SECTION 3.101. Certification for Severance Tax Exemption or Reduction for Gas Produced From High-Cost Gas Wells

(a) Purpose. This section specifies the procedure by which an operator can obtain a Railroad Commission of Texas certification that natural gas from a particular gas well qualifies as high-cost natural gas under the Texas Tax Code, Chapter 201, Subchapter B, §201.057(a)(2)(A) and that such gas is exempt from or eligible for a reduction of the severance tax imposed by the Texas Tax Code, Chapter 201.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Commission--The Railroad Commission of Texas.

(2) Completion--The act of making a well capable of producing gas from a particular commission designated or new field.

(3) Completion date--The date on which a well is first made capable of producing oil or gas from a particular commission-designated or new field, as shown on the completion report filed by the operator with the commission.

(4) Comptroller--The Comptroller of Public Accounts of the State of Texas.

(5) Data-point well--A well that has been tested and/or produced in the proposed tight gas formation; and, from the test results or other data, applicant provides a measured or calculated in situ permeability and/or a measured or calculated pre-stimulation stabilized flow rate against atmospheric pressure.

(6) Director--The director of the Oil and Gas Division or the director's delegate. Any authority given to the director in this section is also retained by the commission. Any action taken by the director pursuant to this section is subject to review by the commission.

(7) High-cost gas--Natural gas which the commission finds to be:

(A) produced from any gas well, if production is from a completion which is located at a depth of more than 15,000 feet;

(B) produced from geopressured brine;

(C) occluded natural gas produced from coal seams;

(D) produced from Devonian shale; or

(E) produced from designated tight formations or produced as a result of production enhancement work.

(8) Operator--The person responsible for the actual physical operation of a gas well.

(9) Spud date--The date of commencement of drilling operations, as shown on commission records.

(c) Applicability.

(1) A severance tax exemption is available for high-cost gas produced from a well that is spudded or completed between May 24, 1989, and September 1, 1996. Eligible high-cost gas shall be exempt from the tax imposed by the Texas Tax Code, Chapter 201, during the period from September 1, 1991, through August 31, 2001.

(2) A severance tax reduction is available for high-cost gas produced from a well that is spudded or completed after August 31, 1996. Eligible high-cost gas shall be entitled to a reduction of the tax imposed by the Texas Tax Code, Chapter 201, for the first 120 consecutive calendar months beginning on the first day of production or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs incurred for the well, whichever occurs first. The amount of tax reduction is determined pursuant to the Texas Tax Code, §201.057(c). If the application for certification is submitted to the Commission after January 1, 2004, the total allowable credit for taxes paid for reporting periods before the date the application is filed may not exceed the total tax paid on the gas that otherwise qualified for the exemption or tax reduction and that was produced during the 24 consecutive calendar months immediately preceding the month in which the application for certification under this section was filed with the Commission.

(3) The plug back or deepening of an existing wellbore qualifies as a completion under this section. When the plug back or deepening is completed prior to September 1, 1996, the gas produced may qualify for a tax exemption. When the plug back or deepening is completed after August 31, 1996, the gas produced may qualify for a tax reduction. The plug back or deepening qualifies as a completion if:

(A) it is the initial completion in a commission-designated or newly discovered field that has not been previously produced from that wellbore; or

(B) the operator can demonstrate that the strata between the former completion and the new completion contain a minimum of 20 vertical feet of impermeable strata; or

(C) the operator submits the results of bottom hole pressure surveys, gas analyses or other methods or calculations comparing the new completion with previous completions in the wellbore that were in existence prior to May 24, 1989. The application shall include an explanation of the engineering principles, calculations, and reasoning to show that the gas to be produced from the applied-for completion could not have been produced from any completion in existence prior to May 24, 1989.

(4) If the operator determines that a gas well previously certified as producing high-cost gas no longer produces high-cost gas or if the operator takes any action or discovers any information that affects the eligibility of gas for an exemption or tax reduction under Texas Tax Code, §201.057, the operator shall notify the Commission in writing within 30 days after such an event occurs.

(5) If the Commission determines that a gas well previously certified as producing high-cost gas no longer produces high-cost gas or if the commission takes any action or discovers any information that affects the eligibility of gas for an exemption or tax reduction under Texas Tax Code, §201.057, the Commission shall notify within 48 hours, in writing, the comptroller and the operator.

(d) Application procedure.

(1) An application for a state severance tax exemption or tax reduction for a gas well may be made only by the operator of that well. The operator shall file one copy of the required application form, one copy of the required attachments specified in subsection (e)(1)-(6) of this section and any additional information deemed necessary by the Commission to clarify, explain and support the required attachments. Submission of legible copies of required attachments shall comply if the application includes a statement, signed by the operator, that the attachments are true and correct copies of the documents originally filed with the Commission. However, the Commission may require an operator to file certified copies of required attachments or other documents from Commission files if necessary for a certification.

