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Colorado increases tax on oil and gas operators to fund a $3.4 million shortfall in regulators’ budget

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By: Mark Jaffe – The Colorado SunThe Colorado Oil and Gas Conservation Commission on Tuesday raised the tax it levies on oil and gas production in the state to fill a $3.4 million hole created by declining commodity prices – with the support of both industry and environmental groups.

The support on the part of the industry was the product of the commission deciding to reduce the size of the new levy as a result of improving oil and gas prices.

Scaling back the increase was “a move in the right direction,” and offered “breathing room for the industry,” said Rich Coolidge, director of regulatory affairs for the Colorado Oil and Gas Association, a major trade group.

Matt Jones, a Boulder County Commissioner, however, urged the new, seven-member, full-time commission to press for the full increase in the production tax in order to fulfill the agency’s new mandate to protect public health, safety, welfare and the environment.

“This is your inaugural vote,” Jones said. “You will send a message.”

And while environmental groups and industry representatives agreed on this tax increase, both sides also staked out positions on future budget and fee battles at the commission.

The oil and gas industry has been hit with low prices and, as a result of the novel coronavirus pandemic, depressed demand leading to losses and precarious finances. Two Colorado operators – Whiting Petroleum and Extraction Oil & Gas – have already filed for bankruptcy protection.

That downturn is also affecting the COGCC’s budget.

The agency is funded by a tax on oil and gas production, fines, permit fees and severance tax money. It does not receive any money from the state’s general fund.

As the COGCC’s mandate and regulations have expanded so has its budget, which was $10.6 million in 2017 and is projected to be $20.1 million in 2021.

The tax on production is one of the main sources of revenue and has been a 1.1 mill levy on the “market value” of oil and gas produced in the state, calculated by taking the total volume of oil and gas and multiplying it by the commodity price.

The combination of the pandemic, economic recession and a brief oil price war between Saudi Arabia and Russia sent oil prices plummeting and forced drastic cutbacks in capital expenditures by oil and gas companies.

The number of drilling rigs in the Denver-Julesburg Basin, the prime Colorado oil field, slipped to four in July from 20 in February as the spot price of benchmark West Texas Intermediate (WTI) crude oil plunged to $18.67 a barrel in April from $63 a barrel at the beginning for the year.

In June, COGCC projections saw a $2 million gap opening up in revenue revenue to fund its operations, requiring an extra $2 million draw on reserve funds. The commission staff suggested increasing the mill levy to 1.7 – the maximum permissible under law.

However, Julie Murphy, COGCC executive director, told the commission that an improvement in commodity prices – WTI spot prices were close to $42 a barrel on Aug. 3 – enabled the mill increase to be rolled back to 1.5.

Even as investments and drill rigs were cut, Colorado oil production held up in the first five months of 2020 compared with 2019, falling by fewer than 1 million barrels to 75.3 million barrels, according to the U.S. Energy Information Administration.

Still, the combination of the industry downturn and the pandemic has hit small oil and gas operators hard, said Trisha Fanning, the executive director of the Small Operator Society, a group representing 60 small operators with about 11,250 wells in Colorado.

The mill increase is “another hit to our industry,” Fanning said, “but we will adjust and accept 1.5.”

Several key environmental groups – Conservation Colorado, the League of Oil and Gas Impacted Coloradans, and the Western Colorado Alliance – also supported the recommended millage increase.

“Based on the figures supplied by Director Murphy, 1.5 mills will provide the COGCC with sufficient revenue to function correctly this fiscal year,” Matt Samelson, an attorney for the groups, said in an email.

At 1.5 mills, the tax will raise 40 cents on every $1,000 of oil and gas sales, Samelson said.

The environmental groups are now looking at a possible increase in permit fees, which haven’t been changed in 21 years, Samelson said, and a potential increase in the mill levy to 1.7 to implement the new rules that will reorient the mission of the COGCC to protecting public health and communities. That rulemaking is set to begin Aug. 24.

And while industry was supportive of the millage increase adopted Tuesday, Lynn Granger, executive director of the American Petroleum Institute-Colorado, said in a statement, “We have concerns about the impact of the increase during these challenging economic times.”

Gov. Jared Polis, during a briefing later in the day, said the additional funding will help speed up the permitting process by making sure COGCC is adequately staffed. “I don’t think this is viewed by the industry or by anybody else as adversarial. It’s viewed as a way to have the staff they need to process permitting quicker.”

“Absent funding from other sources to be able to make sure that they can have quicker turnaround in permitting, it’s really in everybody’s best interest,” Polis said.

During the hearing some industry representatives raised the question of rolling back the size of the levy as commodity prices and production improve or at a minimum periodically reviewing the rate.

“We hope that the conversation surrounding the mill levy remains fluid and reactive to changes in the economic and regulatory landscape,” Granger said.

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