If a state oil and gas setbacks ballot initiative passes next week, it could result in a leading local oil and gas producer suspending drilling operations for years while it looks to transition to operating on federal lands.
Such a shift could mean Caerus Oil and Gas would temporarily cut its annual spending by hundreds of millions of dollars.
Proposition 112 would require 2,500-foot setbacks between drilling and homes, as well as vulnerable areas such as waterways, parks and open space. The Colorado Oil and Gas Conservation Commission has estimated that the measure would prevent drilling on some 99.8 percent of private lands in Garfield and Rio Blanco counties.
In an interview, Caerus Chief Executive Officer David Keyte said passage of the measure probably would mean the company would have to pivot to operating on federal lands, which wouldn't be affected by Proposition 112. That would occur after it takes perhaps a year to finishing drilling based on permits it already has on private land. Existing permits wouldn't be affected by Proposition 112.
Keyte said Caerus currently has "very few if any drilling permits on federal land so that pivot would take a number of years to perfect."
He said Caerus owns a substantial amount of lease acreage on federal land, with some 5,000 drilling locations identified.
"But they were not projected to be drilled for years," he said. "We would have to move them up in the queue. And the permitting isn't as simple as getting permits to drill on our own property from the (Colorado Oil and Gas Conservation Commission)," Keyte said.
As a result, he said, he suspects Caerus would eventually suspend drilling for several years if Proposition 112 passes.
He said Caerus will spend about $400 million this year developing and operating wells in western Colorado's Piceance Basin, and that number "will move up" next year.
But if Proposition 112 passed and if Caerus decided to suspend drilling, that annual spending would drop by about $250 million, with the remaining $150 million continuing to be spent on work on things such as lease operating expenses and existing wells.
Caerus owns minerals, leases and lands covering some 500,000 acres in the Piceance Basin, which Keyte said he believes makes the company the largest leaseholder in the state. It has about 150 employees working in its Parachute office, and another 70 or so in Denver.
Caerus expects to pay more than $24 million in state and local taxes on its 2018 production, most of it entailing property taxes in Garfield, Mesa and Rio Blanco counties.
The company's local interests include about 60,000 acres of land and 45,000 acres of minerals. Keyte said if Proposition 112 passed, it would be prohibited from drilling its own minerals from its own surface locations despite the fact that there are no homes, schools or playgrounds in the area. To him, that means the talk by supporters that the measure is needed to protect the health and safety of humans rings hollow.
Despite that focus on health and safety, Proposition 112 also has what Keyte calls that "oh by the way" language applying to vulnerable areas such as creeks and ephemeral streams.
"That's really what affects us and will affect the Western Slope, and it's never addressed," he said. "I think having people focus on the oh-by-the-way language is really important as it impacts the collective us on the West Slope."
Bob Hea, an executive with Laramie Energy, another local producer, has called the vulnerable area language a catch-all "designed to shut down drilling statewide," and has predicted that drilling activity levels in the Piceance would drop significantly if the measure passes.
The COGCC analysis has projected that the buffer zone, as it pertains to occupied structures, would make drilling off-limits on about 38 percent of private land in Garfield County, but the vulnerable-area provision applies to more than 99 percent of such land. The measure wouldn't apply to the nearly two-thirds of the county that is on federal land.
Anne Lee Foster, a spokeswoman for Colorado Rising, the group behind Proposition 112, previously has said the oil and gas industry averages two spills a day in the state, which has no setbacks for waterways, and the measure's backers felt it was important to protect waters as well.
She said this week that the proposition's language is based on the federal definition of waterways.
"It's not arbitrary under any means. The 'oops, we added this in,' or whatever is a ridiculous claim."
She also pointed to the measure's lack of application to federal land in a place like Garfield County.
"To imply this is a ban, this is going to prevent development, when it doesn't even apply to the vast majority of surface area in the county, is a total scare tactic," she said.
Keyte said one economic factor for Caerus if it moves to federal-land drilling is that it would have to pay 12.5 percent royalties to the federal government. It pays no royalties to develop the minerals it owns.
"That's an immediate hit to us," he said.
Also, he said, its federal leases are generally north of where it's operating. Its infrastructure, such as gas-gathering pipeline and water delivery systems, aren't yet developed to the north. It would cost substantially more to have to build out that infrastructure in just two years as opposed to just constructing it gradually, "in baby steps" as it advances pad by pad on its own property, he said.
"Having to make that jump to the federal land would have a substantial capital cost," Keyte said.
Caerus also says moving to federal land would mean it would have to deal with restrictions to protect greater sage-grouse, which could delay or restrict drilling permits.
Keyte said that nevertheless, Caerus remains 100 percent dedicated to development of its Piceance assets.
"We have no plans to do anything but continue to work in the basin. That was our strategy coming in and we want to aggregate within the basin because we feel it was a great basin being left behind" as publicly owned companies shifted from natural gas basins to oil drilling, he said.
He said if Proposition 112 passes, he expects many lawsuits to be filed involving "takings" claims because of the inability to develop mineral rights. That litigation and the revenue impacts to the state of Proposition 112 make it likely the state would enter into discussions with industry to amend the measure, which is a statutory amendment, so it has more reasonable restrictions, he said.
Foster said any issues with the measure can be addressed by the legislature, and the oil and gas commission also provides a process for companies to obtain variances from state requirements.
"There's opportunities for them to be able to work with the state to get what they want, but first and foremost the public health and safety needs to be prioritized," she said.
Said Keyte, "I think that it's going to be a tough slog if it passes, and if it doesn't pass, unless it's beaten by a substantial margin, I suspect we'll see this (setbacks ballot measure) again in two more years. I don't think they (its backers) are going away anytime soon."
The COGCC's current setback between drilling and homes is 500 feet. Keyte said that if the measure loses by a close margin, he thinks it would be logical that energy producers and the state should further engage on the setback issue because it would clearly be a matter on the forefront of people's minds.
"We need to be able to maintain our social license to operate," Keyte said.
Keyte said the setback issue is one Caerus hasn't been involved with because it doesn't operate near homes and schools.
"It's really not my fight. We just get kind of wounded by the shrapnel of the Front Range on the matter."