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Colorado drilling setbacks on November ballot could slash DJ Basin production

Highlights

Weld County would be most affected

Spending could move elsewhere

Washington — Colorado voters will decide in November whether to increase land setbacks from new oil and gas development, a measure that could sharply limit future production from the DJ Basin.

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The setbacks would have the biggest impact on Weld County northeast of Denver, the most prolific production area in the state.

Colorado is the seventh top oil-producing state and sixth top natural gas producer.

Initiative 97 received enough valid signatures to qualify for the November 6 ballot, the Colorado secretary of state announced late Wednesday. The measure requires any new oil and gas development on non-federal land, including reopening plugged wells, to be at least 2,500 feet away from homes and schools.

Colorado oil production could drop by 50% within three to five years, predicted Dan Eberhart, CEO of Denver-based drilling services company Canary. He said drillers would likely decide to spend resources in Texas or North Dakota instead.

"I think it could have dramatic effect," Eberhart said on a recent episode of the Platts Capitol Crude podcast. "Even in the places where you can still drill, I think it's going to have a very negative impact on companies when they allocate where they want to spend their money."

A separate proposed constitutional amendment strengthens the economic case against Initiative 97, said Paul Sankey, managing director for Americas at Mizuho Securities, in a note Wednesday. The amendment would require property owners to be compensated for any reduction in property value caused by state laws or regulations, which would allow opponents of the land setbacks to highlight not only the threat of lost tax revenues from a decline in drilling activity but also payments that municipalities will have to make to drillers.

"With both Republicans and Democrats having come out against Initiative 97, we continue to think it is unlikely it becomes state law," Sankey said. "However, the overhang for DJ Basin producers will likely persist until there is clarity on the issue."

-- Meghan Gordon, meghan.gordon@spglobal.com

-- Edited by Joe Fisher, newsdesk@spglobal.com