Railroad Commission of Texas: A new lease in the life of an existing well
Late last year, the Texas House put forth their goals and priorities for consideration during the upcoming legislative session. Included among those priorities was House Interim charge #3, which directed the House to examine ways to increase the production of oil and gas and review state regulations that could directly impact the exploration or production of oil and gas and make recommendations for increasing Texas' energy independence.
This is an admirable goal and, given the oil and gas industry’s significant contributions to the economic growth and current budget surplus, a no-brainer for our state.
While several proposals have been introduced this session with this objective in mind, there is one that I believe deserves special recognition, both for its ingenuity and approach to increasing production. Introduced in the House by Representative Drew Darby, HB 2056, and its Senate companion introduced by Senator Phil King, SB 1407, is focused not on simply drilling more holes in the ground but, rather, harnessing the full potential of our natural resources from our existing infrastructure.
As many Texans know, the oil and gas industry doesn’t function like a warehouse. An oil or gas well’s production declines over the course of the life of the well and, eventually, the “useful” life of any given well is diminished to the point at which it no longer makes economic sense to continue production. The individual economics of any particular well depends on a range of factors, but inevitably all wells will one day be relegated to inactive status and will eventually need to be plugged. Importantly, this does not mean that there is not more oil or gas to be harvested from the well, but simply that the economic costs outweigh the financial benefit of further extraction.
The novel approach taken by HB 2056 is one designed to extend that useful life by making it more economical to squeeze more oil or gas from a given well. The legislation accomplishes this by providing a temporary severance tax exemption for those operators who invest capital to re-stimulate existing wells for up to 75% of the re-stimulation costs, or for 60 months – whichever comes first. Importantly, this exemption is based on the difference between the previous production rate and any incremental production resulting from the re-stimulation. So, for tax collection purposes, the state can expect to receive what it otherwise would have received until 75% of the re-stimulation costs have been recouped or five years have elapsed. After which, the severance tax collection can be expected to increase given the increased lifespan of the well due to re-stimulation.
Some may question the need for such legislation, incorrectly believing the loss in severance tax revenue to the state would outweigh any benefit. I myself initially had many of the same questions, with respect to the severance tax base. But after looking at the numbers, it is clear to me that under HB 2056, these marginal wells could receive a new lease on life. Instead of reducing our severance tax base, this legislation could serve to raise total severance tax revenue collected over the long term by extending the lifespan of these marginal assets.
It is also important to remember that severance tax revenue is only one portion of the numerous economic benefits Texas receives from the production of our natural resources. Local school districts, county property tax revenue, mineral owners, and the local workforce both in and out of the energy sector all stand to benefit from increased production under HB 2056.
The bottom line is HB 2056 strives to produce more from our existing resources – thereby increasing the lifespan of oil and gas wells, utilizing existing pipeline and associated infrastructure rather than relying on new development to catch up with production. The importance of this cannot be understated, as the availability of existing infrastructure, including gas gathering systems, reduces the likelihood that an operator will need or request to flare associated gas due to a lack of infrastructure to transport the gas to market because the infrastructure already exists.
As Railroad Commissioner, I am duty bound to “serve Texas by our stewardship of natural resources and the environment, our concern for personal and community safety, and our support of enhanced development and economic vitality for the benefit of Texans.”
Not only does HB 2056 accomplish the goal set forth in House Interim Charge No. 3, HB 2056 fundamentally aligns with the mission of the Railroad Commission and is worthy of further consideration by the legislature.