway some voters against implementing harsh state-wide measures.

Economic Benefits From Fracking
Employment Wage Summary, US$mn
Drilling 4,935 319.2
Extraction and Support Activities 67,572 4,568.40
Petroleum Refineries 4,746 245.9
Transportation 2,889 172.4
Gasoline 18,646 466.2
All Other 12,688 687.3
Total 111,476 6,459.40
Public Revenue, US$mn
Severance $163.00
Property $600.70
Leases $87.90
Royalties $159.90
Personal Income $100.60
Corporate Income $14.90
Sales Tax $453.80
COGCC Tax $4.70
Total 1,585.50
Source: BMI, University of Colorado Study (2012)

That said, while not our core view, we acknowledge that with Colorado turning from a red-leaning (conservative) state steadily more purple (swing) over the last decade, the risks to the oil and gas industry cannot be completely discounted. Indeed, for companies with significant operations in Colorado, the recent show of public disapproval, and high likelihood that this could translate into a push to put a fracking moratorium on the 2014 ballot, is surely somewhat disquieting.

Furthermore, we highlight that this fight could have an impact beyond the state lines, noting that if this currently pro-fracking state were to swing, the reverberations would likely be felt throughout the national discourse. With Colorado's long history of oil and gas drilling, and the significant unconventional activity in the state, if it were to enact a ban or moratorium in 2014 makes is somewhat unusual. Only New York has enacted such draconian laws, and in that state, unconventional activity had not yet taken off in a big way. As such, while we still do not expect a ban or moratorium in Colorado, we believe the potential for one is likely to make it one of the most closely watched battlegrounds states in the coming 12 months leading up to the midterm election.

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