1-1        By:  Holzheauser, et al. (Senate Sponsor - Sims)     H.B. No.
    1-2  1892
    1-3        (In the Senate - Received from the House May 15, 1995;
    1-4  May 17, 1995, read first time and referred to Committee on Finance;
    1-5  May 25, 1995, reported adversely, with favorable Committee
    1-6  Substitute by the following vote:  Yeas 7, Nays 0; May 25, 1995,
    1-7  sent to printer.)
    1-8  COMMITTEE SUBSTITUTE FOR H.B. No. 1892                   By:  Brown
    1-9                         A BILL TO BE ENTITLED
   1-10                                AN ACT
   1-11  relating to an exemption from the oil and gas production taxes for
   1-12  certain oil and gas wells and to the promotion of the drilling of
   1-13  new oil and gas wells; providing civil penalties.
   1-14        BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
   1-15        SECTION 1.  Section 201.053, Tax Code, is amended to read as
   1-16  follows:
   1-17        Sec. 201.053.  GAS NOT TAXED.  The tax imposed by this
   1-18  chapter does not apply to gas:
   1-19              (1)  injected into the earth in this state, unless sold
   1-20  for that purpose;
   1-21              (2)  produced from oil wells with oil and lawfully
   1-22  vented or flared; or
   1-23              (3)  used for lifting oil, unless sold for that
   1-24  purpose<; or>
   1-25              <(4)  produced in this state from a well that qualifies
   1-26  under Section 202.056>.
   1-27        SECTION 2.  Subchapter B, Chapter 201, Tax Code, is amended
   1-28  by adding Section 201.056 to read as follows:
   1-29        Sec. 201.056.  TAX EXEMPTIONS.  The exemptions described by
   1-30  Section 202.056 and Chapters 205 and 206 apply to the taxes imposed
   1-31  by this chapter as authorized by and subject to the certifications
   1-32  and approvals required by those exemption provisions.
   1-33        SECTION 3.  Section 202.052(c), Tax Code, is amended to read
   1-34  as follows:
   1-35        (c)  The exemptions described by Section 202.056 and Chapters
   1-36  205 and 206 apply to <For> oil produced in this state from a well
   1-37  that qualifies under Section 202.056 or Chapter 205 or 206 subject
   1-38  to the certifications and approvals required by those exemption
   1-39  provisions<, the rate of tax imposed by this chapter shall be
   1-40  reduced to zero>.
   1-41        SECTION 4.  Subtitle I, Title 2, Tax Code, is amended by
   1-42  adding Chapter 205 to read as follows:
   1-43         CHAPTER 205.  TAX EXEMPTION FOR CATEGORY TWO MARGINAL
   1-44                          OIL AND GAS LEASES
   1-45        Sec. 205.001.  DEFINITIONS.  In this chapter:
   1-46              (1)  "Barrel" means 42 standard gallons.
   1-47              (2)  "BOE" means a barrel of oil equivalent and refers
   1-48  to the sum of:
   1-49                    (A)  oil, condensate, and other liquid
   1-50  hydrocarbon production volumes in barrels; and
   1-51                    (B)  gas production volumes, in mcf, divided by
   1-52  six.
   1-53              (3)  "Category two marginal lease" means a lease
   1-54  certified under Section 205.003.
   1-55              (4)  "Commission" means the Railroad Commission of
   1-56  Texas.
   1-57              (5)  "Hydrocarbon" means any oil, gas, condensate, or
   1-58  other liquid hydrocarbons produced from a well.
   1-59              (6)  "Lease" means one or more gas or oil wells for
   1-60  which the commission has assigned the same lease or identification
   1-61  number.
   1-62              (7)  "Lease production" means the total amount of
   1-63  hydrocarbon production from a lease, divided by the product of the
   1-64  number of producing wells on the lease and the number of days in
   1-65  those months in which some hydrocarbon production was reported to
   1-66  the commission.
   1-67              (8)  "Mcf" means 1,000 cubic feet of gas as measured
   1-68  according to Section 91.052, Natural Resources Code.
