State grapples with how to assess, allocate tax revenue from oil, gas production

QUICKREAD

WHAT’S AT STAKE

In considering the importance to tax districts of how oil and gas production assessed value is allocated, it’s worth looking at how significant a contributor it can be to a tax base:

■ In Garfield County, which has about 10,800 active wells, the total 2013 assessed value from oil and gas was about $2 billion, with about $721 million of that related to wellhead equipment, pipelines and other personal property, and the rest derived from production.

■ The assessed value of production — the amount to which property tax rates are applied — is 87.5 percent of actual value, unlike an assessed value of just 7.96 percent for a residential property.

■ Oil and gas production and personal property accounted for more than 70 percent of all assessed value in Garfield County for 2013.

■ It accounts for more than 90 percent of tax revenue in the Grand Valley Fire Protection District and last year accounted for 75 to 80 percent of revenues in the Colorado River Fire Rescue district.

■ Oil and gas has served as the prime revenue source that has helped Garfield County amass a fund balance that in its 2014 budget passed last December was projected to exceed $103 million by the end of this year.



When House Bill 1371 sped through the Colorado General Assembly earlier this year and became law, it was bound to create winners and losers, as legislation so often does.

Dolores County counts itself in the latter category. County Commissioner Julie Kibel said the change in how revenue from oil and gas production is allocated to tax jurisdictions resulted in a loss of about $1 million to the county, local schools and other entities.

“That’s a huge hit,” said Kibel, who said the $310,000 loss absorbed by the county government amounts to about 10 percent of its annual budget.

The town of Windsor also took a hit with the measure. Other entities, such as the Grand Valley and Colorado River fire districts, aren’t so sure how it affects them. But officials with those fire districts still question why the legislature saw fit to change the law so that property tax valuation of oil and gas production is allocated to tax districts based solely on where the wellhead is located, rather than accounting for where the minerals actually are produced, which can be miles away underground in the case of wells drilled down and then out horizontally.

“I think it becomes more of a philosophical thing that just doesn’t sound fair to me,” said Mike Morgan, chief of the Colorado River Fire Rescue, which stretches from Rifle to New Castle.

The new law results in tax districts “gathering revenues from minerals that are not coming from their jurisdictions,” he said.

But advocates of the measure argue that it takes a simple and practical approach by considering only wellhead location.

In heavily drilled Weld County, “it became an enormous headache” for the county and industry to comply with the former law, said county Assessor Christopher Woodruff, who supported the recent legislation, which was introduced in the House of Representatives by state Rep. Dave Young, a Weld County Democrat.

“It’s much cleaner and it’s much more transparent this way,” Woodruff said of the legislation, which Gov. John Hickenlooper took the unusual step of letting become law without his signature.

A leading opponent of the change is Assessor Jim Yellico of Garfield County, which in Colorado trails only Weld County in drilling activity and well count levels.

He thinks allocating assessed value based on where minerals are produced from rather than where the wellhead is located “passes the common-sense test and it’s not an impossible situation to deal with.”

Previous law

As it happens, a measure had been on the books for at least 50 years that directed energy companies to break down for assessors a well’s production value proportionally among political subdivisions, based on their corresponding surface acreage above the area being produced.

“It’s just that nobody was doing it,” with a few exceptions, said JoAnn Groff, the property tax administrator for the Colorado Division of Property Taxation.

The oil and gas industry and most assessors long had instead simply taken the wellhead-based approach, except in certain cases, such as Dolores and Montezuma counties, which dealt with drilling along their county line. But the Division of Property Taxation informed assessors what the law always had required after Weld County was approached by local tax jurisdictions about the issue and sought clarification from the state.

It was after assessors and the industry tried to comply with the law for a year that the push came for a new bill that simply codified what already had been common practice.

Travis Holland, a senior tax accountant at Anadarko Petroleum, has been heavily involved with the issue and favors the legal change also supported by the Colorado Oil and Gas Association industry group. He cited the difficulty of complying with the previous law, and objected to the fact that companies rather than assessors were being relied upon to break down a well’s production value by tax district.

“We want to be a good citizen and pay the right amount and pay the right people. We just don’t want to be put in a position of determining who those people are,” he said.

The wellhead approach also appropriately makes use of data that the public can access and inspect, the industry argues.

“It shouldn’t be in the hands of private citizens who because of the process that we have to use to do those allocations, it becomes suddenly not very transparent at all,” Holland said.

 

Not signed or vetoed

A fair amount of the concern over this year’s measure came from its quick consideration late in the legislative session.

“It seemed like this got rammed through late and quickly,” said Kimberly Bullen, government affairs coordinator for the city of Rifle, which shares Garfield assessor Yellico’s concerns about the measure.

“There’s a lot of people now that are like, ‘Wait a minute, we never got a say in this,’ ” Dolores County’s Kibel said.

For Dolores County, the concern stems from drilling in what’s known geologically as the McElmo Dome area, where most of the wells have been drilled from Montezuma County but some of them reach underground into Dolores County.

