Stakes high as billions head Colorado's way

By Laura Frank, Rocky Mountain News (Contact)

Published December 10, 2007 at midnight

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Photo by Matt McClain © The Rocky

As day fades Katrina West, 5, plays at the grandparents' Oxford Farms home near the Weld-Boulder County line.

Photo by Graphic by Michael Hall

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Rolling west along Interstate 70 out of Glenwood Springs, down valley to Rifle and on to Parachute, the gas drilling rigs illuminate the night sky like exotic carnival rides — here, there and way up there in the distance, two ridges over.

The brilliantly lighted exploration towers are symbols of Colorado's roaring natural gas boom — 33,600 wells now pumping and tens of thousands more on the drawing board. Forecasts show the boom extending 20, even 30 years into the future.

While most of the state's 3.8 million Front Range residents go about their daily business with little or no awareness of the boom, it is an economic and environmental phenomenon with huge implications for the future of the state.

It very well could influence how our children are educated, the kinds of jobs the state can attract and other major aspects of what Colorado will be like in the decades to come.

Already, the oil and gas industry dwarfs most others — even tourism. But while neighboring energy-rich states have amassed multibillion-dollar trust funds to keep their budgets healthy when the wells run dry, Colorado has virtually nothing to show — at least in the way of cash reserves — for the riches severed from its ground.

"That's what happens when we start raiding our future," said state Sen. Gail Schwartz, D-Snowmass Village, who chaired an interim legislative committee earlier this year seeking to reshape public policy to take advantage of the boom.

"We are depleting a state asset that can never be replaced. The question is, how can we actually leave something for our grandchildren and generations to come?"

Powerful economic and political forces are propelling the surge in Colorado drilling.

Natural gas heats more than half of the nation's homes and fuels kitchen stoves and other household appliances. It fires power plants that generate a fifth of all U.S. electricity. Demand for natural gas is expected to grow significantly in the next quarter-century.

A decline in traditional natural gas fields elsewhere, including the Gulf of Mexico; the strong sentiment for greater energy independence; the push by the Bush administration to open more Western lands for drilling; and a breakthrough in technology called "fracing," the hydraulic fracturing of deep rock formations to release gas, have all pushed Colorado to the main stage.

"It's the epicenter," said Ted D. Brown, past chairman of the Colorado Oil and Gas Association.

Colorado has collected about $2.5 billion in severance taxes and federal royalties on oil and gas drilling and mining since 1980. A Rocky Mountain News investigation into what happened to those billions found a trail of state budget bailouts, pet projects, and lavish grants to Colorado cities and counties for projects ranging from a Nordic ski complex in Steamboat Springs to a financial education center in Lakewood that teaches fifth- and sixth-graders about free enterprise.

Many projects funded by severance tax revenue have had little or nothing to do with mitigating the impacts of oil and gas extraction.

"It's been like Santa Claus leaving a gift under every kid's tree," said state Sen. Chris Romer, D-Denver.

State Sen. Josh Penry, R-Fruita, was equally blunt: "This program has funded more than its fair share of rec centers and other dubious projects."

To the south, New Mexico has built its oil and gas tax revenue into a permanent trust fund that tops $4.7 billion, earning hundreds of millions more dollars in interest a year than Colorado draws in total annual severance taxes.

To the north, Wyoming has nearly $4 billion in its state trust fund. It plans to use oil and gas revenue to send 70 percent of its high school graduates to college on scholarship and still have enough left over to fund up to a quarter of its state budget.

Colorado chose not to protect its trust fund with a constitutional ban on legislative raids, as New Mexico and Wyoming have. As a result, the state has just $20 million left in its reserve fund from oil and gas taxes, not counting $242 million kept as a revolving loan fund for water projects.

To put that in further perspective, sparsely populated Rio Blanco County in northwest Colorado has socked away as much money to deal with energy impacts as the entire state government.

Penry calls the state's failure to constitutionally protect its so-called permanent fund "malfeasance."

Meanwhile, Colorado has lost out on at least another $1 billion in oil and gas income by allowing energy companies to take advantage of a 30-year-old tax loophole not allowed by any other state. The loophole is so large that producers in 25 of the state's 30 oil- and gas-producing counties paid no severance tax in recent years.

