FISCAL NOTE

Date Requested: January 25, 2019
Time Requested: 03:44 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2733 Introduced HB2673
CBD Subject: Environment


FUND(S):

Oil & Gas Abandoned Well Plugging Fund, General Revenue Fund

Sources of Revenue:

General Fund Oil & Gas Abandoned Well Plugging Fund

Legislation creates:

Decreases Existing Revenue, Creates New Expense, Increases Existing Expenses, Creates New Program



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill is to exempt low volume oil and gas wells from severance tax, and to provide a special use fee on sales from oil and gas wells which produce more than 5,000 cubic feet of natural gas per day or one-half barrel of oil per day but less than 60,000 cubic feet of natural gas or 10 barrels of oil per day. The special use fee shall be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells . According to our interpretation, passage of this bill would exclude natural gas production from wells producing between 5,000 cubic feet and 60,000 cubic feet per day and oil wells that produce between one-half barrel and 10 barrels per day from the 5 percent Severance Tax at an initial annual cost of roughly $15 million to State and local governments. Given that the provisions of this bill would take effect on January 1, 2019, General Revenue Fund collections would decrease by up to $3 million in in FY2019, by up to $15 million in FY2020 and by up to $13.5 million per year, thereafter at current price levels. Local governments would collectively lose up to $1.5 million per year beginning in FY2021. In addition to current exclusions for very low volume wells, the provisions of this bill would exclude roughly 7.5 percent of current natural gas production and 15 percent of current oil production from tax. The provisions of the bill would generally exempt most traditional vertical stripper wells from severance tax. Some horizontal wells would also benefit, including a few wells with a volume of natural gas production that is too large for exclusion, but a smaller volume of oil production that might fall under the exclusion limits. Over time, the share of total natural gas production excluded from severance taxation should slowly decline as overall production from shale wells increases. Very few traditional stripper wells are likely to be added in production in this future environment. Absent the impact of natural gas price increases, the value of the proposed exclusion would be expected to slowly decline over time as production from such wells decreases. The provisions of this bill would also create a new contingent fee equal to 2.5 percent of the value of severed product for any natural gas wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and any oil well with average daily production between one-half barrel and 10 barrels. The fee would be calculated on the same basis as the severance tax and would include allowance of a $500 tax credit for each Taxpayer. The anticipated annual yield of this new fee would initially be slightly more than $6.0 million for the Oil and Gas Abandoned Well Fund. The fee would be due on March 1st of each year beginning in FY 2020. The fee would be imposed only if the balance in the Oil and Gas Abandoned Well Fund is not equal to at least $4 million as of June 1st of each year. The current balance in the Oil and Gas Abandoned Well Fund is closer to $400,000. The proposed Statute also provides that the Oil and Abandoned Well Fund may not be used until the Oil and Gas Reclamation Fund is depleted. It may be impossible for the Department of Environmental Protection to spend down an influx of revenue received around March 1st of each year before June 1st of the same year. Therefore, there is a high probability that the proposed fee might be imposed no more often than once every two years. Based on Department of Environmental Protection estimates of more than 4,000 old abandoned orphan wells and an average cost of more than $60,000 to plug a well, future revenues generated by the proposed fee should be easily exhausted over time. Additional administrative costs to the State Tax Department would be $40,000 in FY2019 and $95,000 in subsequent fiscal years



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 40,000 95,000 95,000
Personal Services 20,000 70,000 70,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 20,000 25,000 25,000
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


