Past Texas Severance Tax Incentives
Co-Production Incentive. (Tax Code, §202.054, Qualification of Oil from New or Expanded Enhanced Recovery Project for Special Tax Rate) (Adopted by 73rd Legislature – 1993) Gas and crude oil from Commission-approved co-production projects is eligible for severance tax exemption (gas) or reduced rate severance tax (oil). These projects were carried under the Enhanced Oil Recovery tax program. The program became effective September 1, 1993 with an application filing deadline of December 31, 1993. Exemption for gas and reduced rate for oil was is through August 31, 2001. Under Gas Research Institute grants, work was done in the last 1970s on the Gulf Coast in very deep brine aquifers. Enormous volumes of water were produced to capture small amounts of entrained gas. While technically feasible, it was not economic.
New Field Discovery Wells, the Texas Discovery 1994 Incentive. (Adopted by 73rd Legislature – 1993) This incentive granted severance tax credits if the number of new field discoveries spudded in Texas during 1994 reached certain levels. If 521 discovery wells were spudded, each of the spudding operators would be eligible to receive $10,000 severance tax credit. If 721 or more discovery wells were spudded, the total tax credit would be $25,000. Then, if 842 discovery wells were spudded, there would be an additional $25,000 in credit available for each infield well brought into production during a ten-year period from the date of the discovery well if the discovery well is still producing; this credit would be available to the discovery well spudding operator no matter who drills or produces the infield wells. Such a severance tax credit could be used on any production from any field and would also be fully transferable. The discovery goals were not achieved, and this incentive program ended.
Three-Year Inactive Well Incentive. (Tax Code, §202.056, Exemption for Oil and Gas from Wells Previously Inactive)(Adopted by 73rd Legislature – 1993) Beginning September 1, 1993, through February 29, 1996, the Commission designated wellbores with no more than one month of production in the preceding 3 years as candidates for the 3-year inactive wellbore incentive. If a designated wellbore was brought back to production the crude oil, gas well gas, and casinghead gas produced was eligible for a severance tax exemption for up to 10 years or until January 31, 2006. Wells designated under the three-year program, but not brought back to production before the February 1996 deadline were re-designated under the Two-Year Inactive Well Incentive Program described below. If the ownership of the well is transferred, the new operator may transfer the exemption for the remainder of the ten years.
Incremental Production Incentive (Tax Code, §202.057, Tax Credit for Incremental Production Techniques) (Adopted by 75th Legislature – 1997) Leases with wells that averaged seven BOE (barrels of oil equivalent) a day or less in 1996 are eligible for a fifty percent tax reduction on incremental production. The period from September 1, 1997, through December 31, 1998, is used to determine any increase in production over the 1996 baseline level. Primary, secondary, or tertiary techniques may be used to increase production; the primary production technique must involve an expenditure of at least $5,000. The exemption is granted as long as the price of oil, as judged by the Comptroller, remains below $25 (adjusted to 1997 dollars). It is suspended if the price reaches $25 or above for three consecutive months and reinstated when it is below $25 for three consecutive months. Certification for this incentive program has ended.
Two-Year Inactive Well Incentive. (Tax Code, §202.056, Exemption for Oil and Gas from Wells Previously Inactive) (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 incentive, if an oil or gas well has been inactive (i.e., has no more than 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 ended February 28, 2010.
Temporary Severance Tax Relief for Marginal Wells (SB290). (Adopted by 76th Legislature – 1999) - This emergency legislation provided short-term severance tax relief to producers of marginal oil and gas wells when oil and gas prices fell below certain low levels. If wells qualified and the State Comptroller certified low prices, crude oil, gas well gas, and/or casinghead gas produced between February 1, 1999 and July 31, 1999 was exempt from severance taxes.
Qualification for Eligibility. An oil lease or gas well had to be qualified as eligible for the tax exemption by the Commission. The Commission made this determination based on reported production during the three-month qualifying period of October, November, and December 1998. Gas wells qualified if their average daily production was 90 MCF or less per day during the qualifying period. Oil leases qualified if their average daily production per well was 15 barrels per day or less during the qualifying period.
Certification of Low Prices. The average price certified by the Comptroller for a particular month had to be below a certain trigger price: for gas it was $1.80 per MMBtu of gas; for oil it was $15 per barrel of oil. The average closing price of the NYMEX (New York Mercantile Exchange) was used. When the low price for oil was certified for three consecutive months, oil production for the following month from a qualified low producing oil lease was exempt. Likewise, if the Comptroller certified low gas prices for three consecutive months, gas production for the following month from qualified low-producing gas wells and oil leases was exempt. The first determination was made for the three-month period beginning November 1, 1998. Based on Comptroller price numbers, qualified oil production for February, March, and April of 1999 was exempted from severance tax payment by this program.
