While the standard severance tax rate in Louisiana is 12.5% on oil production, Louisiana law provides certain tax incentives depending upon the classification of the well being drilled.  Below is an overview of some of these severance tax incentives.  As noted below, there are several bills currently before the Louisiana legislature to alter these incentives.

HORIZONTAL WELLS (R.S. 47:633(7)(c)(iii))

  • “Horizontal drilling” shall mean high angle directional drilling of bore holes with 50 to 3,000 plus feet of lateral penetration through productive reservoirs and “horizontal recompletion” shall mean horizontal drilling in an existing well bore.
  • No severance tax for a period of 24 months or until payout of the well cost is achieved, whichever comes first, on any horizontally drilled well, or, on any horizontally drilled recompletion well, from which production commences after July 31, 1994.
  • Payout of well cost shall be the cost of completing the well to the commencement of production as determined by the Department of Natural Resources. 

DEEP WELLS (R.S. 47:633(9)(d)(v))

  • Applies to wells drilled to a true vertical depth of more than 15,000 feet, where production commences after July 31, 1994.
  • No severance tax from the date production begins, for 24 months or until payout of the well cost, whichever comes first. 

INCAPABLE WELLS (R.S. 47:633(7)(b))

  • Defined as: Well classified by the Commissioner of Conservation and determined by the Collector of Revenue that such well is incapable of producing an average of more than 25 barrels of oil per producing day during the entire taxable month, and which also produces at least 50% salt water per day.
  • To receive the tax incentive as an incapable well, the well must be certified by the Department of Revenue as incapable of such production on or before the 25th day of the second month following the month of production.
  • Severance tax rate = 6.25%
  • Note:  Oil severed from a multiple well lease or property is not subject to the reduced tax rate unless all such wells are certified as incapable.

STRIPPER WELLS (R.S. 47:633(7)(c)(i))

  • Defined as: Well classified by the Commissioner of Conservation as an oil well and certified by the Department of Revenue as being incapable of producing an average of more than 10 barrels of oil per producing day during the entire taxable month
  • To receive the tax incentive as a stripper well, the well must be certified by the Department of Revenue as a stripper well on or before the 25th day of the second month following the month of production.
  • Severance tax rate = 3.125%.  However, oil produced from a certified stripper well is exempt from any severance tax in any month in which the average value is less than $20 per barrel.
  • Once a well has been certified and determined to be incapable of producing an average of more than 10 barrels of oil per producing day during an entire month, such stripper well shall remain certified as a stripper well until the well produces an average of more than 10 barrels per day during an entire calendar month.

STRIPPER FIELDS (R.S. 47:633(7)(c)(ii))

  • Applies to oil produced from a well in a stripper field (defined as those geological formations as designated by rules and regulations of the Secretary of Revenue which have been historically recognized as being “stripper fields” and as utilizing stripper wells for oil production) classified by the Commissioner of Conservation as a mining and horizontal drilling project which utilizes gravity drainage to a collection point in a downhole operations room.
  • Severance tax rate on the working interest portion = 3.125% until the cumulative value of hydrocarbon production from the project equals 2.33 times the private investment, invested by the working interest owners, in the project.
  • “Private investment” is defined as those costs associated with project design, fabrication, installation of equipment, drilling and completion cost of wells and any other costs directly associated with said project.  A “working interest owners” is defined as the owner of a mineral right who is under an obligation to share in the costs of drilling and completing a mining and horizontal drilling project and excludes a person who does not invest and take a financial or economic risk in the drilling for and actual production of oil.

INACTIVE WELLS (R.S. 47:633(7)(c)(iv))

  • Defined as: To qualify for inactive well status, an application for a two-year inactive well certification shall be made to the Department of Natural Resources, before commencement of production, during the period beginning July 31, 1994 and ending June 30, 2000, for the period beginning July 1, 2002 and ending June 30, 2006, and for the period beginning July 1, 2006 and ending July 30, 2010.
  • Upon certification that a well is inactive, all production is exempt from severance tax for a period of 5 years from the date production begins or 90 days from the date of the application, whichever occurs first.
  • No severance tax for a period of 5 years when returned to service after being inactive for 2 or more years or having 30 days or less of production during the past 2 years.  The exemption shall be extended by the length of any inactivity of a well that has commenced production when such inactivity is caused by force majeure.
  • If the severance tax is paid at the full 12.5% rate before the Department of Natural Resources approves an application for 2-year inactive well status, the operator is entitled to a severance tax credit in an amount equal to the tax paid.  To receive a credit, the operator must apply to the Secretary of the Department of Revenue for the credit not later than the first anniversary after the date the Department of Natural Resources certifies that the well is a two-year inactive well.

