BILL ANALYSIS C.S.H.B. 676 By: Craddick March 23, 1995 Committee Report (Substituted) BACKGROUND H.B. 1975 was passed in the 73rd Legislature to provide tax relief for wells which have been returned to active status after three years or more of inactivity. According to the Texas Railroad Commission, the bill has been responsible for a great number of wells reworked and again producing. However, condensate, a hydrocarbon and wellbore product, was left out of the legislation, and so it is not included in the tax relief package. The current deadline for applying for the exemption is August 31, 1995. PURPOSE The bill would allow for a 10-year severance tax exemption for wells that are brought back to production after 2-years of non-production. The bill also expands the definition of hydrocarbons that currently receive tax relief under Section 202.056, Tax Code. The bill also changes the application deadline for the current 3-year inactive well program. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 202.056 (Exemption for Oil and Gas From Wells Previously Inactive), Tax Code, by amending (a)(2) and adding (4). (2) Expands the definition of "Hydrocarbons," to include all hydrocarbon production. (4) Defines, "Two-year inactive well," to be a well that has not produced in more than one month in the two years prior to application for this exemption. SECTION 2. Amends Section 202.056(b)-(e), and (h), Tax Code, as follows: (b) Expands the qualifications of hydrocarbons for the 10-year severance tax exemption to include hydrocarbons produced from "two-year inactive wells." Also requires the Railroad Commission to notify the Comptroller's office if it discovers any information that affects the taxation of the production from a designated well. (c) Changes the date that a well can be designated as a "three-year inactive well" from the current February 29, 1996, to August 31, 1995. Also requires that if the commission designates a "two-year inactive well," under this section, it shall issue a certificate designating the well as such. Deadline for designation as a "two-year inactive well," is February 28, 1998. (d) Applications for "two-year inactive well" certification shall be made during the period of September 1, 1995, and August 31, 1997. SECTION 2. (e) Establishes that the commission may revoke a certificate for a "two-year (contd.) inactive well." (h) In order to receive a tax credit for taxes paid at the full rate before the comptroller approves an application, the operator must apply to the comptroller for the credit no later than the first anniversary after the date the commission certifies that a well is a "two-year inactive well". SECTION 3. Amends Section 202.056(i)(2) by revoking the tax exemption upon notice from the commission that a certificate has been revoked. The tax exemption is revoked for any oil or gas production from the date of notification forward. It also provides penalties for violation of this subsection. SECTION 4. Effective Date: September 1, 1995. SECTION 5. Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The original bill would have expanded the definition of hydrocarbons to include condensate production, while C.S.H.B. 676 expands the definition to include all hydrocarbon production. The original bill would have extended the certification deadline for "three-year inactive wells," by two years. C.S.H.B. 676 shortens the certification deadline for that program, but creates a new program for wells that have been inactive for two years. The "two-year" inactive well program has the same 10-year severance tax exemption as the "three-year inactive well" program. SUMMARY OF COMMITTEE ACTION Public notice was posted in accordance to the rules and a public hearing was held on March 7, 1995. The chair laid out a committee substitute by Representative Craddick. Without objection, the Committee adopted C.S.H.B. 676. By a record vote of 7 ayes, 0 nays, 1 present not voting and 3 absent, the committee voted to report H.B. 676 to the House as substituted with the recommendation that it be sent to the Local and Consent Calendar, and that it do pass. Testimony received in favor of the bill: Charles R. Matthews (Railroad Commissioner), representing himself Ben Sebree, representing Texas Mid-Continent Oil & Gas Assn. David Sebree, representing Conoco, Inc. Rex H. White, representing himself and TIPRO, North TX Oil & Gas Assn., West TX Oil & Gas Assn., Panhandle Producers & Royalty Owners Assn., Permian Basin Petro. Assn. Neutral testimony received on the bill: David Garlick, representing the Railroad Commission