Production holds up, but revenue hit by low prices

A big drop in natural gas drilling in Colorado last year shouldn’t mean a decrease in production levels, state regulators say.

But the same factor driving that drilling drop — lower natural gas prices — will mean reduced revenues to the state and local governments. That’s because of taxes that are based on production value.

Thom Kerr, permitting and technical services manager for the Colorado Oil and Gas Conservation Commission, said final figures aren’t in, but production for 2009 might show a slight decline in northwest Colorado’s Piceance Basin. And that’s likely to be offset by higher production elsewhere, primarily eastern Colorado’s Wattenberg drilling region, he said.

“At this time Colorado production continues to grow, so we’re not predicting there will be a decline in the volume of gas coming out of Colorado,” Kerr said.

Colorado now has more than 40,000 producing wells that serve as “a huge buffer” mitigating the effects of a drilling drop, he said.

Even so, the staff of the state Legislature’s Legislative Council is predicting state severance tax revenue for the state’s 2009-10 fiscal year, which ends June 30, will be $85.4 million, a 74.6 percent decrease from $336.9 million the previous fiscal year.

In a December report, the Legislative Council blamed the decrease partly on lower gas prices, and it pointed to a 7 percent decrease compared to a year ago for another severance tax source, coal production.

Another factor depressing severance tax revenues is the same robust oil and gas production and pricing that previously drove them so high. Companies also pay local property taxes on that production, and now they are claiming large credits against their severance taxes for those property taxes, the Legislative Council says. In 2008, Colorado voters rejected a proposal to eliminate the tax credit.

Half of Colorado’s severance tax revenue goes to the state Department of Natural Resources. Of the rest, 30 percent is directly distributed to counties and municipalities impacted by energy development. The distribution formula provides for the rest to go into a local energy impact grant fund. However, Gov. Bill Ritter has targeted that fund as part of his efforts to balance the budget, which resulted in cancellation of a grant cycle.

State Sen. Al White, R-Hayden, whose district covers many energy-producing counties in northwest Colorado, said the diversion of energy impact funds concerns him.

“But our budget situation is so dire that I don’t have any options,” said White, a member of the Legislature’s Joint Budget Committee.

He said the drop in severance tax revenues will reduce the state’s ability to make grants to local governments.

The good news is the Legislative Council is predicting a recovery in severance tax revenues, with the amount doubling to $167.4 million in fiscal year 2010-11, and reaching $214.5 million a year later. The reasons include an expected rebound in gas consumption and prices, and the fact companies’ tax credit claims will be lower based on local property taxes that reflect lower production values in 2009.

Early last year, Garfield County Assessor John Gorman predicted the drop in the taxable value of 2009 production would mean a $19 million to $21 million decrease in property tax revenues for the county. The drop would come when those collections occur in 2011, after assessments of 2009 production take place this year.

“I haven’t really put a pencil to it, but I think my projection is probably still good. I hope I’m wrong,” Gorman said.

Gorman said another consideration is companies can deduct certain production-related costs before paying taxes on production. When gas prices are lower, those deductions become a greater amount of the total value of gas, reducing the proportion of production that is taxable.

Kerr said while gas prices are lower, he expects total production in Colorado for 2009 to end up being about the same as a year earlier, which was just under 1.5 trillion cubic feet. Garfield County accounted for more than one-third of that production. The state has been setting production records each year going back at least to the mid-1990s.

Production statistics on the oil and gas commission Web site don’t yet include December but suggest the state’s 2009 production won’t match the 2008 amount. Kerr said some companies can lag behind in production reporting, meaning that gas volumes from about August on will increase beyond what’s currently shown.

While drilling slowed last year in the Piceance Basin and elsewhere, it didn’t cease, and the numbers of producing wells continued to increase. The leading producer in the Piceance, Williams Production, cut its local rig count to eight by June 2009, about one-third of the rigs it had been operating in June 2008. Over that time, however, its local well count grew to more than 3,000, and its production increased from 760 million cubic feet per day to 850 million cubic feet per day.

Some other companies maintained or increased local production. Doug Hock, a spokesman for EnCana Oil & Gas (USA), said that wasn’t the case for EnCana. Its average 2009 production over the first nine months was 358 million cubic feet per day, compared to an average of 385 million cubic feet per day in 2008, Hock said.

It reduced its local drilling rig count to around four to five last year, and it expects to average about five rigs this year. Through September, it had drilled 113 wells for last year, compared to 258 for the same period in 2008 and 328 for that year as a whole.

Piceance wells usually are most productive during their first few years, which makes constantly drilling new ones important to helping maintain production levels. Then again, existing wells go on producing for decades.

“The production ramps down fairly quickly, but then it levels out, and we continue to see production for a 20-to 30-year period,” Hock said.

One thing affecting EnCana’s production in the Piceance and elsewhere is that it shut in some wells, suspending production due to low gas prices, he said. Company-wide as of the third quarter, EnCana had shut in production of about 500 million cubic feet a day, he said.


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