“Marginal” Wells in Texas Qualify for State Tax Credits for Severance Taxes

Article

Oil and gas prices have had their ups and down in recent years. Severance tax credits for “marginal” wells are available but are set to expire soon. Learn more.

3 minute read

October 8, 2024

Mayur Naik

Partner, State and Local Tax Services

Never miss a thing.

As oil and gas prices have soared and plummeted in recent years, there’s an opportunity to recover severance taxes from low-producing marginal wells. However, it is crucial to seize this exemption now, as open tax periods expire monthly and may result in missed refund opportunities.

What is a marginal well?

A "marginal" well is a well that produces small amounts of crude oil or natural gas.

Texas defines a “marginal” well to be:

Qualified oil leases that have production of less than 15 barrels of oil per day or five percent (5%) of recoverable oil per barrel
Qualified gas wells that have less than 90 MCF per day in the prior three-month period, excluding flared gas

Exemptions

When prices drop below a certain threshold, Texas allows a tax rate credit ranging from 25 percent to 100 percent for marginal wells.

Oil

Due to low oil prices in 2020, Texas issued a credit for oil produced from July 2020 to December 2020. The eligible credit is listed below.

Report Period	Eligibility
July 2020	100 percent credit available
August 2020	50 percent credit available
September 2020	25 percent credit available
October 2020	25 percent credit available
November 2020	25 percent credit available
December 2020	25 percent credit available

*Certified price for oil can also be found on the Texas Comptroller’s Website

Natural Gas

Gas prices have fluctuated over the last four years. Texas offers a credit for natural gas production from July 2020 through June 2024 with the exception of ten months during that time period.

*Certified price for natural gas can also be found on Texas Comptroller's Website

Next Steps

For qualifying wells, there are a few steps that must be taken to capture this exemption:

File forms AP 216 (oil) or AP 217 (natural gas) with the Texas Comptroller to have the lease or well qualified. To be qualified, these leases or wells must meet production averages over a three-month period.
Once qualified, severance tax amendments will need to be made to the applicable periods in order to generate a refund.

For more information about Texas severance taxes for qualified low-producing oil leases and gas wells, or to learn how our Weaver oil and gas professionals can help, contact us.

Authored by Mayur Naik and Tanner Owens