SWB C.S.H.B. 3491 75(R)BILL ANALYSIS WAYS & MEANS C.S.H.B. 3491 By: Holzheauser 4-22-97 Committee Report (Substituted) BACKGROUND According to the Railroad Commission, there are over 72,000 wells producing less than seven barrel-of-oil equivalents (BOE) per well per day. Lower production wells have high production costs and smaller profits. Providing a tax break to those leases which show a sustained increase in production could create an incentive for those operators to invest in production-enhancing activities. PURPOSE The bill exempts oil and gas that is produced (from qualified leases) that are the result of an incremental production technique from 50% of the severance taxes for a period of 5 years. RULEMAKING AUTHORITY The bill grants rulemaking authority to the Railroad Commission in Section 2 of the bill, and references those rules in Sections 1 and 2. SECTION BY SECTION ANALYSIS SECTION 1.Amends Section 201.058, Tax Code (Tax Exemptions), by exempting from severance taxes incremental production as described by Section 202.057 (added by this bill). Also exempts (from severance taxes) gas that has been released into the air for 12 or more months pursuant to the rules of the commission. SECTION 2. Amends Chapter 202, Tax Code (Oil Production Tax), by adding Section 202.057. TAX CREDIT FOR INCREMENTAL PRODUCTION TECHNIQUES. (a) Defines "baseline production," "commission," "incremental production," "incremental production techniques," "incremental ratio," "qualifying lease," and "qualified incremental production" (b) Entitles operators of qualified leases to a 50% tax exemption on that lease's qualified incremental production for 5 years if: (1) the incremental production required to define a qualifying lease occurred after the effective date of this bill and before December 31, 1998. (2) the operator of a qualifying lease applies to the Commission for a determination of a leases incremental ratio before February 11, 1999; and (3) the operator provides to the comptroller a commission-certified incremental ratio. (c) Suspends the tax exemption if the price of crude oil reaches $25.00 per barrel, adjusted to 1997 dollars, for three consecutive months. (d) Entitles operators to a tax credit for taxes paid at the full amount prior to comptroller approval. Application for approval must be within one year of the commission's certification of the incremental ratio. (e) Grants rulemaking authority to the Railroad Commission to administer the provisions of this section. SECTION 3.Effective date: September 1, 1997. SECTION 4.Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 3491 differs from H.B. 3491 by changing certain definitions in Section 2 of the bill. "Baseline production" is changed to a lease's average production from January 1, 1996 through December 1996. "Incremental ratio" is changed to the amount of a qualifying lease's average monthly incremental production during the four-month period utilized to meet the definition of a qualifying lease divided by its average monthly total production during the same four month period. "Qualifying lease" is changed to provide that for purposes of qualifying a lease, production per well per day is measured by dividing the sum of lease production during the four highest months of production in the baseline period by the sum of the number of well-days, where a well day is one well producing for one day.