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Millions in oil, gas taxes may have been lost because Colorado regulators didn’t enforce reporting rules

A scathing audit -- which comes after Colorado tightened oil and gas regulations last year -- found the top drillers in the state failed to file thousands of production reports from 2016 to 2018

Extraction Oil & Gas drilling rig on the Coyote Trails pad is visible behind houses along Tundra Circle in Erie on Thursday, April 4, 2019. (Andy Colwell, Special to the Colorado Sun)
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Colorado’s Oil and Gas Conservation Commission failed to collect thousands of monthly production reports from operators across the state over a two-year period — information that impacts the accuracy of the state’s severance tax collection, according to a recently released state audit.

Of the 420 oil and gas operators in Colorado, 316 were out of compliance with their monthly well reporting from 2016 to 2018, submitting either incomplete reports or none at all, according to a 76-page audit report presented to the Joint Legislative Audit Committee on Tuesday.

One of Colorado’s 10 largest operators was called out for missing as many as 8,407 well reports — the most of any operator. The company, which the audit report did not identify by name, produced and sold 46 million barrels of oil and 187 million MCF of natural gas from 2016 to 2018, based on the well reports that were submitted to the COGCC. 

The audit report estimates that if the COGCC imposed the maximum fine of $200 per day, per well, the state could have collected more than $308 million in penalties. The top three offenders, each missing over 5,000 reports, would account for more than $120 million of that total number. 

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“We have seen lax enforcement of reporting from oil and gas operators, which has resulted in thousands of unfiled reports and millions of dollars in uncollected fines, and ultimately tax dollars that could go to the state,” said Rep. Dafna Michaelson Jenet, vice chair of the Legislative Audit Committee. “…It’s not fines we want; we want producers to file their reports like they are supposed to.”

The Department of Revenue relies on COGCC’s annual summary reports to help verify that the production amounts operators report on severance tax returns are accurate, the audit said. The missing reports likely means that operators are underreporting their production amounts.

“This highlights yet another aspect of the oil and gas industry that has gone unchecked for years, and we need a reliable reporting and compliance system so this industry can no longer skirt the system with impunity,” House Speaker KC Becker, D-Boulder, said in a statement. 

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Becker requested the audit in 2018. Last year, she pushed for the passage of Senate Bill 181, which gave more authority to local governments in regulating oil and gas operations.

The problems the audit highlighted were not with the industry but with the state agencies that oversee severance tax collection, Dan Haley, executive director of the Colorado Oil and Gas Association, said in a statement.

“The audit highlights several flawed processes within multiple states agencies that prevent the auditor from collecting accurate information,” Haley wrote. “We’re open to having conversations as one of the state’s largest taxpayers.”

The audit found that only 10% of mine operators with active permits submitted production reports in 2017 and that the Department of Natural Resources has not produced an annual mining report since 1981, both of which are required by statute.

“It’s always been in place that they issue and get annual reports from producers and then they issue their own annual report on how much has been extracted. But they haven’t done that. They didn’t think it was something that they were supposed to do,” said Derek Johnson, who helped lead the audit process. “So that’s obviously part of our recommendation as well.”

Colorado’s severance tax is imposed on the extraction of nonrenewable natural resources that are sold for profit. Tax rates vary depending on the mineral extracted.

The Revenue Department does not rely solely, or evenly primarily, on COGCC’s reporting data when calculating severance taxes, department spokesman Daniel Carr said in an email. “Like any other tax return, we primarily rely on the data provided directly by the taxpayer and in the event a taxpayer does not provide the required data we would audit them.”

But individual operators might not be including their missing reports when submitting their numbers to the Department of Revenue. 

An Extraction Oil & Gas oil drilling rig in operation on the Livingston pad on the west side of the Anthem neighborhood in Broomfield on Aug. 2, 2019. (Doug Conarroe, The Colorado Sun)

“Ultimately, what we were getting at in the audit was that the two agencies within the Department of Natural Resources and the Department of Revenue are not collecting complete information that can be used to verify amounts of minerals that are extracted,” Johnson said.

“We can’t really speak to what COGCC intends to do about these missing reports,” he said, “but our recommendation is basically that moving forward they need to run these queries to find out which reports are missing and that they need to use the power of fines to force them into compliance.”

There are approximately 70,000 active wells in Colorado, making oil and gas the largest extractive industry subject to severance taxes, the report said. In 2018, operators produced 178 million barrels of oil and 2.3 billion MCF (thousands of cubic feet) of natural gas.

Colorado has one of the lowest severance tax rates in the nation. In 2018, the state collected $102.7 million in severance taxes –– which gets split between the state and local governments. 

In fiscal year 2016-17 Colorado collected $4.2 million, but that shot up to $126.2 million the next year. 

Colorado’s Oil and Gas Severance Tax over time. Graph courtesy of Colorado’s General Assembly.

At the same time that severance taxes declined, oil output in the state rose from 10.3 million barrels in January 2016 to 16.8 million barrels in December 2018, according to the U.S. Energy Information Administration. Natural gas production rose during the same period from 1.6 million MCF to 1.8 million MCF.

In 2018, 177.8 million barrels of oil were produced in Colorado, up 32% from 2017, EIA reported.

Colorado’s Oil and Gas Commission has a one-year statute of limitation to fine operators who inaccurately report, or fail to report, their monthly production data. Meaning, everything that happened from 2016 to 2018 is moot.

“So in terms of the ones that are inaccurate, we don’t have a way to go back,” Jeff Robbins, director of the Colorado Oil and Gas Conservation Commission, said.

Robbins, who was appointed in March 2019, said that the commission is working to implement the recommendations made in the audit. Until the audit, he was unaware the Department of Revenue relies on COGCC records to calculate severance tax, he said.

Currently, the commission uses an automated system to notify operators if their monthly report is incomplete or missing. But what the audit highlighted was that there was no mechanism within their current system to follow up after the operator has been notified.

Another issue identified in the report was a lack of oversight when it came to calibrating the machines that collect the production data for producers. Robbins said that well inspectors have always looked at this, but now will document it on their “check list.”

“Historically, this hasn’t been a part of the field inspection but we are adding that,” he said, noting that wells typically are inspected about once every 1.7 years.

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Mary Ellen Denomy, who audits oil and gas companies for local tax collections in Mesa, Rio Blanco and Montezuma counties, said each year she flags two or three companies for discrepancies between production volumes and revenues.

“It is like doing a full audit,” Denomy said. She pulls the records for the meters on every well. “The volumes are supposed to be reported to the COGCC, but those aren’t always accurate or there are gaps.”

Companies that have underpaid may then get audits on multiple years. But Denomy says it’s hard to keep up. 

“I can only do two or three,” she said. “It is very time consuming.”

Colorado Sun contributor Mark Jaffe contributed to this report.


UPDATE: This story was updated at 8:35 a.m. on Jan. 29, 2020, to add comments from the Colorado Oil and Gas Association.


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