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Notices to Industry, Publications and Statewide Rules

Two Severance Tax Incentives Extended the Two-Year Inactive Well Incentive for Oil Wells and Gas Wells and the High-Cost Gas Incentive

Application deadlines for two existing severance tax incentives have been extended through bills passed by the 76th legislature and signed into law by the governor:

The Two-Year Inactive Well Incentive which provides a ten-year severance tax exemption on crude oil, casinghead gas, and gas well gas production (but excluding condensate) from oil wells and gas wells with no more than one month of production in the two-year period prior to application to the Commission for certification; and

The High Cost Gas Incentive which provides a tax reduction on the sale of gas produced from gas wells completed in tight formations, Devonian shale, coal seams, or at depths below 15,000’

The Two-Year Inactive Well Incentive.

The extended two-year inactive well incentive program allows operators to apply for certification of two-year inactive wells until August 31, 2009. The previous filing deadline was August 31, 1999. The Railroad Commission can certify "two-year inactive wells" through February 28, 2010. The Commission will continue to identify all oil and gas wells that have been inactive (with no more than one month of production) beginning with the two year period prior to September 1, 1997 (the effective date of the incentive) up through the end of the program. Operators of these wells will be notified by letter of their initial eligibility for the severance tax exemption and eligible wells will be indicated on the oil proration schedule of allowables with one asterisk (*).

If a listed well is returned to production prior to August 31, 2009 and the operator files a W-10/G-10 retest or a W-2, the Commission will send a letter to the operator. The operator may file an application for certification by filling out the bottom of that letter and returning it to the Commission. Upon approval, certification will be issued to the operator who will file with the Comptroller of Public Accounts for a tax exemption for a period of 10 years from the date of certification. Certified wells will be identified on the monthly proration schedule with two asterisks (**).

Note: Individual wells are not listed on the oil proration schedule for oil leases receiving a lease allowable. If necessary, an operator may request a one-time listing of designated and certified wells for their company from the Proration Unit by calling (512) 463-6742.

The High-Cost Gas Incentive.

The extended high-cost gas incentive allows operators to file for a severance tax reduction on high-cost gas wells spudded or completed after August 31, 1996 and before September 1, 2010. The previous filing deadline was September 1, 2002. The tax reduction begins on the first day of production and runs for 10 years or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs, whichever occurs first.

Statewide Rule 101 contains the eligibility provisions and application procedures for the high-cost gas incentive. High-cost gas wells are defined under Section 107 of the old Federal Natural Gas Policy Act (NGPA) and includes gas from tight sands, completions below 15,000 feet, Devonian shale, coal seams, or geopressured brine. If certification is sought based on gas being produced from a tight sands formation, the area must already have been designated as such or an area designation application must be filed. Please refer to Statewide Rule 101 for complete information on the high-cost gas incentive and tight sands formation designations.

A copy of the rule may be obtained by calling the Oil and Gas Division — Central Records section at 512-463-6882 or electronically through the Commission’s web site, www.rrc.state.tx.us. From the Commission’s site, there is a direct link to the Texas Administrative Code (Title 16, Part 1), which contains the Commission’s rules as registered with the Secretary of State.

Applications for Incentives. Even though it has not been revised to reflect the new provisions, the Form ST-1 Application for Texas Severance Tax Certification can be used by operators to apply for the Two-Year Inactive Well Incentive if the well is not designated automatically and for the High-Cost Gas Incentive. Small quantities are available in the Commission’s district offices. For form supply orders, call the Commission’s Austin office at 512-463-6887 (fax: 512-463-7324). The form can also be downloaded from the Railroad Commission web site at www.rrc.state.tx.us/forms/index.php,Oil and Gas Divsion’s Forms Library.


For further information on the Two-Year Inactive Well Incentive, contact William Groves of the Oil and Gas Division’s Production Services Section at 512-463-6733 or e-mail him at william.groves@rrc.state.tx.us. You may direct questions concerning the high-cost gas incentive application procedures to Kim Holtzendorf at 512-463-7679 or e-mail him at kim.holtzendorf@rrc.state.tx.us

Austin, Texas July 1999