Present Texas Severance Tax Incentives
Enhanced Oil Recovery (EOR) Incentive. (Tax Code, §202.054, Qualification of Oil from New or Expanded Enhanced Recovery Project for Special Tax Rate)(16 Tex. Admin. Code §3.50) - 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.
Enhanced Oil Recovery (EOR) Using Anthropogenic Carbon Dioxide Incentive. (Tax Code, §202.0545, Tax Exemption for Enhanced Recovery Projects Using Anthropogenic Carbon Dioxide) (Title 16 Chapter 5, Subchapter C.) - Under the current incentive, the producer of oil recovered through an EOR project that qualifies under the EOR incentive (above) is entitled to an additional 50% reduction in that tax rate if in the recovery of the oil the EOR project uses CO2 that: (1) is captured from an anthropogenic source in this state; (2) would otherwise be released into the atmosphere as industrial emissions; (3) is measurable at the source of capture; and (4) is sequestered in one or more geological formations in this state following the enhanced oil recovery process. The commission may issue a certification for the purposes of this incentive only if it finds that at least 99% of the carbon dioxide sequestered will remain sequestered for at least 1,000 years and the operator's planned sequestration program will include appropriately designed monitoring and verification measures that will be employed for a period sufficient to demonstrate whether the sequestration program is performing as expected.
High-Cost Gas Incentive. (Tax Code, §201.057, Temporary Exemption or Tax Reduction for Certain High-Cost Gas)(16 Tex. Admin. Code §3.101) (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. (Tax Code, §201.058, Tax Exemption) (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.
Two-Year Inactive Well Incentive. (Tax Code, §202.056, Exemption for Oil and Gas from Wells Previously Inactive) - The 86th Legislature approved Senate Bill 533 authorizing a five-year severance tax exemption for hydrocarbons produced from a well designated by the RRC as a two-year inactive well. A two-year inactive well is a well that has not produced oil or gas in more than one month in the two years preceding the date of application for severance tax exemption. The term does not include a well that is part of an enhanced oil recovery project, or a well that is drilled but not completed and that does not have a record of hydrocarbon production reported to the Commission. Application for certification must be made with the Commission and hydrocarbons sold after the date of certification are eligible for the tax exemption. The severance tax exemption authorized by Senate Bill 533 takes effect on September 1, 2019.
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 – (Tax Code, §201.059, Credits for Qualifying Low-Producing Wells) The incentive 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:
- 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
- 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 – (Tax Code, §202.058, Credits for Qualifying Low-Producing Oil Leases) The incentive provides 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:
- a 25% tax credit if the average taxable oil price were above $25 per barrel but not more than $30;
- a 50% tax credit if the price were above $22 per barrel but not more than $25; and
- a 100% tax credit if the price were $22 or less.
The incentive 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 incentive 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 incentive 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 only apply to crude oil and gas produced on or after September 1, 2005.
Enhanced Efficiency Equipment Severance Tax Credit (Tax Code, §202.061, Tax Credit for Enhanced Efficiency Equipment)(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.
Incentive for Reuse/Recycling of Hydraulic Fracturing Water (Tax Code, 151.355, Water-Related Exemptions) (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.
Last Updated: 9/3/2019 9:09:37 AM