(2) Filings and correspondence on high-cost gas state severance tax applications shall be addressed to the Railroad Commission of Texas, P.O. Box 12967, Austin, Texas 78711-2967, Attention: High-Cost Gas Severance Tax Section. No filings may be made at the district offices.

(e) Application requirements for individual well certifications. To qualify for the severance tax exemption or tax reduction, the operator shall prove that the gas produced is high-cost gas by providing the following information:

(1) Applications for wells producing deep high-cost gas shall include:

(A) the completed applicable commission form; and

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well.

(2) Applications for wells producing geopressured brine shall include:

(A) the completed applicable commission form;

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well;

(C) a bottom-hole pressure test report and other information establishing the initial reservoir pressure gradient; and

(D) evidence to establish that, before production, the gas from the well was in solution in a brine aquifer with at least 10,000 parts of dissolved solids per million parts of water.

(3) Applications for wells producing coal seam gas shall include:

(A) the completed applicable commission form;

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well if the gas is produced through a wellbore, or a detailed description of the production process if the gas is not produced through a wellbore;

(C) a radioactivity, electric or other log which will define the coal seams or, if such logs are not reasonably available, a detailed lithologic description of the gas-producing interval; and

(D) evidence to establish that the natural gas was produced from coal seams.

(4) Applications for wells producing Devonian shale gas shall include:

(A) the completed applicable commission form;

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well;

(C) an environmentally corrected, calibrated gamma ray log with values greater than 100 API units over the Devonian age stratigraphic section, or a gamma ray log with superimposed indications of the shale base line and the gamma ray index of 0.7 over this section or, if the gamma ray log is not reasonably available, a driller's log or similar report indicating the general characteristics of the strata penetrated and the corresponding depths at which they are encountered throughout the Devonian age stratigraphic section;

(D) information which calculates the percentage of footage of the producing interval which is not Devonian shale as indicated by the gamma ray log, driller's log, or similar report;

(E) information which demonstrates that the percentage of potentially disqualifying nonshale footage for the stratigraphic section selected is equal to or less than 5.0% of the Devonian stratigraphic age interval; and

(F) reference to a standard stratigraphic chart or text establishing that the producing interval is a shale of Devonian age.

(5) Applications for wells producing designated tight formation gas shall include:

(A) the completed applicable commission form;

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well;

(C) specific reference to the commission docket number assigned to the applicable designated tight formation area certification along with a copy of the map with the subject well location shown, which outlines the designated tight formation area approved by the commission.

(6) Applications for wells producing production enhancement gas shall include:

(A) the completed applicable commission form;

(B) copies of all Gas Well Back Pressure Test, Completion or Recompletion Reports and Logs ever filed on the subject well;

(C) a description of the production enhancement work that has been performed on the well, including the dates the work was commenced and completed, or that will be performed on the well;

(D) an itemized statement of costs incurred in performing the production enhancement work, including copies of invoices and bills for such work, or, if the work has not yet been completed, estimates of such costs;

(E) a statement estimating, for a five-year test period beginning from the month in which the application is filed, the increase in gas production resulting from the application of production enhancement work;

(F) calculations showing that the projected increase in revenue does not exceed 200% of the §103 price;

(G) the renegotiated price;

(H) a copy of that portion of the sales contract that authorizes collection of the renegotiated price; and

(I) the properly executed statement under oath made by the purchaser of natural gas which states that there is a reasonable basis for the statements and estimates made by the applicant.

(f) Application requirements for tight formation area certifications.

(1) If justification for an individual well application is based on a tight formation certification and the well is not located within a geographical area that has been previously certified as a designated tight formation area or the well is not completed in a formation interval that has been previously certified as a designated tight formation by the Federal Energy Regulatory Commission under the Natural Gas Policy Act or by the Railroad Commission of Texas, the operator shall first apply for a tight formation area designation.

(2) An applicant requesting a tight formation area designation shall submit a written request to the High-Cost Gas Severance Tax Section, at the address given in subsection (d)(2) of this section, for a certification that a named formation or a specific portion thereof is a tight formation. The applicant shall supply a list of the names and addresses of all affected persons. For purposes of this subsection, "affected persons" means all operators of all wells listed on the current proration schedule for the applicable field or fields located within the proposed designated area. The applicant shall mail or deliver a copy of the prescribed, completed notice of application form to all affected persons, and if required, shall publish the notice of application in accordance with §1.46 of this title (relating to Notice by Publication in Oil and Gas and Surface Mining and Reclamation Nonrulemaking Proceedings), as found in the Commission's General Rules of Practice and Procedure (16 Texas Administrative Code Chapter 1). Notice of application forms may be obtained by contacting the Railroad Commission of Texas, P.O. Box 12967, Austin, Texas 78711-2967, Attention: High-Cost Severance Tax Section. Before the application may be approved, the applicant shall submit a letter certifying that all affected persons were sent a copy of the notice of application, and the date on which the notice of application was sent.

