Over two years, more than 50,000 required monthly oil and gas well production reports weren’t turned in or were incomplete, which meant the state of Colorado wasn’t getting a complete picture of the taxes owed by the industry, according to a state audit released Tuesday.
The state auditor’s report, which reviewed tax collections from 2016-18, also found that of the 420 operators actively producing oil and gas, 316 of them turned in 1,209 incomplete required monthly well reports and/or failed to submit as many as 50,055 well reports. That matters because the taxes operators pay are based on the amount of oil and gas produced.
The Colorado Oil and Gas Conservation did not verify that oil and gas operators were properly maintaining and calibrating equipment used to measure the accuracy of the reporting on oil and gas production, the audit said.
If the COGCC had imposed the maximum $200 daily fine for each well, the state would have received as much as $308 million, the auditor calculated.
COGCC Director Jeff Robbins, who took over the agency in 2019, said his staff has started making improvements and implementing the audit’s recommendations.
Eight of the 11 operators in the audit’s sample had not submitted withholding statements with their severance tax returns. The statements are used to identify mineral interest owners who haven’t filed severance taxes. The Department of Revenue does not always use complete production data when auditing oil and gas severance taxes to verify production amounts reported on tax returns, according to the audit.
After exemptions and tax credits are applied, Colorado’s effective severance tax rate is 0.54% on oil and gas, the lowest out of nine states in the region, according to the audit. For coal, the effective rate is 0.62%
Severance taxes are levied on oil, gas, coal and other nonrenewable minerals that are “severed” from the earth. The revenue goes to both the state and local governments.
“This audit shows how oil and gas operators have failed to pay millions in tax revenue to the state, local governments, and their communities, all the while running expensive television ads to tout their contributions to the state,” House Speaker KC Becker, D-Boulder, said in a statement.
Becker was one of the main sponsors of a bill approved last year to overhaul how oil and gas is regulated. State agencies are writing new rules to carry out Senate Bill 181’s mandate to prioritize public health, safety and the environment. She requested the audit, the first of severance taxes since 2006.
“It’s just really frustrating that it took an audit to figure all this out,” Becker told The Post. “Some of these same issues were brought up in 2006.”
Becker said it is “wild” that more than 50,000 required monthly reports by operators were incomplete or not submitted during the two-year period. She said it’s too early to say what kind of legislation might be proposed to address some of the problems highlighted in the audit, but “there are a lot of things we could be doing better.”
Colorado’s stated severance tax rate ranges from 2% to 5%. Producers are allowed to deduct the costs of getting the product to market and to deduct 87.5 percent of the amount paid in property taxes, or ad valorem, on what they produce.
After the deductions and tax credits, Colorado’s effective severance tax on oil and gas was the lowest in the region from 2016 through 2018, the audit found. Utah was the second-lowest at 0.72%. Wyoming’s rate was 4.95% and New Mexico’s was 4.06%.
“We only get one time to tax this as a state, and we don’t do a good job,” said Matt Samelson, an environmental attorney.
However, Samelson said adjusting the tax rate could be difficult because of Colorado’s Taxpayer Bill of Rights, or TABOR. The constitutional amendment requires voter approval of tax increases and limits the tax dollars government can keep, based on a formula.
Industry representatives defend the system, saying that unlike in other states, oil and gas companies in Colorado pay most of their taxes at the local level, where the money supports a variety of services, including education, roads and social services.
Robbins said the COGCC staff learned of the audit’s findings about a month ago and has already started making improvements, including using an automated system to ensure that operators are submitting well reports and that the reports are accurate. Inspectors will also be checking equipment at well sites to make sure it is accurately measuring the oil and gas.
The COGCC agreed with the audit’s findings, said Robbins. In the past, the agency has focused on safety and responding to spills and other environmental problems and wasn’t aware of how much the Department of Revenue relied on the production information gathered by the COGCC, he said.
However, Robbins said the $308 million cited as lost revenue because of incomplete or missing wells reports “is not really a for-real number.”
“That’s not the way this agency or any agency uses its enforcement authority,” Robbins said. “We use it to bring operators into compliance. We wouldn’t immediately jump to full-on penalties.”