Big changes ahead for oil/gas and real estate | new law goes into effect | impact?

A new bill heading to the governor’s desk for signature, senate bill 181 will radically alter oil/gas development and the real estate landscape.  This bill will create large winners and losers.   In an anticipation of the law Boulder county has halted any new oil/gas approvals.   How will this impact you and your real estate?  What lawsuits will be spurred by this new bill?  What areas are most impacted?  What lawsuits will be on the way?

What is in SB 181?

1. Mission change: There is a major shift in the organization that overseas oil and gas development, the Colorado Oil and gas Conservation Commission (cogcc). The current mission of the COGCC is to foster the development of oil and gas that is “consistent with” the protection of public health.  SB 181 drastically changes the COGCC’s mission to regulate the development of oil and gas in a manner that “ protects public health”.    The new mission directs regulators to put public health and safety above everything else.  This mission change is a radical shift that will alter the approval of many prospective projects
2. Repeal Limitation on local control & increased explicit local authority: Under the current law local governments are not able to regulate oil and gas as they are “preempted” by state law. The new law would allow local governments to regulate oil and gas.  The new laws allows cities to regulate not only where a well is able to be situated but also environmental hazards.
3. Reduce industry members on the COGCC: currently the COGCC is heavily stacked in favor of the oil and gas industry, the new law would reduce the number of industry members required to be on the board to only one out of the nine.  The members of the COGCC are appointed by the governor and confirmed by the senate.  With democratic controlled houses and governor, the membership will tilt considerably towards conservation/public safety

What will local governments/counties do?

One of the biggest changes of SB 181 is that it gives local governments control over local oil and gas regulations.  Counties will likely react very differently.  For example, in Boulder county, I see most new oil and gas drilling coming to almost a standstill.  Boulder county will put in regulations on environmental impact and siting of the rigs that it will likely be unprofitable to drill in the county.  Boulder would likely develop regulations that say that oil/gas exploration can only take place in an industrial area with setbacks of xxx feet, meeting environmental air quality standards, etc… and basically eliminating most locations.  Other counties like Weld county will likely be more open to the industry as it is a very large part of the budget.

I think all counties in the front range will develop larger setbacks from neighborhoods and schools to try and limit the impact to constituents.  The setback changes will substantially decrease the amount of available locations along the front ranges as housing demand continues to rapidly expand.

Who will win? Some Surface owners

Many surface owners will be big winners.  Allot of uncertainty for surface owners could be taken out of the equation substantially increasing values. For example a plot in Boulder county might have been zoned residential, but the surface owners did not own the mineral rights and theoretically a rig could be placed on the property or nearby substantially decreasing the value of any houses.  For example, if Arapahoe county passes regulations that rigs cannot be placed  on or within xxx feet of a parcel zoned residential a large piece of uncertainty for the developer has been eliminated.  Many surface owners will see their values increase substantially.

Who will lose? Some mineral rights owners

Many mineral rights owners could be “legislated” out of the area as new regulations make it prohibitively expensive to site new locations.  Mineral owners in many counties will have the values of their mineral rights basically reduced to zero as they are unable to access the mineral in a reasonable fashion.  As housing along the front range continues to expand, less and less area will be available for mineral owners to drill.

What lawsuits will occur? Takings claim

The lawsuits will begin shortly after the implementation of the bill as mineral rights owners will claim the government “took” their property by not allowing them to develop the gas resource.  The courts will spend years deciding the reasonable balance between the various property owner groups.  The courts will ultimately decide how the new legislation will be implemented as case law becomes more established.

What areas are most impacted?

From the map below it is clear that the majority of impact from the new regulations will take place along the Northern Front Range.  For example, look at Brighton, this is a high growth area for residential development.  Many of the proposed wells around Brighton will be difficult under the new rules as cities/counties look to reduce the conflict between home owners and oil/gas development.

What does this all mean?

SB 181 will drastically alter the oil and gas industry most notably in the front range.  Unfortunately, the true implications of the law will not be known for quite some time until the judicial branch settles the inherent conflict over property rights.  There are also proposals for a ballot initiative to nullify the law (I think this will have a hard time based on the changing demographics of Colorado)

As you can see from the map the majority of new well applications are in the northern front range which is also the location of most of the residential and commercial growth.  The collision of oil/gas and other development is what led us to SB 181.  The new law will tilt the tables in favor of other development as opposed to just oil/gas.  SB 181 is just the beginning of the changes occurring throughout the front range as the states tilts blue.   How will you be impacted by the new law (please leave your comments below)?

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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