    2-1              (9)  "New well chit" means the voucher issued by the
    2-2  commission under Section 205.005 for each BOE of production
    2-3  capacity of a new well.
    2-4              (10)  "New well" means an oil or gas well that:
    2-5                    (A)  during the period beginning on September 1,
    2-6  1995, and ending on August 31, 1997, is:
    2-7                          (i)  spudded, sidetracked, horizontally
    2-8  drilled, or deepened below the total depth of the wellbore and
    2-9  completed in a different commission-designated field; or
   2-10                          (ii)  a plugged oil or gas well and
   2-11  reentered; and
   2-12                    (B)  has not been granted any other tax exemption
   2-13  for a new well, including a high-cost gas exemption under Section
   2-14  201.057.
   2-15              (11)  "Posted price of West Texas intermediate oil"
   2-16  means the volumetrically weighted price of crude petroleum oil, and
   2-17  crude petroleum commonly known as "West Texas intermediate crude
   2-18  oil," posted by the first purchaser of crude oil from the original
   2-19  producer.
   2-20        Sec. 205.002.  TAX EXEMPTION.  Hydrocarbon production from a
   2-21  category two marginal lease is exempt from the taxes imposed by
   2-22  Chapters 201 and 202 if the comptroller has approved the tax
   2-23  exemption under Section 205.006.
   2-24        Sec. 205.003.  APPLICATION FOR CERTIFICATION.  (a)  The
   2-25  operator of an eligible lease may apply to the commission for
   2-26  certification of the lease as a category two marginal lease.
   2-27        (b)  In addition to other requirements of this chapter, the
   2-28  operator must include with the application any relevant information
   2-29  the commission requires.
   2-30        (c)  If the commission approves the application, the
   2-31  commission shall issue a certificate to the operator.  The
   2-32  certificate must:
   2-33              (1)  include identification of the category two
   2-34  marginal lease; and
   2-35              (2)  state the date on which the tax exemption takes
   2-36  effect, subject to the comptroller's approval of the exemption
   2-37  under Section 205.006.
   2-38        (d)  The tax exemption is effective on the later of:
   2-39              (1)  the first day of the first month after the
   2-40  12-month production period required by Section 205.004; or
   2-41              (2)  September 1, 1997.
   2-42        (e)  Notwithstanding Subsections (c) and (d), the commission
   2-43  may not issue a certificate under this section until the posted
   2-44  price of West Texas intermediate oil is at or below:
   2-45              (1)  $16.50 a barrel for 60 consecutive days during the
   2-46  state fiscal year beginning September 1, 1996; or
   2-47              (2)  $17.50 a barrel for any 60-consecutive-day period
   2-48  between September 1, 1996, and August 31, 2003.
   2-49        (f)  The comptroller shall compute the posted daily price of
   2-50  West Texas intermediate oil for the purposes of Subsection (e).
   2-51  When the requirements of Subsection (e) are met, the comptroller
   2-52  shall publish, one time, in the Texas Register, the posted price of
   2-53  West Texas intermediate oil for each of the qualifying 60
   2-54  consecutive days.  Only the comptroller's computations of the
   2-55  posted daily price may be used to determine when the commission may
   2-56  issue a certification under this section.
   2-57        Sec. 205.004.  QUALIFICATION FOR CERTIFICATION.  (a)  A lease
   2-58  is eligible for certification as a category two marginal lease if:
   2-59              (1)  during the most recent 12-consecutive-month
   2-60  production report period preceding the month in which the
   2-61  application for certification as a category two marginal lease is
   2-62  filed with the commission, lease production is:
   2-63                    (A)  beginning on or after September 1, 1997, 5
   2-64  BOE or less for all other leases;
   2-65                    (B)  beginning on or after September 1, 1999, 10
   2-66  BOE or less for all other leases; and
   2-67                    (C)  beginning on or after September 1, 2001, 15
   2-68  BOE or less for all other leases; and
   2-69              (2)  the operator submits with the application new well
   2-70  chits issued under Section 205.005 in an amount equal to the
    3-1  hydrocarbon production from the lease as determined under this
    3-2  section.
