Making Heads and Tails of Proposition 112’s Chances – A Coin Flip?

September 27th, 2018 |

Over the last several weeks, client interest in Colorado Proposition 112, the setback rule impacting future development of oil and gas in the state of Colorado,  has continued to climb. We first addressed this topic in the market commentary, DJ Basin: Is the Future Setback? in July. Now that Proposition 112 is on the November ballot, and with BTU Analytics being based in Colorado, everyone wants to know our ‘boots on the ground’ impression on the likelihood of Proposition 112 passing. Many have been surprised to hear that we believe there is an even chance that it will pass.

First, let’s consider where that impression comes from, and examine the data that supports that impression. Many of us at BTU Analytics have lived in Denver for at least a decade and have watched the rapid urbanization of the Front Range, which is a population corridor bordering the Eastern side of the Rocky Mountains. For context, Colorado’s population in 2003 stood at just 4.5 million people, growing to an estimated 5.6 million by 2017, adding over 1.1 million people in just 15 years. Population growth has been fueled by a well-diversified economy, with the technology, energy, healthcare, craft beer, cannabis, and tourism industries all contributing.

While the Front Range’s economy is booming, many transplants move here for the lifestyle – the desire to enjoy an outdoors-based culture with proximity to the mountains. Additionally, the population trends discussed below show that the demographic has trended younger and more left-leaning over time, which has bolstered support for initiatives that provide alternatives to fossil fuels. Beyond the shifting demographics recently, Colorado was the first state to pass a voter led renewable energy standard back in 2004 prior to even the current boom.

Trying for a moment to check our own bias at the door, we must ask ourselves, how does the ballot proposal sound to a layman without an interest in or intimate knowledge of the oil and gas industry? In simple terms, the rule will require operators to place drilling rigs and surface equipment 2,500 feet away from my children’s schools, my home, and my drinking water. That sounds reasonable, does it not? It taps into hopes and fears for the well-being of our families.  But, as we have previously analyzed, the rule may sound simple, but the impacts to people working in the industry and the Colorado economy are likely to be severe. Educating voters might sway some, but the industry is fighting an uphill battle using rational arguments against emotions.

So, given our impression of the landscape in Colorado, does the data support that impression? The below graphic, which was compiled from data provided by the Colorado Secretary of State’s office, highlights the trends in active voter registration by political affiliation.

Proposition 112 - Colorado Active Registered Voters by Party Affiliation

Compiling the data for the January of each year since 2009 shows that the Republican Party in Colorado had more registered active voters each year compared to the Democratic Party until 2017. Also of note is the rapid growth in voters not affiliated with either party over that time frame. In August of this year, unaffiliated voters represented nearly 40% of the total active registered voters up from just 30% in 2009.

The demographic makeup then of the unaffiliated voters will likely be key to success or failure of proposition 112 in the current voting cycle. Slicing the data on age indicates that voters in the unaffiliated group are predominately younger than those affiliated with either Democratic Party or Republican Party. Over 50% of unaffiliated voters are under age 40 compared to 40% for Democrats and just 30% for Republicans.

Proposition 112 - Active Voters by Party and Age

The data would tend to support the impression that Colorado has gotten younger and more liberal over the last decade.  Technically both major party candidates have come out against Prop 112, but the language of the proposition seems like it should appeal to the casual voter.

In our upcoming Upstream Outlook, BTU Analytics will be doing a deep dive on the potential impacts to our outlook from this ballot measure, but the key takeaways at the 30,000-foot level are:

  • E&P’s in the core of the DJ basin could see significant losses in drillable acreage, proved reserves, and declining production
  • Midstream companies serving the DJ basin and downstream in Cushing and Conway would see significant drops in volumes flowing from the basin.
  • Refiners benefiting from depressed crude prices in the Rockies and Midcontinent would see pressure on refining margins as crude differentials tighten due potential declines in DJ production.

Click here for more information on our Upstream Outlook analysis.

Author: Tony Scott

Anthony (Tony) Scott has built an in depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex. Mr. Scott has conducted hundreds of consulting engagements assisting producers, marketers, midstream, refiners and private equity understand how rapidly changing natural gas, natural gas liquids, and crude oil markets in North America would impact their assets.