Expanding the Separation of Development for Oil and Gas and Real Estate

State ballot initiatives related to energy sector could chill real estate

The Colorado Oil and Gas Conservation Commission published a report in July estimating that 51 percent of Colorado’s land would be off limits to oil and gas drilling, should Initiative 97 pass. Taking federal land out of consideration would increase that figure to 84 percent, according to the report. / National Institute for Occupational Safety and Health

Last week saw the certification of two high-profile initiatives for Colorado’s ballot in November. Initiative 97 would increase the setback requirement for oil and gas drilling to 2,500 feet from any occupied structure or government-designated vulnerable area. Initiative 108 seeks to counteract 97’s effects by allowing a right of action for private property owners to seek government compensation for a reduction in fair market value resulting from a law or policy. 

The Colorado Oil and Gas Conservation Commission published a report in July estimating that 51 percent of Colorado’s land would be off-limits to oil and gas drilling, should Initiative 97 pass. 

Taking federal land out of consideration would increase that figure to 84 percent, according to the report. And such a significant impact on oil and gas development could also chill Colorado’s real estate market, because a setback requirement also means residential property can’t exist in the same “circle” determined by the required distance.

“Picture a giant white canvas rectangle that’s Colorado, and you start throwing blobs of paint on it, and each one of those blobs is a 2,500-foot circle where oil and gas development and residential development cannot be proximate,” said Andy Spielman, co-partner-in-charge of WilmerHale’s Denver office and global chair of the firm’s environment and natural resources practice. “Well, what the COGCC report says [about Initiative 97] is you’ve now thrown so many blobs of paint on that canvas that you can hardly see any canvas.”

Spielman, who also recently finished a six-year tenure on the COGCC including a stint as chair, said several years ago the commission increased drilling setback requirements to 500 feet from residences and 1,000 feet from high-occupancy buildings. He recalled the Colorado Association of Home Builders and other stakeholders arguing that over-regulation of setback requirements would have diminishing returns on increased health benefits, as well as “sterilize” land that could no longer be used for development. 

About 2,500 new residents move into the Front Range every week, according to demography estimates. “These folks need housing,” he said.  “We’ve got to balance the need to have communities for our existing and our new residents, but we also can’t turn our back on the economy that made this state what it is today. So that’s where regulation comes in, and regulatory certainty.”

To Spielman, measuring the reverberations of regulations such as 97 and 108 including their effect on real estate lies in regulatory certainty. Certainty is useful both for businesses deciding where and how to operate and also for members of the public, he said.

A Combination of Possible Outcomes

Spielman said if both initiatives pass, 108 would likely result in more litigation and more certain outcomes for regulatory taking claims as a result than without 108. Initiative 108 doesn’t invent the concept of a regulatory taking, in which laws and regulations have the effect of stripping property of its value. Spielman said the initiative may follow the example of Lucas v. South Carolina Coastal Council, a case that established the “total takings” test for determining whether a regulatory action amounts to a taking that demands compensation. In 1992, the U.S. Supreme Court found property on a barrier island purchased by David Lucas had been stripped of its economic value by a law barring him from building permanent habitable structures on the land. 

Colin Harris, a partner at Faegre Baker Daniels, envisioned an effect on local government zoning decisions Initiative 108 could have, beyond the energy sector. Property developers might argue a zoning decision decreased their property’s fair market value and claim compensation.

“That would be an argument that would be very difficult to make under your ordinary takings law,” he said.

Related to 97’s real estate impact because of energy development changes, he said it certainly could affect companies’ decisions about whether to do business in Colorado. But current property owners unable to develop because of 97 would likely feel the largest effect. 

Spielman said even if 97 passes and 108 does not, he would still expect regulatory taking claims to be tested as a result of 97’s effects. And if neither pass, it’s still doubtful their failure would mark the end of movement in regulation. The COGCC’s regulations would remain the status quo, but ballot initiatives the courts and the legislature provide three other avenues.

“If the ballot initiative is unsuccessful, you’ve still got the other two vehicles, which are go to court or get the legislature to act,” Spielman said. “And any of those you have to assume can happen any year.”

If Initiative 97 passes, challenges to it may follow. But it is a constitutional amendment, and Harris pointed out the complexity attached to challenging the constitutionality of an amendment to the constitution.

“It makes for very interesting lawyering to figure out how you then render a constitutional challenge to that.” 

— Julia Cardi

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