According to our interpretation, passage of this bill would exclude natural gas production from wells producing between 5,000 cubic feet and 60,000 cubic feet per day and oil wells that produce between one-half barrel and 10 barrels per day from the 5 percent Severance Tax at an initial annual cost of roughly $15 million to State and local governments. Given that the provisions of this bill would take effect on January 1, 2019, General Revenue Fund collections would decrease by up to $3 million in in FY2019, by up to $15 million in FY2020 and by up to $13.5 million per year, thereafter at current price levels. Local governments would collectively lose up to $1.5 million per year beginning in FY2021. In addition to current exclusions for very low volume wells, the provisions of this bill would exclude roughly 7.5 percent of current natural gas production and 15 percent of current oil production from tax. The provisions of the bill would generally exempt most traditional vertical stripper wells from severance tax. Some horizontal wells would also benefit, including a few wells with a volume of natural gas production that is too large for exclusion, but a smaller volume of oil production that might fall under the exclusion limits. Over time, the share of total natural gas production excluded from severance taxation should slowly decline as overall production from shale wells increases. Very few traditional stripper wells are likely to be added in production in this future environment. Absent the impact of natural gas price increases, the value of the proposed exclusion would be expected to slowly decline over time as production from such wells decreases. The provisions of this bill would also create a new contingent fee equal to 2.5 percent of the value of severed product for any natural gas wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and any oil well with average daily production between one-half barrel and 10 barrels. The fee would be calculated on the same basis as the severance tax and would include allowance of a $500 tax credit for each Taxpayer. The anticipated annual yield of this new fee would initially be slightly more than $6.0 million for the Oil and Gas Abandoned Well Fund. The fee would be due on March 1st of each year beginning in FY 2020. The fee would be imposed only if the balance in the Oil and Gas Abandoned Well Fund is not equal to at least $4 million as of June 1st of each year. The current balance in the Oil and Gas Abandoned Well Fund is closer to $400,000. The proposed Statute also provides that the Oil and Abandoned Well Fund may not be used until the Oil and Gas Reclamation Fund is depleted. It may be impossible for the Department of Environmental Protection to spend down an influx of revenue received around March 1st of each year before June 1st of the same year. Therefore, there is a high probability that the proposed fee might be imposed no more often than once every two years. Based on Department of Environmental Protection estimates of more than 4,000 old abandoned orphan wells and an average cost of more than $60,000 to plug a well, future revenues generated by the proposed fee should be easily exhausted over time. Additional administrative costs to the State Tax Department would be $40,000 in FY2019 and $95,000 in subsequent fiscal years



Memorandum


The stated purpose of this bill is to exempt low volume oil and gas wells from severance tax, and to provide a special use fee on sales from oil and gas wells which produce more than 5,000 cubic feet of natural gas per day or one-half barrel of oil per day but less than 60,000 cubic feet of natural gas or 10 barrels of oil per day. The special use fee shall be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells . There are concerns regarding the bill title. The does not mention the internal effective date or that the bill is retroactive. The bill does not indicate that the DEP will be collecting and administering a fee calculated in the same manner as the Severance Tax. It is also mentioned a civil penalty, or penalties and additions must be collected in a civil action in Kanawha County Circuit Court or that the Secretary of DEP is required to submit an annual report to the Governor or Legislature as to the Oil and Gas Abandoned Well Plugging Fund. The bill title also makes statements that do not appear in the bill. This bill is essentially retroactive. Severance tax payers file monthly and quarterly statements with the Tax Department and will have already started making payments for the 2019 Tax Year by the time this bill becomes effective. If a taxpayer met the criteria for these new exemptions during the 2018 calendar year, these taxpayers are exempt as of January 1, 2019, according to this bill. In addition, this bill will result in two different agencies administering the Severance Tax on oil and gas depending on the volume of natural gas and oil produced. This may result in confusion to the taxpayers and administrative difficulties. It is unclear to see why the Tax Department is not collecting the 2.5 percent fee and remitting the money to the Treasury to put in the special revenue fund. Taxpayers may have a low-volume producing well that qualifies for the DEP fee, in addition to wells that produce sufficient gas and oil such as they must pay the regular Severance Tax to the Tax Department. Having to file two different forms with two different agencies may cause confusion and difficulties with the taxpayer. Also, two different agencies will be developing tax policy on the Severance Tax, as the DEP fee is to be calculated in the same manner as the Severance Tax under West Va. Code §11-13A-1, et seq. As a result, it is possible that two different administrative decision could be reached on the same issue, which would cause confusion to taxpayers. Based upon the volume of gas produced, it appears there may be different appeal rights and privacy issues. The Severance Tax is administered under the Tax Procedure and Administrative Act, W.Va. Code §11-10-1, et seq. and appeals are heard by the Office of Tax Appeals. W. Va. Code §11 -10-1, et seq. Accordingly, there are certain privacy rules pertaining to Severance Tax returns and return information. See, W. Va. Code §11-10-5d. It is unclear how the fee administered by DEP would differ or what appeal rights would be. If taxpayers are not required to file an annual report upon the previous year’s production numbers, it may be difficult for the Tax Department to determine if the taxpayer is eligible for the exemption. For example, if a severance tax return is not filed for several years based upon production data and the taxpayer is supposed to be filing with DEP instead, it would be difficult for the Tax Department to determine that without an annual return or some information from the DEP. There is also an issue with the wording of W.Va. Code §22-6-29a. The DEP fee is applicable to every operator of an oil and gas well which produced on average of more than 5,000 cubic feet per day, but less than 60,000. The new exemption from the Severance Tax under the bill is for those wells that produced an average of 5,000 cubic feet per day but less than 60,000. Therefore, there is left open the possibility that those that average exactly 5,000 per day fall under the new exemption from severance tax, but may not fall under the criteria for the DEP Fee. The same issue occurs for those that average one half barrel per day.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov