Association for Public Policy Analysis & Management

This paper analyses the effect of setback requirements on the oil and gas sector. Setback requirements define minimum distances between oil and gas operations and entities such as occupied dwellings, schools, water sources or ecologically vulnerable areas, etc. Setbacks, typically of a few hundred feet, are widespread and frequently controversial. A recent Colorado ballot proposition to increase the statewide setback distance from 500’ to 2500’ lost 55%-45%, with the campaign against emphasizing that the proposition’s passage would lead to job losses.

Despite the controversy and ubiquity of these regulatory policies in oil and gas producing states, surprisingly little economic analysis has been conducted on the use of setbacks as policy instruments. In this paper, we provide theoretical and empirical insight into several important questions such as: What are the employment effects of setback distances? How should setback distances be determined? How does technology, specifically horizontal drilling, affect optimal setback distances?

We develop a simple, intuitive model that considers the tradeoffs inherent in setting minimum setback distances. Optimal setback distances will balance health benefits against the increasing employment and fiscal costs as setbacks place more and more resources off-limits to extraction and thus lead to more and more job losses. Interestingly, while the ability to drill horizontally up to three miles under the surface has spurred the unconventional boom, it also provides increased rationale for increasing setback distances - horizontal drilling spatially decouples the location of health impacts (e.g. wellhead) from the location of the resource.

A key contribution of this work is that we use GIS tools to provide detailed projections of the employment and resource losses associated with setbacks as a function of setback and horizontal drilling distances. Under plausible assumptions, we find that setbacks can be increased from their current 500-1000 feet up to 1250-1500 feet at very low employment cost. Resource unavailability and job losses increase sharply beyond that point and follow a pronounced S-curve, with particularly large increases in resource unavailability from 1750-2250 feet. By contrast, in the absence of horizontal drilling technologies, even small setbacks – on the order of 500 feet – can place large amounts of resources off-limits, and resource unavailability increases immediately as setback distances increase. For example, with two mile horizontal drilling and 1500 foot setbacks, 1% of Weld County subsurface area is off-limits, compared to 71% under 1500 foot setbacks with no horizontal drilling (not a typo).

The key policy takeaway is that, despite ongoing uncertainty in the public health impacts of oil and gas production, increases in the setback distance up to 1250-1500 feet likely have benefits that exceed the costs. That said, because of the rapid increase in marginal costs as a function of setback distance, the harms from oil and gas extraction at spatial scales of 2500 feet, as proposed, would have to be substantial to pass a cost-benefit test. In summary, this paper provides theoretical and empirical evidence regarding a commonly-used yet understudied policy instrument.