The Colorado shale oil boom is adding billions of dollars to oil company balance sheets and millions to the coffers in counties where drilling takes place — but it hasn’t amounted to much for the rest of the state.
While thousands of wells are being drilled in the Niobrara shale formation — mainly in Weld County — none is likely to pay state tax after three years, according to one economic analysis.
Those tax payments are being reduced by tax credits equal to $208 million a year, according to a Colorado Legislative Council staff analysis.
In 2013, Colorado surpassed a 60-year-old record, producing 64 million barrels of oil — valued at about $5.7 billion.
“We have a one-time resource we are not collecting on,” said Matt Samelson, an attorney with the Western Resource Legal Center.
The size and role of energy taxes varies across the West, with Colorado having one of the lowest rates. Some states have raised more and turned it into a statewide benefit.
Wyoming collects about $1 billion a year and uses the money to fund highway and water projects and to provide grants to all cities and towns based on population.
A portion goes to a trust fund, now valued at $6.2 billion, whose interest, dividends and capital gains go to the Wyoming general fund.
Montana is using oil and gas taxes for statewide property tax relief.
Half of Colorado’s severance taxes goes to the state Department of Natural Resources, and the other half goes to the counties impacted by oil and gas development.
“The goal is to help those counties cope,” said Weld County Commissioner Barbara Kirkmeyer.
Colorado’s severance tax also funds water and wildlife projects across the state, as well as covering the cost of state oversight of oil and gas and minerals, said Mike King, director of the state Department of Natural Resources.
“Severance taxes are projected to be $190 million this year,” King said. “That’s a significant number.”
Colorado’s energy-tax structure is also creating a mismatch between counties where the money is generated and those getting that money back.
Weld County is awash in oil money, while La Plata County, which yielded 44 percent of the state’s energy taxes in 2013, is facing an austerity budget.
“We are getting the short end of the stick,” said La Plata County Commissioner Gwen Lachlet.
Anadarko Petroleum Corp. tax specialist Travis Holland said the Colorado system is complex and could use some modifications, but the industry is following the rules as written.
Colorado produced 49 million barrels of oil in 2012, worth an estimated $4.1 billion. About 80 percent of the oil came from Weld County.
According to the Colorado Legislative Council study, the state tax on oil and gas in 2012 was $118.3 million — a tiny fraction of the $10.6 billion in overall state tax collections.
The small amount of revenue and the volatility of energy prices on which it is based are reasons that little attention is paid to the tax in the statehouse, said Carol Hedges, director of the Colorado Fiscal Institute, a nonprofit think tank and legal center.
“It just isn’t seen as a source for ongoing funding,” she said.
The state’s main levy on oil and gas is the severance tax, which ranges from 3 to 5 percent of sales.
Producers can, however, take the bulk of local property taxes — also called the ad valorem tax — as a credit against the state tax. Low-producing wells, called stripper wells, don’t have to pay at all.
As a result, the effective tax rate is 1.3 percent, according to the Colorado Legislative Council analysis.
“We are one of the few states that allows a credit against severance taxes,” said Mary Ellen Denomy, a petroleum accountant, who audits oil and gas taxes for three Western Slope counties.
This doesn’t mean the industry isn’t paying taxes.
In 2013, the state collected $118.3 million in severance taxes, according to the state legislative council analysis.
Houston-based Noble Energy said it paid more than $36 million in severance taxes in 2013 and estimates its 2014 tax bill will be nearly $50 million. The company paid $66 million in property taxes in 2013.
The Woodlands, Texas-based Anadarko Petroleum Corp., the second-largest operator, in 2013 paid nearly $83 million in property taxes. It would not disclose its severance payments.
The challenge for companies is balancing between local taxes and the state tax since Colorado has the widest variation of local property taxes among the oil states, Holland said.
As a big producer, Anadarko pays severance at the top 5 percent rate.
“In an area with a 3 percent tax rate, that doesn’t make a big difference, but some areas have tax rates in excess of 17 percent, and that becomes unworkable,” Holland said.