Dolores County wrote Hickenlooper, urging that he veto the bill. In a letter he wrote to the House explaining his decision to neither sign nor veto the measure, he acknowledged the concerns he was hearing about the measure changing longstanding principles of taxation and “creating tax winners and losers,” and voiced sympathy for jurisdictions that would be impacted.

“We have even heard from legislators who voted for the bill who are now having second thoughts,” Hickenlooper wrote.

But in refusing to veto the measure, he noted that only three lawmakers voted against it.

“As a matter of good government, when carefully crafted legislation that simplifies the tax code passes with near unanimous support, that legislation should be allowed to become law,” he wrote.

Meanwhile, however, Young and other bill sponsors, the state Department of Local Affairs and others have begun to reach out to interested parties after the fact to see if there’s any better way to address the issue.

Kevin Bommer, deputy director of the Colorado Municipal League, had urged Hickenlooper to veto the measure so there could be more time to address the issue. He said he thinks parties were glad to finally have the chance in a recent meeting to state their case. He said no concrete proposals came from that meeting.

“I think at this point the way we see it going forward is continuing respectful dialogue. … I don’t think there’s any bad actors here,” he said.

 

Horizontal headaches

The issue is taking on greater urgency with the increasing use of directional and particularly horizontal drilling in the state. Colorado law likely didn’t contemplate such trends, but instead was more focused on the fact that the underground oil and gas lease/drainage area that a vertical well tapped could extend across tax boundaries.

More recently, companies in western Colorado’s Piceance Basin have been using directional drilling to tap gas from hundreds of acres from a single well pad with dozens of wells drilled at angles. In northeastern Colorado, companies have been drilling down and then out horizontally for miles to tap oil in what has become a drilling boom in places like Weld County. In the Piceance, firms also have been discovering significant deep gas reserves, which they’ve begun producing with horizontal drilling.

Yellico said that in the case of wells reaching out horizontally two miles, “there’s definitely (tax jurisdiction) boundary crossing at that point.”

Said Rifle’s Bullen, “Using the wellhead as that point of taxation really ignores where the minerals are actually being extracted from.”

She’s not aware of the new law having an immediate impact on Rifle, but can envision a potential loss of revenue if companies drill horizontally beneath the city, although she said the impact would be minimized by the fact that the city relies more on sales taxes than property taxes for revenue.

The town of Windsor in northeastern Colorado has identified 113 wells that have been drilled beneath the town or are planned for that from outside the town’s boundaries, and from which it will get no property tax revenue.

The town has drilling within town limits also, but has been working with industry to locate pads away from high-density residential areas, which in a lot of cases has meant putting them outside the town. Now it feels as if it’s being punished for planning efforts aimed at reducing drilling impacts, losing out on taxes from wells that individually might produce oil and gas worth $20 million or more.

“We thought we were doing the right thing, not having them get into conflict with high residential density areas,” said town manager Kelly Arnold, a former Grand Junction city manager.

Drilling outside of the town also lets companies pay a lower property tax rate, Arnold noted, echoing the concern of several critics of the law that it might encourage companies to choose their drilling locations based on the applicable tax rates.

Holland, from Anadarko, said history has shown that hasn’t been occurring.

“We have an economic incentive to locate the well as close to the resource as we possibly can,” he said.

Drilling from farther away drives up the cost, and companies also have to consider all kinds of other issues such as meeting setback requirements from buildings and reaching surface use agreements, he said. About the only way Holland thinks taxes might enter into a company’s thinking is if it might decide not to drill a well at all if an area’s tax rate is too high.

 

Royalty owners

People like Colorado River fire chief Morgan and David Blair, chief of the Grand Valley fire district, based in the Parachute area, say that in cases such as theirs, the effects of the new law may balance out as they gain from some wells drilled from their districts into other tax jurisdictions, and lose out where the opposite occurs. But their districts have lots of wells, and Morgan could envision serious impacts for small tax districts with no wellheads but minerals being produced from beneath them.

Blair notes that companies already divvy up production among royalty owners.

He added, “If they can figure it out for royalty owners, why can’t they use the same rationale and percentage for taxing entities?”

Holland, and Weld County Assessor Woodruff, point to the sheer numbers involved. Garfield County has 109 different tax areas, when all the various combinations of tax districts are taken into account. Holland said that’s a lot in itself, but in Weld County, there are about 3,000 unique tax areas resulting from the varying overlays of about 300 tax districts.

The county also has about 22,000 active oil and gas wells.

“The idea that we’re going to go in and somehow carve up 22,000 operating wells into 3,000 tax areas, it’s a gut-buster. It’s tough,” he said.

Said Woodruff, “It becomes a huge problem for the county as well as the companies.”

Holland said he thinks the conversation on the issue needs to continue, but added, “At some point it becomes a thing that there’s no process that’s perfect, so we want to do the one that’s the least imperfect.”


COMMENTS

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Thank you for this well-written article that points out the nuance and complexity of legislation in general, and this legislation in particular.

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