Oil prices triggered exemption for February, March, and April 1999 oil production. Natural gas prices did not reach the trigger point, so no natural gas production was eligible for the tax exemption.
Qualifying Low-Producing Oil Leases Incentive (Section 202.058 Texas Tax Code) - The following section was amended by the 86th Legislature. Pending publication of the current statutes, see S.B. 925, 86th Legislature, Regular Session, for amendments affecting the following section.
(2) "Qualifying low-producing oil lease" means a well classified as an oil well that is part of a lease whose production during a 90-day period is less than:
(A) 15 barrels of oil per day of production; or
(B) five percent recoverable oil per barrel of produced water.
(b) For purposes of qualifying a lease, production per well per day is determined by computing the average daily per well production from the lease using the monthly lease production report made to the commission. For purposes of qualifying a lease, production per well per day is measured by dividing the sum of lease production during the three-month period by the sum of the number of well-days, where a well-day is one well producing for one day. The operator of a lease that is eligible for a credit under this section only on the basis of Subsection (a)(2)(B) must pay to the comptroller a filing fee of $100 before the comptroller may authorize the credit.
(c) Each month, the comptroller shall certify the average taxable price of oil, adjusted to 2005 dollars, during the previous three months based on various price indices available to producers, including the reported Texas Panhandle Spot Price, West Texas Intermediate Crude Spot Price, New York Mercantile Exchange, or other spot prices, as applicable. The comptroller shall publish certifications under this subsection in the Texas Register.
(d) An operator of a qualifying low-producing lease is entitled to a 25 percent credit on the tax otherwise due on oil produced from that lease during a month if the average taxable price of oil certified by the comptroller under Subsection (c) for the previous three-month period is more than $25 per barrel but not more than $30 per barrel.
(e) An operator of a qualifying low-producing lease is entitled to a 50 percent credit on the tax otherwise due on oil produced from that lease during a month if the average taxable price of oil certified by the comptroller under Subsection (c) for the previous three-month period is more than $22 per barrel but not more than $25 per barrel.
(f) An operator of a qualifying low-producing lease is entitled to a 100 percent credit on the tax otherwise due on oil produced from that lease during a month if the average taxable price of oil certified by the comptroller under Subsection (c) for the previous three-month period is not more than $22 per barrel.
(g) If the tax is paid on oil at the full rate provided by Section 202.052, the person paying the tax is entitled to a credit against taxes imposed by this chapter or Chapter 201 on the amount overpaid. To receive the credit, the person must apply to the comptroller for the credit not later than the expiration of the applicable period for filing a tax refund under Section 111.104.
Subsection (h) was repealed by Acts 2007, 80th Leg., R.S., Ch. 911 (H.B. 2982), Sec. 4. The effective date of the repeal was January 1, 2008, which was after the expiration of the section.
(h) This section expires September 1, 2007.
(h) Repealed by Acts 2007, 80th Leg., R.S., Ch. 911, Sec. 4, eff. January 1, 2008.
Added by Acts 2005, 79th Leg., Ch. 267 (H.B. 2161), Sec. 12, eff. September 1, 2005. Amended by: Acts 2007, 80th Leg., R.S., Ch. 911 (H.B. 2982), Sec. 4, eff. January 1, 2008.
Orphaned Well Reduction Program. (Section 202.060 of the Texas Tax Code) (HB2161). Adopted by 79th Legislature – 2005) - This incentive was 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 was defined as a well that had been inactive for 12 months where the operator of the well no longer had a current registration with the Commission as required by Texas statute. Under the program, a prospective new operator could nominate the well and be given a 30-day period during which they could (through visual means and non-invasive testing methods) inspect the well to determine whether the person wished to assume operatorship of the well. If so, the operator provided evidence of a good-faith claim to the right to produce minerals from the well, filed paperwork with the Commission to assume operatorship of the well, and remitted a $250 fee. If an orphaned well were taken over by a new operator under this program during the effective period (1/1/2006 – 12/31/2007), the operator was entitled to receive certain tax relief and a potential cash payment if the well were plugged or restored to activity within three years of acquisition. The incentive was enacted June 6, 2005 and the adoption period was effective from Jan 1, 2006 through Dec 31, 2007.
Last Updated: 9/3/2019 9:10:27 AM