Compounding the problem is an odd mix of petroleum geology and accounting.
The state requires the severance tax payment be made in the year that the oil and gas are sold.
The property tax rate, however, isn’t set until the end of the year and paid early the next, so the tax credit — equal to 87.5 percent of the tax bill — is applied against the second year’s severance tax.
The oil and gas production out of shale wells declines sharply year after year.
“You are always applying a bigger credit against a lower production,” said Mark Haggerty, an economist with Headwaters Economics, a nonprofit research group in Bozeman, Mont.
When the local tax rate is above 58 mills, there is no severance tax.
“The Front Range counties where shale development is taking place — Weld, Arapahoe, Adams — have millage rates above that threshold,” said Samelson, of the Western Resource Legal Center.
The total local and county mill rate is 69.7 for Weld, 103.6 for Arapahoe and 106 for Adams, according to the state Department of Revenue.
Headwaters did an analysis of 1,200 wells drilled in the Niobrara in the past five years and found that none was paying state tax after three years.
“That might be true on a well-by-well basis,” Anadarko’s Holland said.
But more than 55 percent of a well’s production comes in the first year — when there is no tax credit at all, he said.
And as long as the industry drills new wells, there is a fresh infusion of severance tax money.
“Stop drilling wells and the severance tax and the ad valorem tax will fall like a rock,” Holland said.
The tax payments could be smoothed and extended if the county and state accounting were harmonized. As it is, each operator has to keep two sets of books.
“It is silly and it is onerous,” Holland said.
The property-tax credit also has a big impact because Colorado has the lowest oil and gas taxes in the West.
Even adding in income and sales taxes, the effective Colorado rate is 5.5 percent compared with 9.6 percent in New Mexico and 10.7 percent in Wyoming, according the state legislative council study.
“We have low business, personal and sales tax rates,” said Dan Neal, director of the Equality Policy Center in Casper, Wyo. “We decided we’d tax mineral production, and none of the companies have left.”
In 2008, a constitutional amendment to remove the property-tax credit for oil and gas was defeated in Colorado, with 58 percent of voters opposed.
Oil and gas county officials opposed the amendment — fearing, in the words of then-Trinidad Mayor Joe Reorda, that it would “upset the apple cart.”
The severance money to ease the impacts of oil and gas activity is divvied up based on production and the number of industry workers in a county.
Weld County, where 60 percent of all the drilling permits in the state were issued in 2013, receives the largest share of the severance money.
In 2013, Weld got $5.2 million while La Plata received $1.1 million, according to the state legislative council analysis.
But when it came to severance taxes, La Plata generated $52.7 million in 2013 — double the sum in Weld.
The reason? The La Plata County and local property tax rate is lower than Weld’s, so producers had fewer credits to deduct.
“There is a huge disparity,” said La Plata Commissioner Lachlet. “We get penalized because a lot of our wells are serviced by workers living in New Mexico. The formula needs work.”
In December, the La Plata County Commission, facing declining tax revenues, adopted an austerity budget, refused a request to fill seven positions and spoke of “narrowing” services.
The oil and gas industry paid $264.7 million in taxes to Weld County, municipalities and school districts in 2013 — more than half of all the taxes paid in the county.
The county is building a $100 million contingency fund, creating a new crime lab, expanding and extending 34 miles of heavily used County Road 49, and issuing a temporary tax credit for all property owners.
The county has neither short- nor long-term debt.
“Oil and gas have been huge in the county for the last 20 or 25 years,” Weld County Commissioner Kirkmeyer said.
“But we’ve been through boom and bust cycles and know you have to manage carefully,” said Kirkmeyer, who also served as director of the Department of Local Affairs, which distributes the severance funds.
As for the distribution formula, Kirkmeyer said all the counties were at the table when it was devised.
“You look at the formula, the mixing and mingling of types of accounting, the severance tax’s low rate — this is a system that needs an overhaul,” said Denomy, the petroleum accountant.
Mark Jaffe: 303-954-1912, mjaffe@denverpost.com or twitter.com/bymarkjaffe