Texas Severance Tax Incentives
Present Incentive Programs
- The Enhanced Oil Recovery (EOR) Incentive. (Initially introduced by 71st Legislature – 1989) Under the current version of the incentive, oil produced from an approved new enhanced oil recovery project or expansion of an existing project is eligible for a special EOR tax rate of 2.3 percent of the production’s market value (one-half of the standard rate) for 10 years after Commission certification of production response. For the expansion of an existing project the reduced rate is applied to the incremental increase in production after response certification.
- The High-Cost Gas Incentive (initially introduced by 71st Legislature – 1989) Under the current incentive, gas from wells defined as high-cost gas wells under Section 107 of the old Federal Natural Gas Policy Act (NGPA) is eligible for a severance tax reduction. The level of reduction is based upon drilling and completion costs. To qualify for the reduction the well must be spudded or completed after September 1, 1996. An earlier program granted a tax exemption if the well was spudded or completed between May 24, 1989 and September 1, 1996.
- Incentive to Market Previously Flared or Vented Casinghead Gas (adopted by 75th Legislature – 1997) If an operator markets casinghead gas that had previously been released into the air (vented or flared) for 12 months or more in compliance with Commission rules and regulations, the operator may receive a severance tax exemption on that gas for the life of the well.
- The Two-Year Inactive Well Incentive (adopted by 75th Legislature – 1997, extended by 76th Legislature - 1999) This is comparable to the Three-Year Inactive Well Incentive that was introduced in 1993. Under the new incentive, if an oil or gas well has been inactive (i.e., has no more that one month of production) during the preceding two years, any new oil, gas well gas, or casinghead gas production may be eligible for up to a 10-year severance tax exemption. Certifications began September 1, 1997 and end February 28, 2010.
- Severance Tax Relief for Marginal Wells (originally adopted by 79th Legislature – 2005, HB2161; made permanent by 80th legislature – 2007, HB 2982)This legislation provides severance tax relief to producers of marginal oil and gas wells when oil and gas prices fall below certain low levels. This tax incentive became effective on September 1, 2005. The original legislation was due to expire September 1, 2007 but was made permanent by the 80th legislature.
- Marginal Gas Wells The bill provides three levels of tax credits on gas production from qualified low-producing gas wells for any given month, depending on the Comptroller's average taxable oil and gas prices, adjusted to 2005 dollars, based on applicable price indices of the previous three months. An operator of a qualifying low-producing gas well would be entitled to (1) a 25% tax credit if the average taxable gas price were more than $3.00 per mcf but not more than $3.50, a 50% tax credit if the price were more than $2.50 per mcf but not more than $3.00, and (3) a 100% tax credit if the price were $2.50 or less. The bill defines a qualifying low-producing gas well as a well that averages, over a three-month period, 90 mcf per day or less.
- Marginal Oil Wells The bill provide three levels of tax credits on oil production from qualified low-producing oil leases for any given month, depending on Comptroller's average taxable oil prices, adjusted to 2005 dollars, based on applicable price indices of the previous three months. An operator of a qualifying low-producing oil lease would be entitled to: (1) a 25% tax credit if the average taxable oil price were above $25 per barrel but not more than $30; (2) a 50% tax credit if the price were above $22 per barrel but not more than $25, and (3) a 100% tax credit if the price were $22 or less. The bill defines a qualifying low-producing oil lease as a lease that averages, over a 90-day period, less than 15 barrels per day per well or 5% recoverable oil per barrel of produced water per well.
The bill limits tax credits for both low-producing oil leases and gas wells only to wells currently paying full tax rates (it excludes those wells operating under existing tax incentive programs.) Further, the bill does not extend tax credits to casinghead gas and condensate production.
The Comptroller's Office must certify and publish in the Texas Register, each month, the average taxable prices of oil and gas, adjusted to 2005 dollars, using applicable price indices during the previous three months. A taxpayer must apply to the Comptroller's Office for tax credits within the statutory time limit and the tax credits would only apply to crude oil and gas produced on or after September 1, 2005.