(3) In addition to the written request and list of affected persons, the applicant shall submit the following information in duplicate:

(A) a geographical and geological description of the formation, including:

(i) a map with an outline of the geographical limits of the formation in and around the requested area, with the proposed designated areal boundaries shown, with counties, surveys and abstracts identified and with the locations clearly identified for all wells inside the requested area that have penetrated the proposed formation; all wells (i.e., those that penetrated the proposed formation) shown on the map inside the requested area shall include either the commission's gas well identification number or the API number (if available);

(ii) a list of the counties involved, abstract numbers, survey names, geologic formation markers, and any other descriptive information that will aid in identifying the subject formation including an estimate of the number of acres within the requested area; and

(iii) a structure map contoured on the top of the formation and a cross-section to depict upper and lower limits of the proposed formation, or specific portion thereof.

(B) engineering and geological exhibits, including a written explanation of each, to establish the following:

(i) that the in situ permeability throughout the proposed formation or specific portion thereof is 0.1 millidarcies or less, as determined by geometric mean or median analysis of available data from all wells that either have been tested or are completed in the proposed formation within the requested area. If no in situ permeability estimates are provided for wells that are in the requested area and have been tested and/or are completed in the proposed formation, an explanation shall be provided;

(ii) that the pre-stimulation stabilized production rate against atmospheric pressure at the wellhead, as determined by a geometric mean or median analysis of available data from all wells within the requested area that either have been tested and/or are completed in the proposed formation or specific portion thereof, does not exceed the production rate listed in the following table:

Attached Graphic

(iii) that no well drilled into the formation is expected to produce, without stimulation, more than five barrels of crude oil per day; and

(iv) that the requested designated area does not extend beyond a two and one-half mile radius drawn from any data point well.

(g) Commission action on applications for individual well certifications and for tight formation area designations.

(1) Each application, for an individual well certification, shall be assigned a docket number identifying it as a severance tax application. A notice of receipt shall be sent to the applicant, indicating the assigned docket number and receipt date. All further correspondence shall include this docket number.

(2) The director may administratively approve the individual well certification applications if the forms and information submitted by the operator establish that the gas qualifies as high-cost gas eligible for the severance tax exemption or tax reduction. If the director denies administrative approval, the applicant shall have the right to a hearing.

(3) If Commission staff finds that the data submitted with the tight formation area designation applications are complete and comply with the requirements set out in subsection (f)(3) of this section and if no protest to the application is filed within 21 days of the notice, the application shall be presented to the Commission for approval. If Commission staff finds the data submitted are incomplete, or indicate the area does not qualify, or if a protest is filed within the 21-day notice period, the applicant shall request a hearing to have the application considered. If the applicant does not request such a hearing or if the applicant fails to appear at a requested hearing, the application shall be dismissed. Any such hearing shall be held only after at least 10 days' notice by the Commission to all affected persons as defined in subsection (f)(2) of this section. If no protestant appears at the hearing, and/or if the application and any evidence presented at the hearing establishes that the subject formation meets the requirements for a tight formation certification, the application shall be presented to the Commission for approval.

(h) Reporting. To qualify for the exemption or tax reduction provided by Texas Tax Code, §201.057(a)(2)(A), all persons responsible for paying the tax shall apply with the comptroller after receiving a copy of the Commission's certification letter. The application shall contain the Commission's letter certifying that the well produces or will produce high-cost gas, a completed copy of the Commission's application for certification form and a completed copy of the applicable Comptroller of Public Accounts' form. To obtain the maximum tax exemption or tax reduction, the application shall be filed with the comptroller at the later of the 180th day after the first day of production or the 45th day after the certification by the Commission. If the application is not filed by the applicable deadline, the tax exemption or reduction will be reduced by 10% for the period beginning on the 180th day after the first day of production and ending on the date on which the application is filed with the comptroller.

Source Note: The provisions of this §3.101 adopted to be effective January 11, 1995, 19 TexReg 10351; amended to be effective September 15, 1997, 22 TexReg 8974; amended to be effective August 13, 2001, 26 TexReg 6009; amended to be effective October 12, 2003, 28 TexReg 8585