Wednesday, December 13, 2017

Shale Law in the Spotlight: Oil and Natural Gas Severance Taxes in the United States (Texas, Oklahoma, Louisiana, and Wyoming)

Written by Chloe Marie – Research Fellow

This series will address severance taxes on oil and natural gas imposed by various states, and this second article will review the severance tax system for the states of Texas, Oklahoma, Louisiana, and Wyoming. In a prior article, we addressed the severance tax systems for the states of Pennsylvania, Ohio and West Virginia.


Under the Texas Tax Code, any operator who produces natural gas must pay a severance tax equal to 7.5% of the market value of gas produced. (TAX § 201.051-052). The Code provisions specify that such tax does not apply to underground natural gas storage, natural gas withdrawals from oil wells, gas lift for oil wells, and natural gas produced from wells previously inactive or from reactivated orphan wells (TAX § 201.053). The Texas Tax Code also imposes a condensate production tax at a rate of 4.6% of the market value of gas (TAX § 201.055).

Producers may benefit from a severance tax credit for qualifying low-producing wells if production on an eligible gas well does not exceed 90 Mcf per day during a three-month period (TAX § 201.59). The Texas Code clarifies that this exemption does not apply to casinghead gas or condensate. Producers also are exempt from paying such tax if they increase their well production by marketing natural gas flares from an oil well or lease (TAX § 201.058).

In some cases, producers may be exempt from the severance tax or obtain a tax reduction for certain high-cost gas wells; however, the Texas Railroad Commission must certify those wells as producing high-cost gas (TAX § 201.057). When the gas well qualifies for several severance tax incentives, the taxpayer can choose which incentive is most favorable based on the average price of gas, and this for each individual reporting period.


The Oklahoma legislature provides for a gross production tax, or severance tax, at a rate of 7% of the gross value of the production of natural gas. In addition, it also provides for a gross production tax incentive levy of 2% for the production of oil and gas from wells drilled on or after July 1, 2015, over a period of 36 months ending in July 2018. The rate will be increased to 7% thereafter for the life of the well.

In addition, the Oklahoma legislature provides an exemption from the gross production tax for a certain period of time on 1) incremental production from secondary and tertiary enhanced recovery projects; 2) horizontally drilled wells; 3) reestablished production from inactive wells; 4) incremental production from production enhancement projects; 5) production from deep wells; 6) production from new discovery wells; and 7) production from wells drilled based on 3-D seismic surveys. The well producers are required to meet sunset dates for the qualification of gross production tax exemptions.

Oklahoma legislation stipulates that all horizontal wells drilled for production prior to July 1, 2011, are exempted from the gross production tax for a period not exceeding 48 months from the initial production date. Pursuant to severance tax legislation enacted in May 2017, all horizontal wells drilled for production between July 1, 2011 and July 1, 2015 can benefit from a reduced tax of 1% for a period of 48 months from the initial production date. After the 48-month period elapses, operators pay a reduced rate of 4%.


In Louisiana, the severance tax rate effective from July 1, 2017 through June 30, 2018 is set at 11.1 cents per Mcf of natural gas produced. According to the Louisiana revised statutes (LA Rev Stat § 47:633), the severance tax is calculated on a base rate of 7 cents per Mcf to be adjusted annually on July 1st by a “gas base rate adjustment.” The statutes explain that the “gas base rate adjustment” must be determined by the Department of Natural Resources Secretary and represents a fraction, which numerator is the average of the New York Mercantile Exchange (NYMEX) Henry Hub settled price as reported in the Wall Street Journal and which denominator is the average of the monthly average spot market prices of gas fuels delivered in the pipelines as reported by the Natural Gas Cleaning House.

The Louisiana legislature also provides a specific tax to “incapable” gas wells – which are incapable of producing an average of 250,000 Mcf of gas per day during the entire taxable month – at 1.3 cents per Mcf as well as to produced water-incapable gas wells.

Under the Louisiana statutes, there are exemptions from the gas severance tax, including for natural gas production from wells drilled at a depth of 15,000 feet; natural gas production from horizontal wells but only for a two-year period or until payout of well costs; and natural gas reestablished production from inactive wells for a period of five years.

