NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

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(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD)

Energy Mineral and Natural Resources Department (EMNRD)

SUMMARY

Synopsis of HTRC Amendment

The HTRC amendment sets a time limit on the application for tax exemption of twelve months from the date of the completion of the project. This change has no impact on the original analysis.

Synopsis of Bill

House Bill 11 proposes to change the definition of a "production restoration project" contained in the Oil and Gas Severance Tax Act and the Natural Gas and Crude Oil Incentive Tax Act. The definition serves to determine whether projects qualify for an exemption to oil and gas severance taxes that flow into the severance tax bonding fund. To qualify as a production restoration project, the project must return to production a natural gas or oil well within a certain time period. The bill proposes to broaden the eligible time period from "thirty days or less of production between January 1 1993 and December 31, 1994" to "thirty days or less of production in any period of twenty-four consecutive months beginning on or after January 1, 1993."

FISCAL IMPLICATIONS

The fiscal implications of this bill depend on one assumption. Would all or some of the restoration projects qualifying for the incentive have occurred without the incentive. Reports from the Taxation and Revenue Department and Energy Minerals and Natural Resources Department take diametrically opposed positions on that assumption. EMNRD assumes that none of the projects would occur absent the incentive, and thus there would be no loss in severance taxes and possible gains to general economic activity and thus some positive impact on revenues. TRD apparently assumes that all projects would happen without the incentive.

Under current market conditions with low oil prices (which are expected to remain low for the next couple of years) and modest gas prices it would seem unlikely that restoration projects would occur absent incentives. Since few of these wells would likely be restored absent the incentive, the fiscal impact from exempting the production to severance tax is assumed to be negligible for the severance tax bonding fund, and thus the bill is expected to have no fiscal impact.

ADMINISTRATIVE IMPLICATIONS

Neither EMNRD nor TRD report significant administrative implications.

OTHER SUBSTANTIVE ISSUES

1. TRD notes that refunds are allowed if the severance tax exemption was not taken when reporting production taxes for an eligible well after the effective date. This is not consistent with encouraging production from wells that would not produce without the exemption.

2. EMNRD states that the state will lose many wells as they are plugged and abandoned.

POSSIBLE QUESTIONS

1. An unforseen spike in energy prices would possibly lead to the restoration of many projects without incentives. Does this bill protect against such events?

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