Now, as Colorado finds itself in the early years of an unprecedented oil and gas boom that is expected to last decades, lawmakers are poised to overhaul public policy on energy extraction.

Three decades ago, in a musty room in the basement of the state Capitol, a small group of legislators laid the foundation for the severance tax policy that has largely endured — including the tax rate, the big tax loophole, and the failure to protect the permanent fund. The result so displeased then-Gov. Dick Lamm that — even though he had campaigned long and hard for a severance tax — it became law without his signature.

Natural gas wasn't even a factor. The focus was on coal and oil shale potential.

These days, in another room at the Capitol, another group of lawmakers has been debating how to change the policy they believe has lost its focus and purpose. What they decide could set the stage for the next three decades — and beyond.

As remarkable as it is, today's energy boom may be just a prelude to an even bigger development on the horizon.

Colorado has the richest oil shale reserves in the world. If technology evolves to extract it efficiently — a task industry scientists are furiously tackling — the current boom could easily pale in comparison.

If oil shale extraction becomes commercially viable, it would be the "biggest industrial development in the history of the state of Colorado," said Gov. Bill Ritter.

For now, though, the state's attention is clearly on the current boom, with proposals for policy changes coming from across the political spectrum.

Some argue that Colorado should be able to someday rely on its own trust fund to pay for the things oil and gas revenue used to buy. Others say the state has too many urgent needs in education, transportation, health care and other areas, and must change how it doles out that revenue.

"We have to decide what's first among those priorities," Ritter said in an interview with the Rocky.

The stakes are enormous.

The energy boom has brought sudden prosperity to some parts of the Western Slope and eastern plains. But it also is bringing labor and housing shortages, inflation, health concerns, social ills, scarred lands, polluted water, potential species decline and crumbling roads.

At this point, however, the state is ill-equipped to deal with the boom — its severance tax funds are largely depleted and its income from taxes on the industry are among the lowest in the West.

Only Utah ranks lower than Colorado among Western states in total taxes paid by oil and gas companies relative to production.

Wyoming's overall tax burden on the industry is more than twice Colorado's. New Mexico's is two-thirds higher.

"We've got a blue-light special going on right now for the oil and gas industry," said Elise Jones of the Colorado Environmental Coalition. "They have bargain-basement prices in Colorado."

Not surprisingly, industry officials disagree, saying that while they may pay less in taxes here, they're paying more in royalties to landowners because less drilling land is publicly owned in Colorado.

"When you look at the entire pie, Colorado's really not too much out of line," said Brown of the Colorado Oil and Gas Association. "When we have to drill a well, and 25 percent of that is given over to royalties and taxes, we think we're paying a pretty good chunk already of our revenue."

But excluding the royalty payments companies distribute to private land owners, and focusing on taxes alone, Colorado's rates are much lower than those of most of its neighbors.

In 2006, New Mexico produced 1.7 trillion cubic feet of natural gas and collected $800 million in severance taxes. Colorado that year produced 1.2 trillion cubic feet of gas, or 70 percent of what New Mexico produced, yet it collected only a fourth of what New Mexico collected in severance taxes — about $200 million.

"Wyoming is surpassing Colorado in dollars invested in education, research facilities and economic development; New Mexico has established deep funds to address its growing capital and infrastructure needs," wrote the group that lawmakers appointed this year to investigate possible changes in Colorado's severance tax structure.

Colorado's legislators can't decide all these issues alone, however, because changes in tax policy must be approved by the voters. And the energy industry has proven itself a formidable foe when pressed into confrontation at the polls.

Meanwhile, government officials, especially on the Western Slope, already have their hands full struggling to find people to fill essential jobs — from teachers and bus drivers to restaurant workers and plumbers — because so many are drawn to high-paying energy jobs. A high school graduate can earn as much as $100,000 a year.

"How are you going to operate a society where you can't find a doctor or plumbers or teachers?" asked Judy Jordan, Garfield County's oil and gas liaison.

In a county where the median-priced house has shot up to $280,000, or 25 percent higher than the rest of the state, officials no longer talk about "affordable housing." Instead, they are scrambling to provide "attainable housing" for people willing to work outside the gas industry.

Roads, meanwhile, are disintegrating under the weight of industry trucks, and while local governments may appear flush with energy tax money, they're having trouble fixing them because employees and contractors are taking industry-related work instead.

