Blog Post

Local Fiscal Impacts of a Drilling Slowdown Along Colorado’s Front Range

Oct 11, 2016 | Daniel Raimi

Regulation of oil and gas development has been a highly contentious political issue along Colorado's Front Range over the past several years. During that time, numerous cities have challenged state regulations in an attempt to exert more control over the siting of oil and gas production facilities, leading to lawsuits and ongoing political debate.

Cities such as Longmont and Fort Collins, which in previous years passed bans or moratoria on hydraulic fracturing (also known as “fracking”), sit at the foot of the Rocky Mountains and lie on the periphery of oil and gas development. Travel 10 or 20 miles east of these cities, however, and the oil and gas related issues facing local governments shift rapidly. In the heart of the producing region, oil and gas development often occurs in and around residential areas. Perhaps surprisingly, there has been less political opposition to industry activity in these areas where most of the drilling and production actually takes place.

Image 1: A drilling rig operates behind a house near Windsor, Colorado

Photo by Daniel Raimi, 10/4/2016

 

In a November 2013 visit to the Denver-Julesburg basin, we examined several local governments in and around Weld County, where the bulk of industry activity takes place. While these governments described some challenges managing infrastructure costs and retaining their workforces, every jurisdiction we examined had experienced net fiscal benefits from oil and gas development. We returned in October 2016 to see what, if anything, had changed.

Most significantly, drilling has slowed substantially because of declining oil and gas prices. At the 2014 peak, more than 60 rigs were active in the Denver-Julesburg basin. In September 2016, shortly before our visit, that number had fallen to around 15 (Figure 1). This slowdown means a reduction in industry vehicle traffic and competition for labor, easing demand on local governments such as Weld County and cities like Greeley, Evans, and Windsor. In addition, companies have increased pipeline capacity to transport liquids such as crude oil and produced water, reducing heavy truck traffic across the region.

Figure 1

Data source: BakerHughes

 

At the same time, lower commodity prices and production have translated into a substantial decrease in revenue for these local governments. Primarily, these reductions have come in the form of lower property tax revenues and reduced distributions from state-collected taxes on oil and gas production. Other revenue sources for local governments, such as sales and use taxes, have been less heavily affected because, unlike some other parts of the United States that we have examined, the region’s economy is fairly diverse, limiting the levels of revenue volatility due to changes in oil and gas activity. And while revenues have generally declined from their peak, local governments continue to collect substantial sums from oil and gas production.

A prime example is Weld County, which relies on oil and gas related revenues for a large portion of its annual budget. The county projects that total property tax revenues will decline from $180 million in 2015 to roughly $140 million in 2016 because of lower oil and gas prices. However, Weld County’s budgeting strategy, which saw the county investing unexpectedly high revenues into savings funds and capital projects, means that local officials do not expect to cut services or lay off employees.

Looking over the longer term, some cities in the region may face a new challenge associated with the legacy of oil and gas development. Because many of the suburban cities north of Denver expect to continue growing, there is some potential for land use conflict between existing oil and gas infrastructure and new residential and commercial development. For example, the city of Evans expects that a recent oil and gas project will reduce the city's potential future housing stock by roughly 200 units.

Image 2: A workover rig operates in a residential development near Brighton, CO

Photo by Daniel Raimi, 10/6/2016

 

Colorado's Front Range presents a fascinating case study in how different local governments seek to manage oil and gas development, and how widely those approaches can vary even across a small geographic distance. Returning to the region three years after our initial visit, we continue to find that most local governments in and around the region where most development occurs are experiencing net fiscal benefits from the industry.