BILL ANALYSIS



C.S.H.B. 1892
By: Holzheauser
May 5, 1995
Committee Report (Substituted)


BACKGROUND

Chapter 201, Tax Code, levies the gas production tax on gas
produced and saved at a rate of 7.5% of its market value. The Tax
Code provides certain exemptions.  Until August 31, 2001, "high-cost" gas as defined by Section 107 of the Natural Gas Policy Act
of 1978 and co-production gas are exempt from the gas production
tax if the wells are spudded between May 24, 1989 and September 1,
1996.

Chapter 202, Tax Code, levies the oil production tax on oil
production in Texas, at the rate of 4.6% of its market value.  A
reduced rate of 2.3% is offered for oil wells using enhanced
recovery techniques. Additionally, a 10-year exemption is offered
for production from a well which is brought back into production
before February 29, 1996, after a minimum three-year period of
inactivity.

The Tax Code also provides a tax credit for new field discoveries
spudded in 1994, conditional upon at least 521 new fields being
discovered in 1994.  There were not enough new field discoveries in
1994 to trigger the tax credit.

There is no incentive in either oil or gas severance tax provisions
for the research and development of new hydrocarbon recovery
techniques.  Texas oil production has fallen by more than half
since its 1972 peak.  In that same period, gas production in the
state has fallen by over 40%.  Approximately 8,000 oil and gas
wells are plugged and abandoned in Texas annually, forever losing
the reserves potentially producible from these wells.  Because
conventional recovery techniques obtain only a third of the oil in
place, over 100 billion barrels of discovered oil remain in the
ground with an estimated value of over $1 trillion.

PURPOSE

This bill would grant a temporary exemption from oil and gas
severance taxes on production resulting from a new recovery
technique project, if the project demonstrates that the technique
results in the increased ultimate recovery of hydrocarbons.  Up to
100 wells in the project field employing the new recovery technique
would be eligible for permanent tax exemption from oil and gas
severance taxes.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does expressly grant
additional rulemaking authority to the Railroad Commission of Texas
under SECTION 4 of the bill.

SECTION BY SECTION ANALYSIS

SECTION 1. Amends Section 201.053 (Gas Not Taxed), Tax Code, by
           deleting reference to the current exemption from the gas
           severance tax for inactive wells to make conforming
           language change consistent with SECTION 2 of the bill.

SECTION 2. Amends Subchapter B, Chapter 201, Tax Code, by adding
           Section 201.056
           TAX EXEMPTIONS.  Provides exemptions from the gas
           production tax for certain natural gas, condensate, and
           liquid hydrocarbons produced from inactive wells
           (Section 202.056, current law) and from new technique
           wells (Chapter 205, added by this bill).

SECTION 3. Amends Section 202.052 (Rate of Tax), Subsection (c),
           Tax Code, to provide an exemption from the oil
           production tax for hydrocarbons produced from previously
           inactive wells (202.056, current law) and from new
           techniques wells (Chapter 205, added by this bill).

SECTION 4. Amends Subtitle I, Title 2, Tax Code, by adding Chapter
           205
           TAX EXEMPTION FOR CERTAIN HYDROCARBONS PRODUCED AS A
           RESULT OF PRODUCTION ENHANCEMENT PROJECT.

           205.001. DEFINITIONS.  "Commission" as the Railroad
           Commission of Texas; "Hydrocarbons" as any gas, oil,
           condensate, or other liquid hydrocarbons produced from
           a well; "New hydrocarbon recovery technique" as a
           technique that is unproven and has a reasonable
           possibility of increasing the recovery of hydrocarbons;
           "Project" as a group of wells in a field in which an
           operator intends to employ a new technique; "Successful
           project" as a well or group of wells in which the use
           of a new technique increases the recovery of
           hydrocarbons.

           205.002 TAX EXEMPTION FOR PROJECT AND SUCCESSFUL
           PROJECT.  Provides that production wells in a project
           receive a temporary exemption from severance taxes for
           the period provided in Section 205.003(d), and an
           exemption for hydrocarbons in a successful project
           pursuant to Sections 205.004(d) and 205.005(c) if the
           comptroller has approved the tax exemption under Section
           205.006.

           205.003 APPLICATION FOR INITIAL PROJECT.  Requires the
           operator of a project to apply to the Railroad
           Commission for project certification, specifying the
           beginning and ending dates, and requires the operator
           to report the results of the project within 90 days of
           the commission-approved termination date for the
           project.  Requires the commission to issue a certificate
           to the operator of a well in a project if approved.  The
           certificate must include identification of each well,
           the length of the project and the effective and
           expiration dates of the tax exemption.  Provides that
           the tax exemption is effective on the first day the
           project begins and expires on the 90th day after the
           date the project ends.

           205.004 APPLICATION FOR SUCCESSFUL PROJECT.  Allows an
           operator of a well in a project to apply to the
           commission for certification as a successful project. 
           The operator must provide a copy of the certification
           and evidence that the recovery technique actually
           increased the ultimate recovery of hydrocarbons, along
           with any other information required by the commission. 
           Upon approval of the project, the commission shall issue
           a certificate to each operator of a well in the project,
           not to exceed 100 wells.  The certificate must identify
           each well and state the effective date of the tax
           exemption which is effective on the first day of the
           first month after the date on which the commission
           receives the application for certification of the
           project as a successful project.

