As Oil Prices Plunge, Small Producers Could Get Tax Relief

After a 20-month freefall, West Texas crude prices thudded to a milestone last month — one that could bring some tax relief to small-time producers in Texas, state Comptroller Glenn Hegar said this week.

In 2005, Texas lawmakers created a tax credit for minor oil producers, triggered only when oil prices plunge below certain levels. It had never kicked in until February, Hegar said in an interview.

“It’s a significant low threshold for oil prices in Texas,” the Republican said, calling the credit “a big deal” to operators of “marginal wells” — typically stripper wells, whose nodding pumpjacks churn up low volumes of crude.

Those wells are the most common of those dotting the Texas landscape. They produce a significant share of the state’s total output — up to 20 percent, according to Ed Longanecker, president of the Texas Independent Producers and Royalty Owners, a group that represents small producers.

The tax credit applies only to those pumping an average of 15 barrels a day over three months. And it’s based on average prices over that period, adjusted to 2005 levels.

 

Last month, that figure settled at $28.48 per barrel, according to the comptroller’s office. That’s just below the $30 threshold to shave 25 percent off a small producer’s severance tax bill.

If adjusted prices range from $22 to $25, those producers could claim a 50 percent credit. The credit swells to 100 percent at $22 per barrel or lower.

Hegar said his number crunchers aren’t yet sure how the credit would affect the state’s budget outlook, since they had no historic data on the incentive to analyze. That would depend on how many producers take advantage. If the incentive works, he said, it would prevent producers from completely shuttering marginal wells, slowing the decline in production statewide.

Longanecker said he was still gathering information about the incentive, which he welcomed.

“It’s very refreshing to see our elected officials having that foresight to create policies that provide some relief to producers,” he said.

West Texas crude has rallied over the past month to around $36 per barrel (less than $30 in 2005 prices), but it will still likely hit one of the tax credit thresholds when Hegar’s office recalculates averages later this month.

Without incentives, oil producers pay a 4.6 percent severance tax.

A separate exemption exists for marginal wells pumping natural gas, which has been plentiful and cheap for years. With the exception of 12 scattered months, it has been activated at various levels since May 2009, according to the comptroller’s office.

Marginal gas wells have been eligible for a 100 percent tax credit since March 2015. Otherwise, Texas taxes natural gas at 7.5 percent.

 

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