- Enhanced Efficiency Equipment Severance Tax Credit (HB2161) (adopted by 79th Legislature – 2005)Severance tax credits are available for marginal wells (an oil well that produces 10 barrels of oil or less per day on average during a month) for using equipment that reduces the energy required to produce a barrel of fluid by 10% as compared to alternative equipment. The term does not include a motor or downhole pump. The State Comptroller approves the credits. The approval is based on the condition that a Texas institution of higher education, with an accredited Petroleum Engineering program, has evaluated the equipment and determined that the equipment produces the required energy reduction. The credit is in an amount equal to the lesser of either 1) 10% of the cost of the equipment or 2) $1,000 per well. The number of applications the State Comptroller may approve each state fiscal year may not exceed a number equal to one percent of the producing marginal wells in Texas on September 1 of that fiscal year. The enhanced efficiency equipment installed in or on a qualifying marginal well must be purchased and installed no earlier than September 1, 2005, or later than September 1, 2009.
- The Orphaned Well Reduction Program. (HB2161) (adopted by 79th Legislature – 2005) This incentive is intended to encourage continued production of viable wells by responsible operators, and to reduce the population of orphan wells for which the Oilfield Cleanup Fund will bear the cost of plugging. An orphaned well under this program is defined as a well that has been inactive for 12 months where the operator of the well no longer has a current registration with the Commission as required by Texas statute. Under the program, a prospective new operator may nominate the well and be given a 30-day period during which they can (through visual means and non-invasive testing methods) inspect the well to determine whether the person wishes to assume operatorship of the well. If so, the operator provides evidence of a good-faith claim to the right to produce minerals from the well, files paperwork with the Commission to assume operatorship of the well, and remits a $250 fee.
If an orphaned well is taken over by a new operator under this program during the effective period (i.e., 1/1/06 – 12/31/07), the operator is entitled to receive:
The incentive was enacted June 6, 2005 and the adoption period was effective from Jan 1, 2006 through Dec 31, 2007.
Incentive for Reuse/Recycling of Hydraulic Fracturing Water (HB 4) (adopted by 80th legislature – 2007) Amends §151.355, Tax Code, relating to Water-Related Exemptions, to include in the list of items that are exempt from sales, excise, and use taxes, tangible personal property specifically used to process, reuse, or recycle wastewater that will be used in hydraulic fracturing work performed at an oil or gas well. Effective immediately.
- a non-transferable exemption from severance taxes for all future production from the well under Tax Code §202.060;
- a non-transferable exemption from the fees provided by Natural Resources Code §§ 81.116 and 81.117 (oil and gas regulatory fees paid into the Oil Field Cleanup Fund based on production) for all future production from the well; and
- a payment from the Commission in an amount equal to the depth of the well times $0.50/foot if, not later than the 3rd anniversary of the date the operator acquires the well, the operator brings the well back into continuous active operation or plugs the well in accordance with Commission rules. (Note that payments under this program are made in the order that operators qualify for them. The Commission is limited to total payments of $500,000 under this program per fiscal year. Operators may not receive more than one payment for a particular well, nor may they receive aggregate payments in excess of the amount of financial security posted under Natural Resources Code §91.104.)
Advanced Clean Energy - EOR Tax Reduction (HB 3732) (adopted by 80th legislature – 2007) This bill provides a tax rate reduction on oil produced from enhanced recovery (EOR) projects using anthropogenic carbon dioxide (CO2). The bill requires the Railroad Commission to issue certification if the CO2 used in the EOR project is to be sequestered in a reservoir productive of oil or natural gas; the Texas Commission on Environmental Quality (TCEQ) issue the certification if the CO2 used in the EOR project is to sequestered in a formation other than a reservoir productive of oil or natural gas; and both the Railroad Commission and TCEQ to issue certifications if the CO2 is sequestered in both a formation not productive of oil or natural gas and a reservoir productive of oil or natural gas. Effective September 1, 2007.