Here’s an inconvenient little truth that keeps getting lost in the shuffle when local activists start hyper-ventillating about fracking: If you want to ban fracking, you may end up paying through the nose.
According to a story in the Denver Business Journal, a ban on fracking could cost Boulder County a bundle — a bundle of as much as $1 billion.
The $1 billion figure is not what the county would lose by foregoing taxes, royalties and the boost the local economy would get from oil and gas production. It is what Boulder County taxpayers would owe the holders of oil and gas mineral rights and oil and gas lease-holders in compensation for being denied access to their property.
The $1 billion figure is contained in a study done for the National Association of Royalty Owners by Netherland, Sewell and Associates, an international petroleum engineering firm, according to the Journal.
“The study looked at the money royalty owners might be missing out on due to a moratorium on drilling new oil and gas wells in Boulder County’s portion of the Wattenberg Field, one of the one of the richest oil and gas fields in the United States,” the paper said.
Boulder County currently has an 18-month moratorium in place on accepting new applications for oil and gas development, which will expire on January 1, 2015. If the moratorium turns into a permanent ban, the county mineral rights owners could sue on grounds that it constituted a “taking” of their property and demand compensation.
The study estimated that the moratorium is preventing the development of dozens of “sections” (one-square mile parcels of land) within Boulder County’s part of the Wattenberg Field. It claims that a royalty owner with a one-eighth interest in a single section could receive as much as $40 million in royalty payments over the productive life of a new well. Royalty owners with a one-fifth interest could receive as much as $64 million in royalty payments over the life of a new well.
“Figuring that there are at least 50 sections in the county that could be drilled and produced, the county could be on the hook for $1 billion in compensation for owners who want to develop their oil and gas minerals, but can’t,” the Journal said, citing the study.
An industry-funded study might well be high-balling the amount of compensation that mineral rights owners might be entitled to — the actual amount of compensation would be determined by a court — but the study’s figure does not seem implausible. A single well that produces 500,000 barrels of crude oil would yield roughly $50 million in revenue, assuming a price of $100 a barrel. Horizontal wells with multi-stage fracking that have estimated ultimate recoveries of 500,000 barrels or more are not uncommon in the Wattenberg Field, nor is it unusual to find half a dozen wells to a section.
But while the amount of compensation Boulder County could be on the hook for in the event it imposes a permanent ban on oil and gas production might be debatable, it is a near certainty that it would be on the hook for at least some compensation.
Mineral rights are a long-recognized property right, and in Colorado they can be bought, sold, and owned separately from surface property rights. Both the United States Constitution and the Colorado Constitution provide that private property can’t be taken without compensation.
If Boulder County or some of the cities in the county choose to ban oil and gas production, it is hard to see how they could avoid having to pay compensation to the people who own the mineral rights and have a legal right to produce those minerals — any more than the county could avoid paying compensation to the owners of surface property rights who might be banned from building on their land.
Boulder County and the major cities of Boulder County have spent hundreds of millions of dollars to buy and preserve open space — precisely because they cannot prevent all development on land unless a) they pay compensation to the owner for doing som or b) they own it. It is a near certainty that it will be the same with mineral rights. And given the current value of oil and gas, it is reasonable to assume that compensation for a county-wide ban on oil and gas production would cost the taxpayers at least as much as half a century of open space purchases have — and quite possibly more.
More than 95 percent of the oil and natural gas wells drilled in the United States are fracked. Without fracking, domestic oil and gas production would collapse within a few years. Voters who choose to vote to ban fracking are really voting to stop oil and gas production. There are a lot of Boulder County residents who may be cool with that, but they should realize going in that if they succeed in doing so, it is going to cost government and the taxpayers a bundle.
This opinion column does not necessarily reflect the views of Boulder Weekly.