New Texas Law Specifies Requirements for Severance Tax Exemption for Natural Gas Wells

On June 2, 2023, Texas Governor Greg Abbott signed into state law HB 591, which provides a severance tax exemption for natural gas produced from certain wells that would otherwise be lawfully vented or flared. Gas produced from a qualifying well must be consumed within 1,000 feet to qualify for the severance tax exemption. The bill takes effect September 1, 2023.

Intended for mobile data centers, this “flare gas mitigation” bill is particularly interesting for bitcoin mining companies that utilize stranded and flared natural gas to power their operations. The bill provides much needed clarification on severance tax requirements for companies that monetize natural gas resources that would otherwise go to waste.

Well and pipeline operators need to apply to the Texas Railroad Commission (the “Commission”) for certification that a well is a qualifying well. There are three separate definitions of the term “qualifying well.” Each definition of a qualifying well and the required application details for each definition is as follows.

The first definition of a qualifying well is one that “is connected to a pipeline on which pipeline takeaway capacity is not expected to meet the demand for gas produced from the well.”

Applications for this type of well must:

1. Include an attestation that pipeline takeaway capacity is not expected to meet the demand for gas produced from the well;
2. Be submitted jointly by the well operator and the pipeline operator; and
3. Certify that the Commission authorized gas from the well to be flared for at least 30 days during the year preceding the year in which the application is filed.

The second definition of a qualifying well is one that “is not connected to a pipeline and for which connection to a pipeline is technically or commercially unfeasible but is operated by a well operator who has contractually dedicated the well, the gas produced from the well, or the land or lease on which the well is located to a pipeline operator.”

Applications for this type of well must:

1. Attest that the well is not connected to a pipeline and that it is technically or commercially unfeasible to connect the well to a pipeline;
2. Be submitted jointly by the well operator and the pipeline operator; and
3. Certify that the Commission authorized gas from the well to be flared for at least 30 days during the year preceding the year in which the application is filed.

The third definition of a qualifying well is one that “is not connected to a pipeline and is operated by a well operator who has not contractually dedicated the well, the gas produced from the well, or the land or lease on which the well is located to a pipeline operator.”

Applications for this type of well must:

1. Attest that the well is not connected to a pipeline and is operated by a well operator who has not contractually dedicated the well, the gas produced from the well, or the land or lease on which the well is located to a pipeline operator;
2. Be submitted by the well operator; and
3. Certify that the commission authorized gas from the well to be flared for at least 30 days during the year preceding the year in which the application is filed.

Once approved, the Commission will issue a certificate designating the qualifying well. The certificate expires one year after the date of issuance at which point the operator will need to reapply to the Commission to recertify the well for another year.   

Separately, to qualify for the severance tax exemption, the qualifying well certificate holder must apply annually to the Texas Comptroller for the exemption. Note that these are two separate applications with two separate Texas government agencies.

Currently, no other regulations or guidance issued by the Commission or Comptroller address the process of applying for certification or the severance tax exemption. We will provide updates if additional information becomes available.

For more information about these requirements, contact us. We are here to help.

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