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.

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:
    • 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 - The bill 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 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.

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: 3/10/2016 10:37:46 AM