TERTIARY RECOVERY PROJECTS (R.S. 47:633.4)

  • Defined as: An enhanced crude oil recovery project conducted in accordance with sound engineering principles as used in the industry, subject to the approval of the commissioner and employing one of the following methods: miscible gas floods involving the injection of hydrocarbons, carbon dioxide, and nitrogen; near-miscible fluid floods involving the injection of alkaline, surfactant, hydrocarbons, carbon dioxide, or nitrogen; immiscible floods involving the injection of carbon dioxide.
  • No severance tax shall be due in regard to production from qualified tertiary recovery project approved by the assistant secretary of the Office of Conservation of the Department of Natural Resources until such project has reached payout from total production of: investment costs; expenses peculiar to the tertiary recovery project, not to include charges attributable to primary and secondary operations on that reservoir; and interest at commercial rates.
  • Payout shall be determined at a public hearing held before the assistant secretary of the Office of Conservation.  Once payout has been achieved severance tax shall be due in regard to all future production within the qualified tertiary recovery project as provided by law (except that further incentives apply to production within certain carbon dioxide (CO2) tertiary recovery projects).

RECLAIMED OIL (R.S. 47:648.21)

  • Defined as: The reclamation of waste oil or slop crude oil and condensate from open pits, tanks, or other collectors at the lease production site; provided however, that reclaimed oil shall not include any oil upon which any severance tax has previously been paid.
  • Applies to reclaimed oil which is reclaimed by class one salvage crude reclamation facilities which are permitted by the Office of Conservation.  But  any person, or affiliate of a person actually engaged in severing oil, gas, or other natural resources from the soil or water, or actually operating oil or gas property, or other property from which natural resources are severed is not eligible for this tax incentive.
  • Severance tax rate = 3.125% of value received by the first purchase.

PRODUCED WATER INJECTION (R.S. 47:633.5)

  • Allows oil and gas producers to realize a severance tax savings if they inject produced water into an oil and gas reservoir, from the same reservoir and field, for the purpose of increasing the recovery of hydrocarbons therefrom.
  • When produced water is injected into an oil reservoir for the purpose of increasing recovery, the severance tax on one barrel of oil incrementally produced therefrom shall be reduced by 20% of the tax that otherwise would be due.

 

PROPOSED LEGISLATIVE CHANGES

 HOUSE BILL 616

House Bill 616, pending since the 2013 Regular Session, proposes to amend the tax exemptions for horizontal wells, inactive wells, deep wells, and production related to tertiary recovery projects. It also proposes to repeal present law relative to the tax on stripper wells, stored gas, gas used in the production of natural resources in Louisiana, and gas vented or flared.  Below are some of the pertinent proposals:

  • Horizontal Wells – Would amend the severance tax on horizontal wells so that the severance tax rate would be 60% of the full rate for the 7seven years of production and the full rate thereafter. In sum, it would replace the current severance tax incentive (namely, a total tax suspension for a period of 24 months or until payout of the well cost is achieved, whichever occurs first).
  • Inactive Wells – Would amend the severance tax on inactive wells so that the severance tax rate would be 60% of the full rate for the first 10 years of production and the full rate thereafter. In sum, it would replace the current severance tax incentive (namely, a total tax suspension for a period of 5 years).
  • Deep Wells– Would amend the severance tax on deep wells, replacing the current severance tax incentive (namely, a total tax suspension for a period of 24 months or until payout of the well cost is achieved, whichever occurs first).
    • For wells drilled to a total vertical depth from 15,000 feet to 22,000 feet, the severance tax rate would equal 6.25% for the first 5 years of production and the full 12.5% rate thereafter.
    • For wells drilled to a total vertical depth of 22,000 feet or more, no severance tax would apply from the date production begins, for 24 months or until payout of the well cost, whichever comes first.  Thereafter, the full 12.5% rate would apply.
  • Tertiary Recovery Incentive – Would increases the tax rate from zero to 3.125% for the 10 ten years of production.  Thereafter, the rate would be the full 12.5% rate except for tertiary wells using anthropogenic carbon dioxide (CO2) which would be at half the full rate.

 HOUSE BILL 712

  • Would prohibit interest on refunds for overpayments of severance taxes by deep well operators who qualify for the exemption, as long as the Department of Revenue pays the refund within 180 days of receiving a refund claim.

 HOUSE BILL 713

  • Would provide that severance taxes do not have to be paid during the period of a suspension or exemption from severance tax when the well operator holds a certificate of good standing and the well has been determined by the Department of Natural Resources to qualify as a “horizontally drilled well” prior to beginning production.  It would also apply to wells that have been determined by the Department of Natural Resources to be drilled to a true vertical depth of more than 15,000 feet prior to the well beginning production.

We will continue to monitor these tax issues and provide updates when made available.