DENVER—Western Colorado has 40 times more natural gas than previously thought, potentially making it the second-largest formation in the country, the U.S. Geological Survey said Wednesday.

Mancos Shale formation in Colorado’s Piceance Basin holds about 66.3 trillion cubic feet of gas, up from 1.6 trillion estimated in 2003, the USGS said, citing new research.

A trillion cubic feet of natural gas is enough to heat 15 million homes for a year, the U.S. Energy Department said.

The U.S. already has 2.9 trillion cubic feet of the fuel that has been extracted and put into storage, which has weighed on natural-gas futures prices. The contract for July delivery fell 0.6 cent, or 0.2%, to $2.468 a million British thermal units on the New York Mercantile Exchange on Wednesday.

David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, said prices are too low to spur a boom.

If prices reach $3.50/mmBtu, companies would likely begin drilling, Mr. Ludlam said.

The U.S. also needs more facilities to export natural gas to Pacific nations to help make the Colorado gas competitive, he said, citing the proposed Jordan Cove Liquid Natural Gas terminal at Coos Bay, Ore.

The Piceance Basin, which spans much of western and northwestern Colorado, already has multiple well sites, pipelines and processing plants in place from a previous round of drilling in a shallower formation, Mr. Ludlam said.

Much of the basin is federal land managed by the Bureau of Land Management, and getting approval from the BLM to drill is often more difficult than getting private landowners to agree, said Kathleen Sgamma, vice president of government and public affairs at the Western Energy Alliance, an industry group.

“I hope with this reassessment the government understands that indeed the Mancos Shale is an important formation that should be developed responsibly,” Ms. Sgamma said.

Neither BLM nor USGS officials immediately responded to requests for comment.

The new estimate could mean the Piceance Basin has the second-largest natural gas reserves in the country, after the Marcellus Shale formation in Pennsylvania and neighboring states, Mr. Ludlam said.

USGS said the Marcellus has 84 trillion cubic feet of gas.

More important than the volume of the reserves is the cost of extracting them, said Porter Bennett, an energy analyst and president of Ponderosa Advisors in Denver. The Piceance Basin has traditionally had high drilling costs, Mr. Bennett said.

However, Mr. Ludlam said the next wave of energy companies with leases in the area likely would have lower costs than previous operators.

Drilling companies would use hydraulic fracturing, or fracking, to recover the gas from the Mancos Shale, Mr. Ludlam said.

Fracking uses a mix of water, sand and chemicals under high pressure to force open underground formations and release oil and gas. Opponents say fracking poses a risk to public health and the environment, but the industry says it is safe.