The gas severance tax is not applicable to underground gas injection for storage purpose; gas produced out of state and brought into the state of Louisiana to be injected into the ground; gas produced from flared or vented wells; gas used for fuel; gas consumed in the production of natural resources in the state of Louisiana; and gas used in the manufacture of carbon black.


Wyoming levies a severance tax on the production of natural gas at a rate of 6% of the value of the gas produced (W.S. § 39-14-204(a)). In addition to the severance tax, Wyoming levies a gross production tax on the same value as that used for severance tax purposes, which is collected by the counties.

Money collected from the severance tax must be deposited in the permanent Wyoming Mineral Trust Fund, and then distributed to local governments on a quarterly basis in an amount equal to ¼ of the amount estimated to be earned in the current fiscal year (W.S. § 39-14-211).

The Wyoming statutes provide for exemptions (W.S. § 39-14-205) from the severance tax applicable to 1) stripper wells; 2) tertiary production projects for a period of five years from the initial production date; 3) wildcat wells drilled and completed between January 1, 1991 and December 31, 1994, for a period of four years from the initial production date; 4) wells drilled between July 1, 1993 and March 31, 2003 for the first 24 months of gas production equivalent to up to 6 Mcf for one barrel oil production or until the sales price exceeds $2.75 per Mcf of natural gas for the preceding 6 months period of time; 5) incremental production resulting from a well workover or recompletion between January 1, 1997 and March 31, 2001 for a two-year period from the beginning of the workover or recompletion; 6) gas produced from flared or vented wells; 7) gas consumed in the production of oil and gas on the same lease or unit.

Monday, December 11, 2017

Shale Law Weekly Review - December 11, 2017

Written by Jacqueline Schweichler - Education Programs Coordinator

The following information is an update of recent local, state, national, and international legal developments relevant to shale gas.

Pipelines: West Virginia DEP Announces Public Hearings  for Atlantic Coast Pipeline
On December 6, 2017, the West Virginia Department of Environmental Protection (WVDEP) announced in a news release that they will hold two public hearings for the Atlantic Coast Pipeline’s requested construction stormwater permit. The permit will give WVDEP inspection and enforcement authority over the pipeline project. In addition, WVDEP announced that they have waived 401 Water Quality certification. The news release states that the environmental requirements in a 401 certification are highly similar to U.S. Army Corps of Engineers Nationwide permit.

Pipelines: Landowners File Answer and Motion to Dismiss in Mountain Valley Pipeline Lawsuit
On December 4, 2017, landowners involved in a eminent domain lawsuit against the Mountain Valley Pipeline (MVP) filed an answer to MVP’s complaint as well as a motion to dismiss the case (Mountain Valley Pipeline v. An Easement to Construct Operate and Maintain a 42-Inch Gas Transmission Line, 2:17-cv-04214).  The landowners state that MVP lacks subject matter jurisdiction and has failed to state a claim for which relief can be granted. MVP filed this eminent domain lawsuit to gain easements for the construction of the pipeline after the Federal Energy Regulatory Commission issued certificates of approval in October. According to the landowners, these certificates are only conditional, and therefore MVP must acquire additional certificates before they can use eminent domain to acquire the necessary easements.

Pipelines: Court Orders Interim Conditions for Dakota Access Pipeline
On December 4, 2017, the U.S. District Court for the District of Columbia issued a Memorandum Opinion ordering several interim conditions for the Dakota Access Pipeline (Standing Rock Sioux Tribe v. U.S. Army Corps for Eng’rs, No. 16-1534). The court stated the purpose of the conditions is provide the court with necessary and up-to-date information regarding the operation of the pipeline. Specifically, the court orders that the Army Corps of Engineers, Dakota Access LLC, and Standing Rock must coordinate to finalize spill response plans at Lake Oahe. The court also orders that Dakota Access select an independent third-party auditor, in consultation with Standing Rock, to ensure the pipeline operator’s regulatory compliance. Lastly, the court is requiring Dakota Access to file bi-monthly status reports on any pipeline repairs or incidents.

