Texas has a long history of oil production, and with that comes taxation to support the state’s economy and public services. One of the key levies is the oil production tax, which is essentially an occupation tax placed on the business of extracting crude oil. A quarter of the revenue collected goes toward funding public schools, while the rest is deposited into the state’s General Revenue Fund.

How Texas Oil Production Taxes Are Calculated

So, how is this tax calculated? The rate is 4.6% of the taxable market value of the oil produced or 4.6 cents per barrel—whichever is greater. To determine taxable market value, the state factors in the gross market value of oil at the wellhead but deducts certain expenses, such as royalties paid to government entities and transportation costs to get the oil from the well to market.

In fiscal year 2024, Texas collected $6.3 billion in oil production taxes, marking a 6.3% increase from the previous year’s $5.93 billion.

Key Tax Exemptions for Texas Oil Producers

Texas offers a variety of exemptions to encourage continued oil production, especially in cases where extraction is more challenging or requires advanced recovery methods. These exemptions are laid out in Chapter 202 of the Texas Tax Code and include the following:

Enhanced Oil Recovery (EOR) Tax Incentive (Section 202.054)

Originally established in 1989 and made permanent in 2003, this exemption offers a 10-year tax incentive for oil recovered using methods beyond primary extraction. This encourages operators to use secondary and tertiary recovery techniques to maximize production from existing wells.

Anthropogenic Carbon Dioxide EOR Incentive (Section 202.0545)

Created in 2007, this provision extends tax relief for up to 30 years for oil recovered using anthropogenic (man-made) CO2 in enhanced oil recovery projects. The idea is to incentivize environmentally friendly practices by repurposing CO2 emissions for oil extraction.

Inactive Well and Orphaned Well Exemptions (Section 202.056)

Wells that have been inactive for at least two years may qualify for a five-year severance tax exemption. This exemption, updated in 2019, is meant to encourage operators to bring dormant wells back into production.

Low-Producing Oil Lease Tax Credit (Section 202.058)

Designed to support wells producing at lower volumes, this exemption was first introduced in 2005. It provides tax credits based on three-month average production levels and adjusted oil prices (indexed to 2005 dollars). The credit scales with oil prices:

  • 100% exemption if oil prices average $22 or less per barrel.
  • 50% exemption if oil prices average $22-$25 per barrel.
  • 25% exemption if oil prices average $25-$30 per barrel.

Since oil prices are currently well above $30 per barrel, this tax credit has seen little use in recent years.

Reactivated Orphaned Well Exemption (Section 202.060)

This exemption, established in 2005, applies to certified orphaned wells—wells that have been abandoned by previous operators and later revived. The tax break applies only to the original operator who reactivates the well and is not transferable to future owners.

Geothermal Energy Production Exemption (Section 202.063)

In 2009, Texas introduced a tax exemption for oil that is incidentally produced while extracting geothermal energy. Despite being in place for over a decade, this exemption has never been utilized.

Why These Exemptions Matter

These tax incentives and exemptions encourage investment in new technologies, provide financial relief to operators facing high extraction costs, and support environmentally responsible practices like CO2-based enhanced recovery.

With Texas continuing to be a leader in domestic oil production, these policies play a crucial role in keeping the industry competitive while ensuring the state benefits from its vast energy resources.

Maximize Tax Savings with Proven Expertise in Oil and Gas Property Valuation

Navigating Texas oil production taxes is complex—between calculating market values, qualifying for exemptions, and complying with changing regulations. KE Andrews has decades of experience helping oil and gas operators reduce tax burdens by leveraging industry-specific expertise and a deep understanding of Texas tax law. Our team identifies overlooked exemptions and applies advanced valuation methods to secure optimal tax outcomes, ensuring that you capitalize on every available incentive. Maximize Your Oil Production Tax Benefits – Talk to Our Experts.