‘Stripper’ wells and state taxes

Thousands of small oil and gas wells in Colorado don’t pay state taxes on the resources they extract, a benefit that would be trimmed under a little-known provision of Amendment 58.
Exemptions for so-called “stripper” wells, which produce modest amounts of oil and gas, would be scaled back, giving the state an additional $62 million in 2010 and more or less after that.
In 2007, about two-thirds of the state’s wells — nearly 21,000 — qualified as stripper wells and faced no state severance taxes on the minerals taken, or “severed,” from the ground. Most of those stripper wells are in decades-old Wattenberg Field, most of which is in Weld County.
The Amendment 58 debate is largely swirling around big oil, which has given millions of dollars to defeat it. The measure on this year’s election ballot seeks to raise an additional $320 million each year in severance taxes from the industry by eliminating an existing business property tax credit. The bulk of the money would fund college scholarships, with smaller portions going to renewable energy, environment and conservation.
Small stripper wells don’t get the tax credit because they are exempt from severance taxes. Industry backers have long argued the exemption is important, especially when energy prices are low. It creates an incentive to pull residual oil and gas from older wells, they say. The fossil fuels might otherwise be left behind if the economics aren’t right.
Supporters of Amendment 58 argue that with oil and natural gas prices now higher — this summer saw record-high petroluem prices — even small producers can afford the additional tax.
Denver attorney Lance Astrella, who often represents landowners in disputes with energy companies, notes that small wells are usually paid off and expenses on them are minimal.
“This is something you have zero investment in,” he said. “It’s a huge rate of return.”
But opponents argue that even a modest tax could discourage small well owners from drilling, especially if energy prices fall.
“This is going to change the incentive of going after the smaller well, finishing up the smaller well,” said Henry Sobanet of Coloradans for A Stable Economy, the industry-funded group fighting Amendment 58.
And, he added, “the lower the price, the more that scenario would play out.”
Mary Ellen Denomy, a Rifle-based accredited petroleum accountant, hasn’t taken a position for or against the amendment, but said she doesn’t see too much harm in taxing more stripper wells.
She said profits on many small wells will still be significant, despite the imposition of the five percent tax.
“If this tax passes, if a company makes the decision to close down a well that will be producing $400,000 of income, then they’re not very good business people,” she said. “That would be my attitude.”
But David Howell, general manager of the Denver-Julesburg basin region for Anadarko Petroleum Corp., is wary of tinkering with stripper well rules.
He noted that the natural gas market remains volatile in Colorado. Prices can fall when access to markets outside of the state is limited by pipeline disruptions, making stripper wells less profitable.
“It’s kind of a fine line there for stripper wells,” said Howell, whose company operates scores of such wells. “They can last a long time if you don’t load them up with a lot of cost.”

Rocky Mountain News


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