Texas Tax Alert: Tax Relief for Marginal Wells

In Texas, a severance tax credit is available for operators of eligible marginal oil leases and gas wells due to the current state of low oil and gas prices. In fact, operators of qualified marginal oil leases and gas wells are entitled to 25, 50 or 100 percent of the severance tax that would have otherwise been due. The amount of benefit the operator is entitled depends on how low oil and gas prices have fallen.  

Originally adopted by the 79th Legislature in 2005 through Texas House Bill 2161, the severance tax credit provides relief to producers of marginal oil and gas wells when oil and gas prices fall below certain low levels. The 2005 “temporary” severance tax credit which became effective on September 1, 2005 later became permanent by the 80th Legislature in 2007. The bill defines a qualifying, low-producing oil lease as a lease that averages, over a 90-day period, less than 15 barrels per day per well or 5 percent recoverable oil per barrel of produced water per well. By law, the availability of the credits is determined by how low the price of oil and gas is over the previous rolling three-month period. Each month, the Comptroller is required to certify the average price during the previous rolling three-month period and the price must be adjusted in terms of 2005 dollars. The Comptroller’s certified average price over the past three rolling months qualify that the price is low enough to meet the requirements under the law.  

The Comptroller-certified average price for the past three months and all certified monthly prices can be found here on the Texas Comptroller’s website.
 

When considering whether or not to participate in taking the benefits of these tax credits, taxpayers should know that these credits are available to oil leases or natural gas wells which are currently paying full tax rates.  

For questions about this regulation or other state and local tax matters, please contact us.