    3-3        (b)  The 12-consecutive-month production report period
    3-4  required by Subsection (a) must begin with a month for which some
    3-5  hydrocarbon production is reported to the commission.
    3-6        (c)  A 12-month period is ineligible under Subsection (a)
    3-7  unless during at least seven calendar months of the period some
    3-8  hydrocarbons have been produced and reported to the commission.
    3-9        (d)  Production is determined under this section by rounding
   3-10  up to the nearest BOE produced.
   3-11        Sec. 205.005.  NEW WELL CHITS.  (a)  The operator of a new
   3-12  well may apply to the commission for new well chits only after five
   3-13  months of production is reported for the well.
   3-14        (b)  An operator must apply for new well chits before
   3-15  September 1998.
   3-16        (c)  The commission shall issue to the operator one new well
   3-17  chit for each BOE capacity from the new well.  The operator shall
   3-18  notify each person who owns a working interest in a new well of the
   3-19  issuance of new well chits relating to that well and shall
   3-20  distribute the appropriate number of chits to each person.  The
   3-21  number of chits each person is entitled to receive is determined by
   3-22  that person's percentage of ownership interest in the well.
   3-23        (d)  For purposes of issuing new well chits, the BOE capacity
   3-24  for a new oil well on a single-well oil lease or for a new gas well
   3-25  is the lesser of:
   3-26              (1)  the daily average BOEs from the well during the
   3-27  most recent five consecutive reported months preceding the
   3-28  application for new well chits; or
   3-29              (2)  the daily average BOEs from the well in the most
   3-30  recent month of production for which a production report has been
   3-31  filed and shows some production.
   3-32        (e)  The BOE capacity for a new oil well on a multiwell oil
   3-33  lease is the lesser of:
   3-34              (1)  the results of a BOE capacity test on the new
   3-35  well; or
   3-36              (2)  the daily average BOEs from the new well during
   3-37  the most recent five consecutive reported months preceding the date
   3-38  of the BOE capacity test.
   3-39        (f)  In determining BOE capacity under Subsection (e)(2),
   3-40  production from the lease is apportioned between the new well and
   3-41  other producing oil wells on the lease according to the new well
   3-42  BOE capacity test and the sum of the most recent BOE capacity tests
   3-43  for all of the other oil wells on the lease.
   3-44        (g)  A BOE capacity test for a new well must be performed not
   3-45  earlier than the 60th day before the date on which the operator
   3-46  applies for the new well chits.  BOE capacity tests for all other
   3-47  wells must have been performed not earlier than one year before the
   3-48  date on which the operator applies for the new well chits.  All BOE
   3-49  capacity tests must be performed in accordance with commission
   3-50  rules.
   3-51        (h)  The commission may not consider hydrocarbons that are
   3-52  vented or flared in determining the BOE capacity of a new well.
   3-53        (i)  An operator or owner of a working interest may sell or
   3-54  transfer new well chits to another operator or owner or any other
   3-55  person, but only an operator may use a new well chit to qualify a
   3-56  lease for certification as a category two marginal lease under
   3-57  Section 205.004.  The sale or transfer of new well chits under this
   3-58  subsection is exempted from the taxes imposed by Chapter 151, and
   3-59  revenue from that sale or transfer is not included in computing a
   3-60  corporation's net taxable capital or net taxable earned surplus
   3-61  under Chapter 171.
   3-62        Sec. 205.006.  APPLICATION FOR AND APPROVAL OF TAX EXEMPTION.
   3-63  (a)  To qualify for the tax exemption provided by this chapter, the
   3-64  person responsible for paying the tax must apply to the comptroller
   3-65  for the exemption and include with the application the certificate
   3-66  issued under Section 205.003 by the commission.
   3-67        (b)  The comptroller may require a person applying for the
   3-68  tax exemption to provide any information necessary to administer
   3-69  this section.
   3-70        (c)  The comptroller shall approve a person's application if
    4-1  the hydrocarbons are eligible for the tax exemption.
    4-2        (d)  The comptroller may establish procedures as necessary to
    4-3  comply with this section and Section 205.009.
