[Editor's note: A version of this story appears in the October 2018 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Political opponents can sometimes find themselves in extremely polarized positions. But who would have imagined a battle of opposing viewpoints as stark as that set for the November elections in Colorado? As Initiative 97 made it onto the ballot as Proposition 112, it was as if a cloud containing some of the extreme politics of California descended on the Colorado energy sector.

Like it or not, the big picture is that the global economy needs energy to grow.

At this year’s EnerCom Oil & Gas Conference in Denver, EOG Resources Inc. (NYSE: EOG) highlighted how narrow the sources of world oil supply growth have become. Between 2008 and 2017, global crude oil production, including lease condensate, grew about 6.8 million barrels per day, according to Energy Information Administration data.

However, more than 95% of the increase in supply came from just three sources—the U.S., Russia and Saudi Arabia—with the U.S. accounting for almost 65% of the growth. The rest of the world accounted for a little less than 5% of production growth, a trend EOG did not see reversing.

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Colorado has been a significant contributor to U.S. energy production, but its history of hydrocarbon production is at risk if Proposition 112 is approved. The proposal would increase the setback rule for oil and gas development to 2,500 feet, up from 500 feet currently (and 1,000 feet in specified locations).

The proposal would eliminate about 85% of non-federal lands in Colorado for oil and gas development. In turn, this would obviously cause very substantial losses among the more than 150,000 direct jobs (and more including indirect jobs) involved in the energy sector.

Even if Proposition 112 passes, there are obstacles to its implementation. A clear complication is that the Colorado state government—unlike its California counterpart—has to run within a much more restrictive budgetary environment. But Proposition 112 could put an energy-related hole in the budget with a double-digit percentage loss of revenue to the state purse.

“Using some rough math, between severance, property, corporate and income tax, it seems the industry accounts for about 10% to 20% of Colorado’s tax revenue,” according to a report by SunTrust Robinson Humphrey. “It would take a 20% to 50% bump to income tax to offset that revenue [loss],” it said.

Up to $258 million in state and local tax revenues would be lost in the first year alone, according to a REMI Partnership study.

While it was known that the Colorado Rising group had submitted more than the requisite signatures for the Initiative 97 to be added to the ballot, the news was not fully discounted—as some had thought—in Colorado E&P stocks, particularly those operating in a single basin.

On the day following the Secretary of State’s confirmation that the proposal made it onto the ballot, the stocks of Extraction Oil and Gas Inc. (NASDAQ: XOG) and SRCI Energy Inc. (NYSE: SRCI) both hit intraday lows of down 7%, but recovered somewhat to close down 2.6% and 5.4%, respectively. PDC Energy Inc. (NASDAQ: PDCE), although not a single-basin operator, closed down 3.5% after being down as much as 6.3% intraday.

Proposition 112 has drawn opposition from the Republican candidate for governor and also his Democratic opponent, Jared Polis, who historically has leaned against fossil fuel energy issues. In the event that Proposition 112 does receive 50%-plus of the vote, it could still be modified by majority vote in the Colorado legislature and a tighter definition of setback rules.

Observers say this could be done in special session under outgoing Colorado Gov. John Hickenlooper or in regular session in January.

A counterweight to Initiative 97 exists in the form of Initiative 108, which also made it onto the November ballot as Amendment 74. In essence, the latter would require the state to compensate landowners for any reduction in property value directly caused by state laws or regulations. Initiative 108, as a constitutional amendment, would be harder to amend or remove than Initiative 97, a statutory proposition, according to political insiders.

How will it all play out? The odds of the pro-industry Amendment 74 passing in November are viewed as greater than that of Proposition 112, especially given the fiscal implications of the latter. But if changing demographics and other factors throw an unexpected curve ball at the energy industry, the Colorado Rising faction will have to answer to a harsh reality.

Capital markets are fluid, and capital will flow to areas where it can earn its highest return. On Colorado’s northern border, the industry is opening up a multitude of new opportunities.

Chris Sheehan can be reached at csheehan@hartenergy.com.

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