OilwellThe State of Colorado is a leader in regulating oil and gas development. But a ballot initiative proposes a more dramatic regulatory step: restricting oil and gas development all together. In the upcoming election, Colorado voters will decide whether to enact Proposition 112, a law requiring a 2,500-foot setback between any new oil and gas developments and any “occupied structure” or “vulnerable area.”

Proposition 112 will ban oil and gas development in Colorado.

The measure changes the setback under state law from 72 acres to 450 acres. And the law defines “new” oil and gas development to include reentry of an oil or gas well previously plugged or abandoned. Even Sierra-club endorsed Democratic Gubernatorial candidate Jared Polis opposes the measure, recognizing it as a near-total “ban” on oil and gas development in Colorado.

In fact, advocates for Proposition 112 do not dispute that it will effectively eliminate Colorado’s oil and gas industry. Rather, proponents of the measure see the ban as a valuable step to combat climate change. Other proponents, including the Boulder Daily Camera—a newspaper situated in one of the few Colorado counties with no oil and gas production and one of the few newspapers to endorse Proposition 112—put it this way: “[W]hat is more extreme, expanded setbacks or neighborhoods infested with heavy industry? Proposition 112 is the people’s response to an unresponsive government.”

No matter the merits, if it passes, owners of the impacted oil and gas rights will likely seek redress for the loss of their valuable property rights. (Five Colorado energy companies lost $3 billion in market value the day after Proposition 112 was placed on the ballot.) It is not clear, however, whether the regulation will qualify as a “taking” for which rights-owners might receive compensation from the government.

What redress is available for a property owner deprived of oil and gas property rights?

The Takings Clause of the Fifth Amendment provides that private property shall not “be taken for public use without just compensation.” The classic taking is eminent domain: government seizure of property to build a road, for instance. The United States Supreme Court has recognized, however, that certain regulations that go “too far” can also constitute a taking. Awarding compensation for regulatory takings prevents the government from “forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”

Whether a regulation goes “too far” requires an “ad hoc” analysis based on “factual inquiries designed to allow careful examination and weighing of all the relevant circumstances.” That ad-hoc inquiry is informed by two categorical rules. First, a “regulation that denies all economically beneficial or productive use of land” requires compensation under the Takings Clause. Second, where regulation does not eliminate all economic benefit for property, a taking may still occur based on “a complex of factors”:

  1. The economic impact of the regulation on the claimant;
  2. The extent to which the regulation has interfered with distinct investment-backed expectations; and
  3. The character of the governmental action.

Colorado recognizes that a property owner can possess a distinct interest in a severed mineral estate, including oil and gas. Given that, in certain instances, Proposition 112 may qualify as a total regulatory taking: an owner of oil and gas mineral interests may successfully argue that Proposition 112’s effective ban on oil and gas development constitutes a total taking of his oil and gas property rights.

At least one Michigan Court reached that conclusion where a law—like Proposition 112—prohibited “oil or gas exploration or development” in an area. That court concluded that the government’s action prohibiting oil and gas drilling “so restricted the use of . . . property rights that [the owners] had been deprived of all economically viable use.” Likewise, a Colorado company that owns mineral rights to oil and gas that cannot be developed because of Proposition 112 can argue that a taking has occurred, completely depriving the owner of its oil and gas property rights. This claim is the most compelling for a mineral rights owner whose property’s only viable economic use is oil and gas development.

More likely, a takings claim based on Proposition 112 will consider the Supreme Court’s “complex of factors,” identified above. This is a fact-specific test that turns on the particulars of each claim, including the way a landowner frames its taking argument. Two of the “complex of factors” militate towards finding a taking. Namely, the economic impact of banning oil and gas development is difficult to understate. For many owners of oil and gas rights, those rights reflect virtually all of the value of their property. Along the same lines, Proposition 112’s ban significantly undermines the investment-backed expectations of oil and gas property owners. There is no reason to purchase oil and gas rights absent the ability to extract and sell the oil and gas.

The government will argue that the character of the government action—the last of the “complex of factors”—militates against a taking. In this context, courts give significant weight to government action aimed at protecting public health or abating common law nuisances.  Arguably, Proposition 112 does that, though a proponent of the regulation will have to demonstrate how Proposition 112’s additional buffer serves the public interest more than the existing 72-acre buffer.

Further, to the extent Proposition 112 aims to curb climate change, the means used (banning oil and gas development) may be too removed from the stated policy goal (curbing climate change) to pass muster. That is because a use restriction is more likely to constitute a taking if it is “not reasonably necessary to the effectuation of a substantial public purpose[.]”  So while banning oil and gas activities in Colorado may have some immeasurably small impact on climate change, even the advocates of Proposition 112 acknowledge that oil and gas is sold (and consumed) on a “world market.”

If Proposition 112 passes, Colorado property owners impacted by it will face important strategic decisions about how to best frame their takings claim. A thoughtful approach can help a property owner ensure that the public bears the proper burden for the loss of an owner’s valuable private property rights. More broadly, the outcome of Colorado’s experiment significantly restricting oil and gas development may guide other states’ efforts and inform attempts to curb oil and gas development elsewhere.

Perhaps Amendment 74 will mean additional protection for oil and gas property owners.

One other ballot issue may play a significant role in how oil and gas property owners are compensated. Amendment 74, also on Colorado’s ballot this November, would change Colorado’s constitution to provide that any property owner whose property value is reduced in fair market value because of government law or regulation must be compensated. Courts will likely play a critical role in interpreting and clarifying this significant expansion of landowners’ rights. But, regardless of how courts interpret and apply Amendment 74 (if it passes), Proposition 112 is almost guaranteed to reduce the fair market value of oil and gas property rights. In that case, oil and gas property owners impacted by Proposition 112 will more easily recover for their losses.

Squire Patton Boggs will continue to monitor these issues and provide updates.