TO:	Honorable Morgan Meyer, Chair, House Committee on Ways & Means
FROM:	Jerry McGinty, Director, Legislative Budget Board
IN RE:	HB2056 by Darby (Relating to a severance tax exemption for oil and gas produced from certain restimulation wells; providing a civil penalty.), As Introduced

General Revenue-Related Funds, Five- Year Impact:

All Funds, Five-Year Impact:

Fiscal Analysis

The bill would add Section 202.062 to Chapter 202 of the Tax Code (relating to oil production tax) to provide a severance tax exemption for oil and gas produced from both oil and gas restimulation wells on or after January 1, 2024. The bill would define a restimulation well as a producing marginal oil (depending on depth, less than 35 barrels of production per day) or gas (production of 250 mcf or less per day) well that has been hydraulically fractured to enhance production.  A restimulation well would have at least five years of production, and would not be part of an enhanced oil recovery project or an uncompleted well without a record of production.

Oil, gas, and condensate produced from the qualified well would be exempt from severance taxes ending on the last day of the 60th consecutive month following the restimulation treatment month or the date on which the cumulative amount of exempt taxes equals 50 percent of the restimulation costs or 75 percent of the costs if hydraulic fracturing pumps were powered exclusively by electricity or natural gas, whichever occurs first. The exemption on gas would override the qualified well's concurrent high-cost gas tax reduction under Section 201.057 of the Tax Code while the restimulation exemption is in effect.

The Railroad Commission (RRC) would review an application by the operator and issue a certificate for a qualifying well specifying whether the restimulation treatment was performed using hydraulic fracturing pumps powered exclusively by electricity or natural gas. RRC may revoke the certificate under certain circumstances and the exemption would automatically expire concurrently. RRC would adopt rules necessary to administer the certification and associated penalty provisions of the bill.

To qualify for the exemption, the taxpayer must apply to the Comptroller with the issued RRC certificate and a report of the actual restimulation costs incurred. The Comptroller by rule would establish forms and procedures to implement those provisions of the bill.

Applying or attempting to apply for an exemption if the person knows the well is not a qualifying well would be a civil penalty in an amount not to exceed $10,000 plus the difference in taxes paid and taxes due.

The bill would take effect January 1, 2024.

Methodology

Based on industry information, refracturing can increase production substantially and recover cumulatively more oil and gas than a comparable new well's recoverable reserves, at a fraction of the cost of drilling a new well. Although refracturing currently only represents approximately two percent of all new wells drilled, it is expected to increase substantially in the future given the cost advantage, competitive economics, additional recoverable reserves, better understanding of well drainage and recovery factor, and improving fracturing technology.

The fiscal impact analysis is based on industry data and the Comptroller's 2024-25 Biennial Revenue Estimate and SB 30 as engrossed. The refracturing (restimulating) well counts are expected to rise slowly during the first two years followed with faster increases. Oil wells are expected to be the primary focus of refracturing activities. With an average refracturing costs of $4 million, the time required to accumulate the exempt taxes that equals to the 50 percent of the costs likely extends beyond the five-year period. This analysis assumes refracturing existing certified high-cost gas well with marginal production would render the differences in the tax losses insignificant, particularly for wells with zero tax rates and wells with little remaining time of exemption.

With regard to the civil penalty; as the number assessed, for how much, and the differential value of taxes is unknown, the fiscal implications cannot be determined. The fiscal impact estimate does not include any impact from the civil penalty.

This analysis assumes a qualifying oil or gas well would meet the required standard of being a marginal well prior to the restimulation (refracturing) treatment.

The natural gas and oil production taxes are occupation taxes and, as such, are allocated three-fourths to undedicated GR and one-fourth to GR Dedicated Account – Foundation School.

Of the amount equal (calculated separately for the oil and natural gas production tax) to annual total revenue above 1987 collections, 75 percent is reserved for the constitutional transfer from undedicated GR to the Economic Stabilization Fund and State Highway Fund, in equal portions, the following year.

Fiscal year 2026 GR Loss includes also additional $60 million in reserve for severance taxes above the level it was assumed in BRE and further adjusted in FN for SB 30.  Effects of ESF balance changes on interest allocable to General Revenue are treated as negligible and not included in these estimates.

If restimulations become more prevalent on Permanent University Fund (PUF) Lands, UT System's University Land Office indicates it could result in a positive impact and create additional revenue for the Permanent University Land Fund (PUF), however those amounts are not expected to be significant. 

Technology

Local Government Impact

No significant fiscal implication to units of local government is anticipated.