Severance tax overhaul considered

Lawmakers want to ensure oil, gas producers pay share

Gargi Chakrabarty, Rocky Mountain News

Wednesday, January 17, 2007

Lawmakers want to untangle the state's severance tax, making it easier to collect money from oil and gas companies and catch those that evade it.

The push to revamp the severance tax comes in the wake of a scathing report by the state auditor's office, which found the Colorado Department of Revenue that collects the tax lacks a process to ensure that all companies are filing their tax returns. Thirty percent of the companies audited did not file tax returns, although they reported production and sales.

The audit also found the Colorado Oil and Gas Conservation Commission does not inspect or verify the accuracy of meters used by companies to measure oil and gas produced at well sites. Rather, the commission depends on the information provided by the companies.

State Rep. Kathleen Curry, D-Gunnison, said the audit raises concerns that Colorado could be losing millions of dollars in severance tax.

"The audit really got my attention and raised concerns regarding the structure and enforcement of severance tax, the way we are measuring oil and gas production," Curry said.

Lawmakers including Curry are set to unveil a slew of bills covering not only the collection of the tax but also distributing it in a more efficient manner.

The legislative effort comes as the state braces for a 40 percent decline in severance tax collections for fiscal 2007 ending June 30, a direct result of declining natural gas prices. That compares with a record $202 million collected in fiscal 2006, up nearly 50 percent from the previous year's $135 million.

The state collects severance tax and property tax from oil and gas operators. It also receives half the royalty collected by the Interior Department from oil and gas production on federal lands in Colorado.

According to Colorado law, 50 percent of the severance tax revenue flows to local governments and 50 percent flows into a state trust fund to replace depleted natural resources and to complete water projects.

Curry is drafting a bill that would require companies to disclose confidential information about oil and gas production at wellheads to the state, counties and private royalty owners. The Colorado Department of Revenue often has no access to those records, Curry said.

"Right now, production records are confidential, and it becomes difficult for the state to track whether severance tax (being paid) is the right amount," Curry said.

The oil and gas industry says it will fight any effort by lawmakers to force companies to disclose confidential information, although it is OK with standardizing the measurement of oil and gas.

"If there are proposals designed to try and get at (confidential) records, that would be a problem for the industry," said Greg Schnacke of the Colorado Oil & Gas Association. "No other industry has that."

A bill that would require state officials to certify oil and gas measurement meters is in the pipeline. Currently, the commission doesn't inspect or verify the meters' accuracy.

Brian Macke, director of the oil and gas commission, pointed out the state has more than 31,000 active oil and gas wells and thousands of meters. Monitoring each meter would be virtually impossible.

Also, the commission believes the buying and selling companies have a vested interest to accurately report oil and gas production.

"The seller doesn't want it under- measured, and the buyer doesn't want it over-measured," Macke added. "There are a number of natural checks and balances in the process."

Still, Macke said the commission is looking to bolster its rules by June 30, but those plans could change if the legislature acts sooner.

Mary Ellen Denemy, a petroleum accountant with the National Royalty Owners Association, which supports the proposed bills, said oil and gas companies would have to pay $100 per meter to get them certified.

"There's no reason why we shouldn't be ensuring that meters are reporting measures of oil and gas production at well sites," Denemy said, noting states such as Wyoming, North Dakota and Alaska do.

State Rep. Bernie Buescher, D-Grand Junction, will sponsor a bill aimed at doubling the share of severance tax going to cities and counties affected by drilling.

"My concern is that counties being impacted by oil and gas activity are not receiving enough money," Buescher said.

Colorado's severance tax

• In fiscal years ending June 30:

2007   *$121.2 million

2006   $202 million

2005   $135 million

2004   $115.8 million

2003   $32.4 million

Proposed bills would:

1. Require companies to disclose confidential information about oil and gas production at wells to the state, counties and royalty owners.

2. Require certification of oil and gas meters at well sites.

3. Double the share of severance tax going to cities and counties affected by oil and gas drilling.*A 40 Percent Decline Is Estimated In Fiscal 2007 Because Of Declining Natural Gas Prices. Source: Department Of Local Affairs, Which Distributes ...

chakrabartyg@RockyMountainNews.com or 303-954-2976