Audit finds COGCC let oil and gas operators off the hook for hundreds of millions of dollars

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Joel Dyer

Oil and gas operators in Colorado failed to submit 50,000 required monthly well reports between 2016 and 2018. The Colorado Oil and Gas Conservation Commission (COGCC) failed to collect over $300 million in penalties from the operators for missing those and other reports. And as a result of those and other reporting issues, the state of Colorado — which already has one of the lowest severance tax rates in the country — failed to collect much of the severance tax it was owed by the oil and gas industry operating in the state. (Severance taxes are a fee imposed on industries that make money from extracting natural resources.)

Those were the key takeaways from a state audit released last week that looked into why Colorado is not collecting enough severance tax from oil and gas operators and mining companies.

Over the last four years, the severance tax collected — once tax credits for flaring, capitol costs, transportation, and “stripper wells” that produce less than 15 barrels a day are factored in — has dropped 66%.  In fact, the state actually had to pay operators a $14.3 million refund in 2017 while collecting no severance tax at all. Colorado’s .54% rate is the lowest in the West, and abysmal compared to North Dakota’s 9.81% and Montana’s 9.55% rates.

What the audit found is that the COGCC does not adequately follow up and penalize operators that do not produce monthly well reports, even though it has the resources — and responsibility — to do so. In response, the COGCC claimed in the audit that it only has two staff members who can review 15 operators per year. There are 420 operators in the state.

“I don’t find it hard to believe that that Commission does not have the resources they need to properly ensure public health and safety, much less make sure that the industry is paying their fair share given the incredibly low rate for the industry compared to other states,” says Kelly Nordini, executive director of Conservation Colorado.

The audit suggested the COGCC automatically follow up with oil and gas companies that don’t file reports and routinely run delinquency checks — a suggestion the COGCC accepted.

The COGCC also notified the auditors that it often negotiates with delinquent oil and gas companies, frequently reducing fines up to 90%. If the COGCC had actually fined just the three largest offenders between 2016-18, the state could’ve gathered $120 million from them.

The audit also found there was a five-fold increase in flaring from 2018 to 2019 — a technique that earns a tax exemption and allows drillers to continue operations when there is a surplus of natural gas. 

The audit also found eliminating the stripper well exemption would boost severance tax revenue by $55 million per year, and that by taxing the roughly 500 operators, and not the 13,000 groups that own interest in the operations, the Department of Revenue would be able to more efficiently govern severance tax collection.

Megan Castle with the COGCC told Boulder Weekly that the agency is “committed to being transparent, operating efficiently, and to being good stewards of taxpayer’s dollars” and has already implemented some of the recommendatios from the audit.

But the question of how effective the state will be at ensuring oil and gas operators pay their fair share remains.

“Every single time that I’ve seen in the last 15 years or so that there has been an issue with raising the bar for the industry to do better, they have said it was going to be the end of everything. And it has not,” Nordini says. “I think we need to write rules that prioritize communities and Coloradans and workers and stop buying into the industry hyperbole.”