    4-4        Sec. 205.007.  REVOCATION OF CERTIFICATION.  (a)  The
    4-5  commission may revoke a category two marginal lease certificate if
    4-6  the commission finds that the lease was not eligible for that
    4-7  designation at the time of certification.
    4-8        (b)  The commission shall notify the operator and the
    4-9  comptroller that the certificate has been revoked.
   4-10        (c)  A tax exemption granted under this chapter is
   4-11  automatically revoked on the date the category two marginal lease
   4-12  certificate is revoked, and hydrocarbons produced from that lease
   4-13  on or after the day after the date of revocation are not eligible
   4-14  for the tax exemption.
   4-15        Sec. 205.008.  COMMISSION DISCRETION AND RULES.  The
   4-16  commission has broad discretion in administering this chapter and
   4-17  may adopt and enforce any appropriate rules or orders that the
   4-18  commission finds necessary to administer this chapter.
   4-19        Sec. 205.009.  TAX CREDIT.  (a)  If the tax is paid at the
   4-20  full rate provided by Chapter 201 or 202 on hydrocarbons produced
   4-21  on or after the effective date of the tax exemption contained in
   4-22  the lease certificate, but before the date the comptroller approves
   4-23  the application for the tax exemption, the operator is entitled to
   4-24  a credit on taxes due under Chapter 201 or 202 in an amount equal
   4-25  to the tax paid during that period.
   4-26        (b)  To receive a credit, the operator must apply to the
   4-27  comptroller for the credit not later than the first anniversary of
   4-28  the date the commission certifies the lease as a category two
   4-29  marginal lease.
   4-30        Sec. 205.010.  PENALTIES.  (a)  A person is subject to the
   4-31  penalties that may be imposed under Chapters 85 and 91, Natural
   4-32  Resources Code, if the person makes and submits to the commission
   4-33  or the comptroller an application, report, or other document that
   4-34  is used or intended to be used for a certification, tax exemption,
   4-35  or a tax credit under this chapter and the person knows that the
   4-36  application, report, or other document contains a false or untrue
   4-37  material fact.
   4-38        (b)  A person is liable to the state for a civil penalty if
   4-39  the person, after receiving notice from the commission that the
   4-40  person's certificate for a category two marginal lease has been
   4-41  revoked, applies or attempts to apply for a tax exemption for that
   4-42  lease using the revoked certificate.  The amount of the penalty may
   4-43  not exceed the sum of:
   4-44              (1)  $10,000; and
   4-45              (2)  the difference between the amount of taxes paid or
   4-46  attempted to be paid and the amount of taxes due.
   4-47        (c)  The attorney general may recover a penalty under
   4-48  Subsection (b) in a suit brought on behalf of the state.  Venue for
   4-49  the suit is in Travis County.
   4-50        SECTION 5.  Subtitle I, Title 2, Tax Code, is amended by
   4-51  adding Chapter 206 to read as follows:
   4-52        CHAPTER 206.  TAX EXEMPTION FOR CERTAIN HYDROCARBONS PRODUCED
   4-53             AS A RESULT OF PRODUCTION ENHANCEMENT PROJECT
   4-54        Sec. 206.001.  DEFINITIONS.  In this chapter:
   4-55              (1)  "Commission" means the Railroad Commission of
   4-56  Texas.
   4-57              (2)  "Hydrocarbons" means any gas, oil, condensate, or
   4-58  other liquid hydrocarbons produced from a well.
   4-59              (3)  "New hydrocarbon recovery technique" means a
   4-60  hydrocarbon recovery technique that the commission determines:
   4-61                    (A)  is a previously unproven recovery,
   4-62  completion, or drilling technique; and
   4-63                    (B)  has a reasonable possibility of increasing
   4-64  the ultimate recovery of hydrocarbons.
   4-65              (4)  "Project" means a well or group of wells in a
   4-66  field for which an operator intends to employ a new hydrocarbon
   4-67  recovery technique.
   4-68              (5)  "Successful project" means a well or group of
   4-69  wells in a field for which the commission has determined that the
   4-70  use of a new hydrocarbon recovery technique has increased the
    5-1  ultimate recovery of hydrocarbons.
    5-2        Sec. 206.002.  TAX EXEMPTION FOR PROJECT AND SUCCESSFUL
    5-3  PROJECT.  (a)  Hydrocarbons produced from a well that is included
    5-4  in an approved project during the period specified by Section
    5-5  206.003(d) are exempt from the taxes imposed by Chapters 201 and
    5-6  202 in accordance with Section 206.003(d) if the comptroller has
    5-7  approved the tax exemption under Section 206.006.
    5-8        (b)  Hydrocarbons produced from a well in a successful
    5-9  project are exempt from the taxes imposed by Chapters 201 and 202
   5-10  in accordance with Sections 206.004(d) and 206.005(c) if the
   5-11  comptroller has approved the tax exemption under Section 206.006.
   5-12        Sec. 206.003.  APPLICATION FOR INITIAL PROJECT.  (a)  The
   5-13  operator of one or more wells in a field in which the operator
   5-14  intends to employ a new hydrocarbon technique must apply to the
   5-15  commission for approval of the project to be eligible for the tax
   5-16  exemption under Section 206.002.
   5-17        (b)  In addition to the other requirements of this chapter,
   5-18  the operator must include with the application a statement of the
   5-19  date on which the project begins and the date it will end, subject
   5-20  to commission approval, and any other information the commission
   5-21  requires.
   5-22        (c)  If the commission approves the project, the commission
   5-23  shall issue a certificate to each operator of a well included in
   5-24  the project.  The certificate must:
   5-25              (1)  include identification of each well in the
   5-26  project;
   5-27              (2)  state the length of the project; and
   5-28              (3)  state the date on which the tax exemption takes
   5-29  effect and the date on which it expires.
   5-30        (d)  The tax exemption is effective on the first day the
   5-31  project begins and expires on the 90th day after the date the
   5-32  project ends.
   5-33        (e)  The operator shall report to the commission the
   5-34  production results from the project not later than the 90th day
   5-35  after the date on which the project ends.
   5-36        Sec. 206.004.  APPLICATION FOR SUCCESSFUL PROJECT.  (a)  The
   5-37  operator of one or more wells included in a project approved under
   5-38  Section 206.003 may apply to the commission for certification of
   5-39  the project as a successful project.
   5-40        (b)  In addition to the other requirements of this chapter,
   5-41  the operator must include with the application:
   5-42              (1)  a copy of the certification issued under Section
   5-43  206.003 for that project;
   5-44              (2)  evidence in the form prescribed by the commission
   5-45  demonstrating that the new hydrocarbon recovery technique approved
   5-46  for that project actually increased the ultimate recovery of
   5-47  hydrocarbons; and
   5-48              (3)  any other information the commission requires.
   5-49        (c)  If the commission finds that the use of the new
   5-50  hydrocarbon recovery technique approved under Section 206.003
   5-51  increases the ultimate recovery of hydrocarbons, the commission
   5-52  shall issue a certificate to each operator of a well that
   5-53  participated in the successful project using the same new
   5-54  hydrocarbon recovery technique.  The certificate must:
   5-55              (1)  include identification of each well qualifying
   5-56  under this section; and
   5-57              (2)  state the date on which the tax exemption takes
   5-58  effect.
   5-59        (d)  The tax exemption is effective on the first day of the
   5-60  first month after the date on which the commission receives the
   5-61  application for certification of the project as a successful
   5-62  project.
   5-63        Sec. 206.005.  APPLICATION FOR ADDITIONAL WELLS.  (a)  An
   5-64  operator of a well located in a field in which a successful project
   5-65  has been certified under Section 206.004 may apply to the
   5-66  commission for certification of the well under this section if the
   5-67  operator uses the same new hydrocarbon recovery technique approved
   5-68  by the commission for the successful project.
   5-69        (b)  The commission may not issue a certificate under this
   5-70  section to more than 100 wells in a field, including the original
    6-1  wells certified under Section 206.004, for using the same new
    6-2  hydrocarbon recovery technique.  The commission shall determine
    6-3  which wells qualify for certification.  The certificate must:
    6-4              (1)  include identification of each well qualifying
    6-5  under this section; and
    6-6              (2)  state the date on which the tax exemption takes
    6-7  effect.
