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Ext. PublicationA Practical Guide to Texas Severance Tax Exemptions for Oil & Gas Operators
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Texas severance tax exemptions present significant opportunities for energy producers, offering the potential for improved profitability and a renewed viability for older wells.
Grasping how severance tax exemptions work in Texas is crucial. While these exemptions can lower operating costs and keep projects financially viable, operators need to understand the process and plan accordingly to fully capitalize on them. Without proper preparation, operators risk missing out on key financial advantages and may face unnecessary challenges later on.
Texas offers a range of exemptions tailored to specific production methods, well conditions and reinvestment strategies. To maximize their impact, operators must determine which exemptions apply to their wells and follow the necessary steps to claim them.
High-Cost Gas Well Exemption
Drilling deep wells or those that need special techniques is often very expensive. These high-cost wells may yield valuable commodities, but the upfront investment is substantial. To encourage this type of high-risk, high-reward operation, Texas offers a severance tax exemption that can reduce the tax rate on qualifying high-cost wells by as much as 100%.
Why It Matters: By reducing the tax rate on high-cost wells, Texas helps producers manage the additional expenses of more challenging projects. This makes it financially viable to pursue new, complex wells that might otherwise be prohibitively expensive.
How to Qualify: To qualify for this exemption, producers must prove that their well meets the “high-cost” criteria by submitting detailed financial and technical reports to the Railroad Commission of Texas. Once approved, they must file an additional request with the Texas Comptroller to claim the exemption moving forward.
Low-Producing Well Exemption
Not every well generates a large volume of oil or gas. For wells with low output, the standard severance tax adds additional cost to a low producing well. To help make these marginal wells more viable, Texas offers a low-producing well exemption, providing tax relief based on their production levels.
Why It Matters: For operators, this exemption allows low-output wells to remain in operation by reducing the tax rate. Without this tax relief, many of these wells would struggle to be profitable enough to justify continued operation.
How to Qualify: Operators must submit forms to the Texas Comptroller to certify their wells. Once certified, they can claim exemptions moving forward or file amendments to cover eligible production periods. Proper documentation and timely filing are crucial to fully benefit from the exemption.
Enhanced Oil Recovery (EOR) Exemption
Oil fields don’t maintain consistent production levels indefinitely. Over time, its output typically declines, reducing profitability. Rather than shutting down these wells, producers can boost production using EOR methods. Texas offers exemptions for EOR.
Why It Matters: The EOR exemption can cut the severance tax by 50%, making it more cost-effective to keep these older wells in operation.
How to Qualify: Producers must get certification from the Railroad Commission to confirm they’re using an approved EOR method. A thorough application with all necessary documentation is required, so it’s important to follow the steps carefully to ensure eligibility for the exemption.
Two-Year Inactive Well Exemption
Inactive wells that have been idle for at least two years may still contain valuable resources, but reactivating them can be costly. To incentivize the revival of these dormant wells, Texas offers a severance tax exemption, lowering the tax rate to zero for up to five years once the well is brought back into production.
Why It Matters: This exemption is aimed at making the reactivation of inactive wells more appealing to operators. Without this incentive, the high costs of bringing dormant wells back online could discourage investment, leaving valuable resources untapped.
How to Qualify: To obtain the exemption, operators must submit the necessary paperwork to the Railroad Commission to reactivate the well. After submission, the Railroad Commission will notify the operator of the designation by mail and request confirmation of the accuracy of the provided data. Once confirmed, the exemption will apply to future production.
Natural Gas — Flare Mitigation Exemption
Texas law HB 591 recently passed and provides severance tax exemptions to encourage the repurposing of natural gas that would otherwise be flared. By mandating use of the gas within 1,000 feet of the well, the law supports operations like mobile data centers through this exemption.
Why It Matters: This law encourages companies to use otherwise wasted resources, promoting both economic and environmental benefits.
How to Qualify: Operators, often in partnership with pipeline owners, must certify wells under specific conditions with the Railroad Commission. Once approved, the well will be eligible for a 12-month period. After that, an annual filing must be submitted to the Texas Comptroller to claim the exemption on severance tax filings.
Taking full advantage of Texas severance tax exemptions requires more than just eligibility — it demands strategic planning, timely filings and technical insight. It should also be noted that taxpayers that might benefit from these opportunities are not precluded from exploring the marginal well credit at the federal level.
Weaver’s experienced team can help you identify opportunities, manage compliance and strengthen your bottom line. Contact us today to learn how we can support your energy operations.
Authored by Mayur Naik and Tanner Owens
©2025
