In wake of oil and gas tax audit, advocates seek penalties and reform

Colorado Rising, an anti-fracking group, wants the state to fine oil and gas companies for not submitting data used to confirm tax payments

An oil rig outside the town of Erie. An anti-fracking group wants Colorado to fine companies for failing to report data upon which severance taxes as based. (Photo by Phil Cherner)

An anti-fracking group is calling on state regulators to impose fines on oil and gas companies that have failed to report well production data that the state uses to ensure companies have paid enough in taxes.

The complaint, filed by Colorado Rising, comes after a recent state audit found oil and gas companies could have shorted the state millions in severance tax revenue in recent years. The complaint demands the COGCC penalize companies $15,000 per violation per day, the maximum allowed under state law

“Each day is a violation and this industry needs to be held accountable for its gross misconduct and willful and wanton acts,” said Joe Salazar, an attorney with Colorado Rising and former state representative from Thornton, in a statement Tuesday. 

The state auditor released a 76-page report last week that found between 2016 and 2018, during former Gov. John Hickenlooper’s tenure, 316 of the state’s 420 oil and gas operators submitted 1,209 incomplete monthly well reports or failed to submit as many as 50,055 required monthly well reports. 

Severance taxes are based on a company’s gross income earned from the sale of oil and gas. The well production data is used to confirm that companies paid the correct amount in taxes. The audit cited the example of one company that under-reported its oil and gas production levels, potentially avoiding $2.6 million in severance taxes before credits and deductions. 

Not once did the COGCC, then led by Matt Lepore, who now works as an attorney for an energy consulting firm, impose a fine for delinquent reports, the audit found. Had regulators imposed a $200 fine per well per day, which is the maximum amount under COGCC rules, the state could have netted up to $308 million, the report found. 

Lawmakers requested the audit as part of Senate Bill 181, which Gov. Jared Polis signed into law in April. The law created new oil and gas regulations aimed at protecting public health, safety, welfare, the environment and wildlife. During a committee hearing last week, lawmakers said they were shocked and outraged and accused the COGCC, which is supposed to ensure companies file completed well reports, of neglect.

In response, Jeff Robbins, the COGCC’s new director, said he was not aware of the issue until the audit was underway. Robbins said the state has made an IT upgrade that flags missing well production reports and immediately sends an email to oil and gas operators with a 30-day notice to come into compliance.

“We will ensure full compliance with production reports as we move forward,” he told lawmakers last week. 

Citing the Colorado Oil and Gas Conservation Act, the COGCC says they are not allowed to fine companies for potential violations that occurred more than a year ago.

A COGCC spokeswoman said in an email Thursday, “The one year statute of limitations applies to bringing an enforcement action against an operator. The Act prohibits the COGCC from issuing an NOAV for a rule violation more than one-year after the date of the alleged violation.”

Citing the same law, Salazar, of Colorado Rising, said the state can go back and fine companies. He said the one-year “limitation does not apply to continuing violations where reporting is mandatory and where penalties are assessed on a daily basis.”

The audit did not name companies. But Salazar said the group is prepared to file an open records request for the names of the companies and then file lawsuits against each of them should the state decide not to impose fines. On Thursday, Colorado Rising said it was also prepared to sue the state and have the courts decide whether the Colorado Oil and Gas Conservation Act allows the state to go back and impose fines on companies. 

Dan Haley, president of the Colorado Oil and Gas Association, said the COGCC is already implementing recommendations by the state auditor to improve reporting practices. 

“Our oil and natural gas industry contributes $1 billion in local and state taxes every year, $600 million of which goes to K-12 and higher education. This industry’s property is assessed at 87.5 percent, which is 3 times larger than commercial businesses and more than 12 times larger than homeowners, which is part of the taxing mechanisms that makes this industry one of the state’s largest taxpayers,” Haley said. 

Even so, Colorado has the lowest effective severance tax rate of nine oil- and gas-producing states, according to the audit. North Dakota’s effective severance tax rate is 7.8% percent, the highest among the states, compared to Colorado’s .54%. 

Part of the reason Colorado’s severance tax rate is so low is because companies can claim tax credits and deductions. Companies are allowed to deduct any costs related to transportation, manufacturing, and processing of oil and gas. They can also deduct interest payments on loans and dividends to shareholders. Companies are also allowed to deduct 87.5% of their prior year’s property taxes on their state tax returns. There is also the so-called stripper-well exemption, which allows companies to pay no taxes on low-producing wells. 

But lawmakers say it’s unlikely they will pass major severance tax reform this year. One reason is because they would have to refer a tax measure to the ballot for voter approval under the Taxpayer Bill of Rights, or TABOR. Such voter approval is constitutionally required in years when revenue exceeds the so-called TABOR cap, which it is projected to do next fiscal year. And since 1998, when lawmakers passed TABOR, voters have approved just three of 15 proposed tax increases. 

In 2008, voters rejected severance tax reforms on the ballot. Going to the ballot again will require a well-funded campaign to persuade voters to support it. In 2018, the oil and gas industry spent more than $40 million fighting Proposition 112 with advertisements and organizing. The ballot measure, which failed by a 10-point margin, would have increased setbacks between homes and fracking operations. 

Sen. Mike Foote, a Democrat from Denver, said if lawmakers refer reforms to the ballot and lose, then the industry could use that as a reason to fight future legislative efforts. In 2019, he said, the industry used the defeat of Prop 112 in a public relations campaign to fight Senate Bill 181. 

“When a ballot measure fails, the industry uses that to dissuade lawmakers,” Foote said. “They can say, ‘the people already voted and this and why are you overruling the will of the people?’” 

That’s why lawmakers say they are looking at other reforms that may not require going to the ballot. Ideas include taxing oil and gas production rather than gross income, making sure production measurement equipment at oil and gas wells is accurate or changing the one-year statute of limitations to collect unpaid taxes or impose fines. Some of these reforms may need voter approval depending on how much they raise revenue. 

“There is a whole lot here that we should be looking at,” said House Speaker KC Becker, a Democrat from Boulder. “I think and hope we can do it in a bipartisan way.” 

This story was updated on Feb. 6 with additional comments from the COGCC and Colorado Rising over whether the law allows companies to be penalized. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.