    6-8        (c)  The tax exemption is effective on the first day of the
    6-9  first month after the date on which the commission receives the
   6-10  application under this section for certification of the well.
   6-11        Sec. 206.006.  APPLICATION FOR AND APPROVAL OF TAX EXEMPTION.
   6-12  (a)  To qualify for a tax exemption provided under this chapter for
   6-13  an initial project or a successful project, the person responsible
   6-14  for paying the tax must apply to the comptroller for the
   6-15  appropriate exemption and include with the application the
   6-16  certificate issued under Section 206.003, 206.004, or 206.005, as
   6-17  appropriate.
   6-18        (b)  The comptroller may require a person applying for the
   6-19  tax exemption to provide any information necessary to administer
   6-20  this section.
   6-21        (c)  The comptroller shall approve a person's application if
   6-22  the hydrocarbons are eligible for the tax exemption.
   6-23        Sec. 206.007.  REVOCATION OF CERTIFICATION.  (a)  The
   6-24  commission may revoke a certificate if the commission finds that
   6-25  the well was not eligible for that designation at the time of
   6-26  certification.
   6-27        (b)  The commission shall notify the operator and the
   6-28  comptroller that the certificate has been revoked.
   6-29        (c)  A tax exemption granted under this chapter is
   6-30  automatically revoked on the date the certificate is revoked, and
   6-31  hydrocarbon production from that well on or after the day after the
   6-32  date of revocation is not eligible for the tax exemption.
   6-33        Sec. 206.008.  COMMISSION DISCRETION AND RULES.  The
   6-34  commission has broad discretion in administering this chapter and
   6-35  may adopt and enforce any appropriate rules or orders that the
   6-36  commission finds necessary to administer this chapter.
   6-37        Sec. 206.009.  TAX CREDIT.  (a)  If the tax is paid under
   6-38  Chapter 201 or 202 on hydrocarbon production on or after the
   6-39  effective date of the tax exemption contained in the well
   6-40  certificate but before the date the comptroller approves the
   6-41  application for the tax exemption, the operator is entitled to a
   6-42  credit on taxes due under Chapter 201 or 202 in an amount equal to
   6-43  the tax paid on hydrocarbon production during that period.
   6-44        (b)  To receive a credit, the operator must apply to the
   6-45  comptroller for the credit not later than the first anniversary of
   6-46  the date the commission certifies the well.
   6-47        Sec. 206.010.  PENALTIES.  (a)  A person is subject to the
   6-48  penalties that may be imposed under Chapters 85 and 91, Natural
   6-49  Resources Code, if the person makes and submits to the commission
   6-50  or the comptroller an application, report, or other document that
   6-51  is used or intended to be used for a certification, tax exemption,
   6-52  or a tax credit under this chapter and the person knows that the
   6-53  application, report, or other document contains a false or untrue
   6-54  material fact.
   6-55        (b)  A person is liable to the state for a civil penalty if
   6-56  the person, after receiving notice from the commission that the
   6-57  person's certificate has been revoked, applies or attempts to apply
   6-58  for a tax exemption for that well using the revoked certificate.
   6-59  The amount of the penalty may not exceed the sum of:
   6-60              (1)  $10,000; and
   6-61              (2)  the difference between the amount of taxes paid or
   6-62  attempted to be paid and the amount of taxes due.
   6-63        (c)  The attorney general may recover a penalty under
   6-64  Subsection (b) in a suit brought on behalf of the state.  Venue for
   6-65  the suit is in Travis County.
   6-66        SECTION 6.  This Act takes effect September 1, 1995.
   6-67        SECTION 7.  The importance of this legislation and the
   6-68  crowded condition of the calendars in both houses create an
   6-69  emergency and an imperative public necessity that the
   6-70  constitutional rule requiring bills to be read on three several
    7-1  days in each house be suspended, and this rule is hereby suspended.
    7-2                               * * * * *