Texas Severance Tax Incentives: Past and Present

The  reduction or elimination of state severance taxes provides an economic  incentive to operators to undertake activities that produce oil and gas  resources that otherwise might remain unrecovered.  Texas recognized back in the late 1980’s that incentives to  increase the state’s oil and gas production were extremely valuable.  Economic studies have shown that for each  dollar invested in the oil and gas industry and for each dollar of production,  there is a positive effect on the state’s economy. 

Prior to the oil and gas bust that began in the  mid-1980s, the oil and gas sector was among the strongest in the Texas  economy.  In the late-1980s and early  1990s, the poor health of the industry was reflected in the poor health of the  state’s economy. The incentive programs are targeted to help strengthen the  economy by encouraging investment in exploration and production and to maximize responsible  development and efficient recovery of the state’s valuable natural resources. 

By providing exemptions from or reductions of the severance tax on oil and gas  production, these incentive programs in effect lower the cost of  production.  For marginal operations, in  particular, these incentives might mean the difference between shutting in a  well, keeping a well in production, or bringing a well back into  production.  For others, the incentives  are factored into decisions of drilling or not drilling a well, initiating an  enhanced recovery project, or servicing a well to increase its production. 

Texas incentive programs have been so successful  that other states have used them as models.  Severance tax incentives continue to be  needed in the future to encourage production and expansion of oil and gas  operations, and sustain a vital segment of the state’s economy.

The baseline Texas severance tax on oil and gas  is:

• Gas severance tax = 7.5% of  market value of gas produced and saved
• Oil severance tax = 4.6% of  market value of oil produced
• Condensate tax = 4.6% of  market value

Present Incentive Programs (as of November 2007)

Past Incentive Programs (as of November 2007)

Statewide Rules Pertaining to Tax Incentive Programs:

• §3.50 Enhanced Oil Recovery Projects--Approval and Certification for Tax Incentive
• §3.83 Tax Exemption for Two-Year Inactive Wells and Three-Year Inactive Wells
• §3.101 Certification for Severance Tax Exemption or Reduction for Gas Produced From High-Cost Gas Wells
• §3.102 Tax Reduction for Incremental Production
• §3.103 Certification for Severance Tax Exemption for Casinghead Gas Previously Vented or Flared

Form:

• ST-1 - Application for Texas Severance Tax Incentive Certification - PDF, Fillable PDF, Word
  • Instructions for the ST-1 Form (PDF)