Water Quality: Draft Rule Prohibits Hydraulic Fracturing in Delaware River Basin
On November 30, 2017, the Delaware River Basin Commission
released a draft of their proposed new rule (18 CFR Part 440) which will ban hydraulic fracturing within the Delaware River Basin (DRB). The rule states that high volume hydraulic fracturing creates significant and immediate risks to the conservation and management of the water resources within the DRB. The rule also contains policy provisions that discourage the use of water from the DRB for hydraulic fracturing purposes. Additionally, the rule discourages the importation of wastewater from hydraulic fracturing.

Methane Emissions: BLM Releases Final Rule Suspending Methane Emission Requirements for Natural Gas Production
On December 8, 2017, the Bureau of Land Management (BLM) released a final rule that will suspend certain requirements within the Waste Prevention, Production Subject to Royalties, and Resource Conservation rule. The purpose of the original regulation was to reduce natural gas waste from venting, flaring, and leaks from oil and natural gas production. Several sections of the regulation are being suspended by the BLM out of concern for cost, feasibility, and statutory authority. The new final rule will become effective January 8, 2018.

Production and Operation: EIA Report Shows Increase in Natural Gas Production in Appalachia
On December 4, 2017, the U.S. Energy Information Administration (EIA) released a report showing a rapid increase in natural gas production within the Appalachian region from 2012. The EIA report states that since 2012, the Marcellus and Utica shale plays have increased natural gas production by more than 14 Bcf/d. EIA attributes part of the production increase to efficiency improvements including faster drilling, longer laterals, better well targeting, and technological advances.   

Methane Emissions: Oil and Gas Producers Launch Environmental Partnership
On December 5, 2017, 26 natural gas and oil producers in the U.S. launched the Environmental Partnership, according to Energy API. The purpose of the partnership is to encourage environmental improvements in oil and gas operations across the country. The partnership will focus on reducing methane and volatile organic compound emissions by closely monitoring emissions, minimizing emissions from manual liquid removal at wells, and replacing high-bleed pneumatic controllers. Some of the participants in the partnership include Chesapeake Energy, BP, Chevron, Shell, Encana, and Anadarko.

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See our Global Shale Law Compendium and this week’s article, Natural Gas Severance Taxes in the United States (PA, OH, WV).

Check out this week’s Shale Law in the Spotlight: UPDATE - Dakota Access Pipeline and its Current Legal Developments

Stay informed with our monthly Agricultural Law Brief located here.

Wednesday, December 6, 2017

Shale Law in the Spotlight: Natural Gas Severance Taxes in the United States (Pennsylvania, Ohio and West Virginia)

Written by Chloe Marie – Research Fellow

This series will address severance taxes on natural gas imposed by natural gas-producing states and this first article will review the severance tax system for the states of Pennsylvania, Ohio and West Virginia.


The state of Pennsylvania does not levy a severance tax, but rather imposes an impact fee on unconventional gas wells. Pennsylvania Governor Tom Wolf has repeatedly proposed a severance tax on unconventional natural gas extraction, but each time the proposal has failed to advance through the Pennsylvania General Assembly.

For the year 2015-2016, Governor Wolf proposed to impose a severance tax at a rate of 5% on natural gas extracted at the wellhead plus a fixed tax amount of 4.7 cents per volume MCF. This proposal set a pricing floor for producers at $2.97 per Mcf – meaning that each time the average market price was below $2.97, the pricing floor would have been used to calculate the severance tax. In 2016, Governor Wolf proposed a severance tax at a rate of 6.5% of the value of the natural gas. In the 2017-2018 Pennsylvania Executive Budget issued on February 7, 2017, Governor Wolf once again proposed a severance tax of 6.5% of the value of natural gas extracted with the possibility to convert the amount paid in impact fee as credit against the severance tax.

In Pennsylvania, the state Public Utility Commission (PUC) is responsible for administering the impact fee – also called the unconventional gas well fee – as well as overseeing its collection and distribution to local governments and state agencies (58 Pa. C.S. chap. 23). Every unconventional gas producer must pay this fee to the Commission for each well they spud each calendar year. The impact fee is calculated based on the average annual price of natural gas and the age of the well.

