A New Severance Tax Incentive Emerges for Inactive Wells – SB533

A new bill in the state of Texas SB533 is providing a 5-year severance tax incentive to oil and gas operators to bring inactive wells back into production by reinstating a program that had provided a severance tax exemption. Historically, inactive wells that were categorized as a “three-year inactive well” or a “two-year inactive well” from the Railroad Commission (RRC) were eligible for the severance tax exemption (our team has created this quick, easy to read guide detailing state by state severance taxes and incentives). However, the RRC has been unable to classify wells as either since 2009 due to the legislature. The RRC has been seeking funding to allow for the plugging of abandoned wells because the average plugging cost has increased tremendously due to the new type of wells/depth and higher contractor costs.

SB533 provides severance tax relief for wells that have been returned to active status, as defined by statute, after two years or more of inactivity. The statute defines a “two-year inactive well” as a well that has not produced oil or gas in more than one month in the two years preceding the date of application for severance tax exemption in this program. S.B. 533 reduces the time period for the severance tax exemption from 10 years to 5 years. The bill also clarifies that the severance tax exemption does not apply to wells used for enhanced oil recovery and wells that have been drilled but not completed and that do not have a record of production on file with the railroad commission. Providing an incentive to bring abandoned wells back online reduces the burden on the railroad commission’s well program.

SB533 provides severance tax relief for wells that have been returned to active status, as defined by statute, after two years or more of inactivity.

This bill has been passed and will be effective September 1, 2019.