Rekindling the flame

05 16, 2013 by Daily Advertiser

Pending state legislation would allow drilling to resume at inactive wells

Legislation filed by a second-year lawmaker from Lafayette may prove to be one of the most important bills of the 2013 session, enabling the fiscal year 2014 state budget to move forward in the Legislature by benefiting both state coffers and the interests of the state’s oil and gas industry.

House Bill 474 by state Rep. Stuart Bishop, R-Lafayette, has moved from the House of Representatives, where after some transformation it gained unanimous approval earlier last week. The bill moved to the state Senate this week, where it awaits a committee hearing. Bishop said both the administration and the oil and gas industry approve of the bill.

“It’s a great bill,” Bishop said. “It makes oil and gas happy and can generate some money for the state.”

The bill essentially restores some incentives for oil and gas producers to return to work on inactive wells, which produce no or little oil and, hence, no revenue for the state or the producer, said Don Briggs, president of the Louisiana Oil and Gas Association. Previous state severance tax exemptions elapsed in 2010.

Under the new bill, oil producers would be able to resume work on or after July 1 on inactive wells that had been deemed inactive prior to July 1, 2010 for a two-year, initial exemption period in which oil production from the wells would face a severance tax of 3.125 percent of its value. Gas production would face a 25 percent severance tax.

Under present law, a severance tax of 12.5 percent is levied on all oil produced in Louisiana.

On July 1, 2015 and for five years after, severance tax on oil production on those wells deemed inactive would be figured at 6.25 percent, and 50 percent on gas production. Also beginning that date, producers could make application to the Department of Natural Resources to qualify other inactive wells for an inactive well certification for purposes of eligibility for a reduced severance tax of 6.25 percent on oil, 50 percent on gas, for 10 years.

Oil and gas industry representatives say HB 474 is the most important bill of the session for them. The incentive is necessary, they say, because reopening inactive wells carries with it some financial risk for producers that accompany the effort of drilling deeper. By providing some exemption, even a reduced exemption, the oil companies may realize enough benefit to reopen the wells.

The state, on the other hand, will realize a projected $50 million in tax revenue from reopened wells over the course of the next three fiscal years, Bishop says — some $20 million in both fiscal 2014 and 2015 and some $10 million in fiscal year 2016.

The bill has been tied to other revenue bills that would result in a state budget generated by the Legislature rather than the governor. But HB 474 is the bill the oil industry is focused upon. Such a Legislature-initiated budget would eliminate the practice of using one-time state monies for paying for recurring state expenses.

“Hopefully, it will make it through,” Bishop said of his bill this week. “There are still so many questions out there.”