Given the amount of oil and natural gas produced in Texas it probably comes as no surprise the Texas legislature has passed several laws that allow oil and gas producers to receive severance tax refunds. Texas currently has a four year statute of limitations on severance tax refund claims. Unlike Oklahoma Texas will pay interest on severance tax refund claims. In an effort to reduce the amount of interest the Texas Comptroller was paying on severance tax refund claims they recently started approving severance tax refund claims and paying them before auditing them for oil and gas operators the Texas Comptroller planned to audit within in the next four years. When the Texas Comptroller performs their regular scheduled audit they will also audit the refund claim. If the Texas auditor determines the refund claim was not valid then the oil and gas operator will owe interest to the Texas Comptroller. By making this change the Texas Comptroller has put the interest burden directly on the shoulders of the operator who makes a refund claim. This has made the need to retain a qualified oil and gas tax consultant for Texas refunds even more important.
Below is a brief discussion of some of the more common severance tax refund opportunities available in Texas.
The High-Cost Gas Incentive – Under the current incentive, gas from wells defined as high-cost gas wells are eligible for a severance tax reduction. The level of reduction is based upon drilling and completion costs. The amount of the severance tax reduction can be determined here. To qualify the well must be spud after September 1, 1996 to qualify for the reduction. For wells spud between May 24, 1989 and September 1, 1996 qualify for a total exemption of oil and gas severance tax.
- Incentive to Market Previously Flared or Vented Casinghead Gas – Provides an incentive in the way of a severance tax exemption to an operator that 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 severance tax incentive is an exemption from severance taxes on the gas from such as well for the life of the well.
- Gas marketing deductions – Texas allows operators to take a gas marketing deduction when calculating the amount of severance tax due. You can find here a list of expenses the comptroller will allow as a gas marketing deduction. This along with the high cost gas incentive result in the largest severance tax refund claims in Texas.
- The Enhanced Oil Recovery (EOR) Incentive – Defined as the use of any process for the displacement of oil from the earth other than primary recovery. For projects new projects with a beginning date of September 1, 1989 and after or for expanded projects with a beginning date of September 1, 1991 or after. 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 severance tax incentive is for ten year beginning the first day of the month following the RRC certification date.
- Severance Tax Relief for Marginal Wells – Provides severance tax relief to operators of marginal oil and gas wells when oil and gas prices fall below certain low levels. This severance tax incentive became effective on September 1, 2005. During the 80th legislature this exemption was made permanent previously it was set to expire September 1, 2007.
- Marginal Gas Wells – 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 – 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 – Severance tax credits are available for marginal wells defined as an oil well that produces 10 barrels of oil or less per day on average during a month while 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.