           205.005 APPLICATION FOR ADDITIONAL WELLS.  Allows any
           operator of a well located in the same field as a
           successful project to apply to the commission for a
           permanent severance tax exemption if the operator
           employs the same new hydrocarbon recovery technique as
           employed in the successful project and no more than 100
           wells have been approved for the exemption.  The
           commission is required to issue a certificate with the
           same information as provided in Section 205.004.  The
           exemption is effective on the first day of the first
           month after the date on which the commission receives
           the application for certification.

           205.006 APPLICATION FOR AND APPROVAL OF TAX EXEMPTION.
           Requires that a person apply to the comptroller in order
           to qualify for the tax exemptions provided in this
           chapter, and provide a copy of the appropriate
           certificate.
SECTION 4. The comptroller is authorized to require other
           information to grant the tax 
(Contd.)   exemption. Additionally, the comptroller must approve
           an application if the hydrocarbons are eligible for the
           exemption.  

           205.007 REVOCATION OF CERTIFICATION.  Allows the
           commission to revoke the certification for the project
           well or the wells subsequently approved for the
           permanent tax exemption if information indicates that
           the wells were not eligible for tax exempt status at the
           time of certification.  The commission must notify the
           operator and the comptroller that the certificate has
           been revoked.  The tax exemption may not apply to
           hydrocarbons sold from these wells after the date on
           which certification is revoked.

           205.008 COMMISSION DISCRETION AND RULES.  Grants the
           commission authorization to adopt and enforce necessary
           rules and orders in administering this chapter.

           205.009 TAX CREDIT.  Provides that an operator is
           entitled to a credit against severance taxes that were
           paid on production before the comptroller approved the
           application.  The operator must apply to the comptroller
           for the credit prior to the first anniversary after the
           date the commission certifies the well for tax
           exemption.

           205.010 PENALTIES.  Establishes that any person who
           knowingly submits false information on a report or other
           document required by this chapter will be subject to
           penalties imposed by Chapters 85 and 91, Natural
           Resources Code.  Also provides that when certification
           for severance tax exemption has been revoked, the tax
           credit may not be applied to oil or gas production sold
           after the date of notification.  Penalties shall not
           exceed the sum of:  (1) $10,000; and (2) the difference
           between the amount of taxes paid or attempted to be paid
           and the amount of taxes due.  Provides that the attorney
           general may recover a penalty imposed by this section,
           and establishes venue for suits in Travis County.

SECTION 5. Effective Date: September 1, 1995.

SECTION 6. Emergency Clause.

COMPARISON OF ORIGINAL TO SUBSTITUTE

H.B. 1892 defines a "new hydrocarbon recovery technique" as one
that is: (A) a previously unproven recovery, completion, or
drilling technique or a new application of an existing technique;
and (B) has a reasonable possibility of increasing the ultimate
recovery of hydrocarbons.

C.S.H.B. 1892 limits the definition to an unproven technique that
has a reasonable possibility of increasing the ultimate recovery of
hydrocarbons.  New applications of existing techniques are not
considered "new techniques."  Other changes are primarily non-substantive language changes.

SUMMARY OF COMMITTEE ACTION

Public notice was posted in accordance with the rules, and a public
hearing was held on March 21, 1995.  Representative Holzheauser
explained the bill.  Without objection, H.B. 1892 was left pending
before the committee.

Pursuant to an announcement on the House floor, the committee met
in a formal meeting on April 5, 1995.  The chair referred H.B. 1892
to the Subcommittee on Administrative Tax.





Pursuant to an announcement on the House floor, the committee met
in a formal meeting on May 4, 1995.  The chair recalled H.B. 1892
from subcommittee and laid it out before the committee.
The committee considered a complete substitute by Representative
Holzheauser.  The committee considered amendment #1 to the
substitute by Representative Craddick.  Without objection, the
committee adopted committee amendment #1.  The Chair directed the
committee staff to incorporate committee amendment #1 into the
substitute.  Without objection, the committee adopted C.S.H.B.
1892.  By a record vote of 6 ayes, 0 nays, 1 present not voting and
4 absent, the committee voted to report H.B. 1892 to the House as
substituted with the recommendation that it be sent to the Local &
Consent Calendar, and that it do pass.

     Testimony received in favor of the bill (3/21/95):
           Barry Williamson (Chair-Railroad Commission),
           representing himself 
           Carole Keeton Rylander (Railroad Commissioner),
           representing herself
           Charles R. Matthews (Railroad Commissioner),
           representing himself
           Robert D. Kiker, representing the Permian Basin
           Petroleum Assn. and the North    Texas Oil & Gas Assn.
           Lindsey Dingmore, representing Texas Independent
           Producers & Royalty Owners    Assn.
           Rick Foppiano, representing OXY USA, Inc.
           Ben Sebree, representing Texas Mid-Continent Oil & Gas
           Assn.
           Kay A. Kahlich, representing Marathon Oil Co. and Texas
           Mid-Continent Oil    & Gas Assn.

     Neutral testimony received on the bill (3/21/95):
           David Garlick, representing the Railroad Commission