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  4. Texas Severance Tax Incentives: Past and Present

Present Texas Severance Tax Incentives

    • 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:
      1. a  non-transferable exemption from severance taxes for all future production from  the well under Tax Code §202.060;
      2. 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
      3. 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.)

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.
  • 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.

Last Updated: 4/15/2014 7:37:59 PM