The county recently received no bids on a road project, said Jess Smith, Garfield's assistant county manager. On a project budgeted at $13 million, the lowest bid came in at twice that cost. Garfield has so many vacancies in its road and bridge department that it contracts out even routine maintenance.

Drug use is stagnant in most parts of the state, but in some energy-rich counties, it is spiking. The Garfield County jail just completed a new wing for methamphetamine users, more than a third of whom are oil and gas workers.

Weathering the boom — and, more to the point, thriving in it — has proved difficult for the state.

"It's a pivotal time," said Harris Sherman, director of the Colorado Department of Natural Resources. The state is now "setting the framework for the next 20 to 30 years."

Both the General Assembly and the governor shook up the status quo this year, with lawmakers writing a flurry of proposed bills to change tax law and Ritter restructuring the state oil and gas board so that it no longer is dominated by industry representatives.

Industry is well aware of the gathering debate.

"We recognize that we have an impact on the communities where we operate," said Meg Collins, president of the Colorado Oil and Gas Association, the largest industry organization in the state. "We are committed to minimizing that impact while working with local communities to address local needs.

"We are proud of the substantial contributions our industry makes to local economies statewide — including the taxes we pay — and want to make sure those taxes are used to address impacts where development is occurring."

There will be many voices at the table as the push mounts for potential changes in the state's oil and gas strategy.

The goal is public policy that will allow Colorado to ride the wave of this energy boom, not be damaged by it with little to show when the wells run dry.

Burt Hubbard, Gargi Chakrabarty and Todd Hartman contributed to this report.

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Comments

December 10, 2007

8:07 a.m.

Suggest removal

walkerarmyairfield writes:

Enjoy the oil and gas boom. This is the best thing to happen to an area, having grown up in the Kansas Oil Fields I can relate to the industry very well. For an average Rancher or Farmer that oil royalty check saved a lot of our neighbors from the poor house. Remember Bankers are not your friends when your are poor or down but get a couple of good gas or oil wells on the old Ranch and you are the best old fellow the banks know. Glad to see the prosperity come to Colorado. I used to visit with some ranchers around Ouray and they always stated " You Can't Make A Living Off The View" Enjoy those Oil and Gas Checks. When Oil People have money everybody in the area has money. They spend it well.
December 10, 2007

9:24 a.m.

Suggest removal

longreb writes:

What's the rush, if this really is the biggest boom to hit CO-- shouldn't it be done right? The impacts on local communities alone should give us all pause-- the way of life we all know will dramatically change. That's only the tip of this though, the permanent damages that we risk doing to our air, water and land come at a price far higher than any oil and gas check can ever cover. It may be the biggest boom in our history but it could also ultimately be the boom that breaks the camels back.
December 10, 2007

12:23 p.m.

Suggest removal

Brockage writes:

Legislative Solution For A Larger Trust Fund: spend less.
December 10, 2007

2:35 p.m.

Suggest removal

ebmfck writes:

The biggest problem in the Rifle area is that very few of the surface owners own the mineral rights, so all they get is surface damages and they can be very difficult to deal with. Most of the newer owners were assured by real estate agents that the area would never be drilled as the completion costs were too high for the gas to be developed. Newer frac technology has changed that and now the land owners are mad because they can't prevent development and don't get much out of it. I say tough - if you buy land without minerals, expect it to be developed and don't bitch when it happens. You got a good deal on the land because you bought it without minerals.
December 10, 2007

3:38 p.m.

Suggest removal

me2 writes:

we really need this boom and the gas and oil it produces. It is common in Colorado to not own your lands mineral rights, that is something the legislators could work out:decent standards and payment for land use by the oil companies.

Putting the rig in the picture with a childs play area is cute, bit of an agenda here. That big, bad oil rig next to an innocent child. The land in question is mostly scrub oak and sage brush.

It is nice to live near all kthis and see how it has jumped the economy. Grand Junction now has two Sonic drive ins. Progress is great.
December 10, 2007

5:50 p.m.

Suggest removal

brownjv1 writes:

There are a number of great documentaries that have been released on the Colorado / Rocky Mountain energy boom.

1.) "A Land out of Time"

www.alandoutoftime.com

2.) "National Sacrifice Zone"

www.nationalsacrificezone.com

3.) "Last Hat in Town"

www.soulfabric.net

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