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