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.