All fees must be collected and deposited in the Unconventional Gas Well Fund no later than April 1 of each year and then distributed from the fund no later than July 1 of each year following a specific formula. Prior to the distribution of any funds to local government entities, funds are distributed to state agencies as follows (funds are increased annually based on the Consumer Price Index):
·       PA Fish and Boat Commission - $1,000,000
·       PA Public Utility Commission - $1,000,000
·       PA Department of Environmental Protection - $6,000,000
·       PA Emergency Management Agency – $750,000
·       PA Office of State Fire Commissioner - $750,000
·       PA Department of Transportation - $1,000,000
·       PA Housing Affordability and Rehabilitation Enhancement Fund - $2,500,000
·       County conservation districts - $7,500,000

Once these initial distributions have been made, 60% of the remaining revenue must be distributed to local governments on the basis of the following formulas:
·       36% to counties based on the number of spud wells in each county;
·       37% to municipalities based on the number of spud wells in each municipality; and
·       27% to municipalities based on the number of spud wells in each county based on the proximity to the wells, the total population and the total highway mileage of the eligible municipalities within the county.

The remaining revenue must be deposited in the Marcellus Legacy Fund and distributed to state agencies and projects, including:
·       20% to the Commonwealth Financing Authority 
·       10% to the Environmental Stewardship Fund
·       25% to the Highway Bridge Improvement Restricted Account
·       25% for water and sewer projects
·       15% for greenways, trails, recreation, open space, etc.
·       5% to the Department of Community and Economic Development (DCED); however funds not utilized by the DCED must be deposited in the Hazardous Sites Cleanup Fund.

For drilling in 2016, the Commission collected and appropriated $173,258,900.00, which amount is a small decline compared with previous years.  The Pennsylvania PUC sets forth the previously received amounts as follows:
·       2015 - $187,711,700.00
·       2014 - $223,500,000.00
·       2013 - $225,752,000.00
·       2012 - $202,472,000.00
·       2011 - $204,210,000.000


The severance tax is set at 2.5 cents per thousand cubic feet (Mcf) of natural gas extracted. The Ohio Revised Code provides for an annual exemption applicable to landowners using natural gas produced from their own wells; however, this exemption is limited to the extent that natural gas resources should not exceed a cumulative market value of $1,000 per year (ORC § 5749.02(A)(6)).

As for the revenue distribution, 10% is deposited in the Geological Mapping Fund while the other 90% is deposited in the Oil and Gas Well Fund (ORC § 5749.02(B)(4)). Payments are made electronically each quarterly period.

In addition to the severance tax, well owners are subject to an oil and gas regulatory cost recovery assessment, with an exception provided for an exempt domestic well (ORC § 1509.50). The cost recovery assessment is calculated on a quarterly basis using a formula that takes into consideration the amount of severance taxes paid, the amount of oil and gas production, and the total number of wells owned or being reported. The amount of severance taxes is added to the assessment based on production and the resulting sum is then compared to the minimum assessment amount – which is $15 per well. The severance taxes are subtracted from the greater of the two amounts to arrive at the assessment amount due.

West Virginia

In West Virginia, a severance tax has been set at 5% of gross value of natural gas measured at the wellhead (WVC § 13A). Before July 1, 2016, natural gas producers also had to pay an additional severance tax by volume of 4.7 cents to state Tax Commissioner. The money received from this additional tax used to be deposited in the Workers’ Compensation Debt Reduction Fund to pay off debts associated with the state-run workers’ compensation system prior its privatization in 2006. On February 29, 2016, however, Governor signed SB 419 into law terminating the Workers’ Compensation Debt Reduction Act and thus also terminating the payment of this additional 4.7 cent tax as of July 1, 2016.

The West Virginia Code provides for severance tax exemptions applicable to wells producing less than 5 Mcf of natural gas per day and wells not producing marketable quantities for 5 consecutive years, which exemption is for up 10 years.

90% of the revenue from the severance tax is then deposited in the West Virginia General Fund and the first $24 million of the revenue collected is distributed to debt service for infrastructure bonds. The remaining 10% is distributed to counties and municipalities. Of this percentage, 75% is distributed to oil and gas producing counties, and 25% is distributed to all counties and municipalities based on population densities.