The 2017 Regular Legislative Session was 60 days of sloshing in waist-deep tax policy in order to fix a budget deficit and prepare the state for the upcoming fiscal cliff. During this period, unusual alliances were made, and long-time partners found themselves disagreeing on various tax policies and how to go about fixing Louisiana’s budgetary woes. There were a couple of items that garnered consensus among both the House and Senate, in particular, House Bill 461.
The Chairman of the House Natural Resources and Environment Committee, Representative Stuart Bishop (R- Lafayette), filed House Bill 461 at the request of the Louisiana Oil and Gas Association (LOGA). This bill reinstates a tax incentive for inactive wells that was done away with in 2010. The incentive reduces the severance tax for 10 years by 50 percent on inactive wells and by 75 percent on wells that have been a part of the state’s Orphaned Well Program for five years or longer. All of this will go into effect on July 1, 2018.
So what qualifies as an inactive well, and what is an orphaned well?
For a well to qualify as inactive, the well must have seen less than 30 days of production in a 730 day, or two year, period. In short, these wells are producing little to nothing and thus, deemed inactive. The Orphaned Well Program was started in large part by LOGA President, Don Briggs, in 1993. The purpose of this program is to plug abandoned wells and restore the sites so they may be redeveloped. The term “orphaned” refers to a well site where the operator of record is no longer a viable, responsible party. Since its establishment, the program has plugged over 2,000 wells at a cost of $64 million.
A common question from legislators when presented with the language of the bill was, “If we are cutting severance tax rates on inactive wells by 50 and 75 percent, won’t this hurt Louisiana’s bottom line?” In short, no. If the state is to tax an inactive well that is producing nothing, the state will collect nothing in tax revenue. Furthermore, the state is liable for properly restoring some of these well sites.
Legislators also asked, “How then does this help our state’s financial situation?” It is rather straightforward: in order to save the state money on plugging orphaned wells, we must lower the tax rate to incentivize companies to begin producing out of these wells again. When companies start producing, tax revenue is generated, jobs are created, and royalties for the state are increased. HB 461 incentivizes operators to re-enter existing well-bores and implement new technologies to produce oil and gas that were not previously recoverable from the original reservoir.
LOGA worked around the clock to show legislators the great benefit that HB 461 could provide for Louisiana. The House first supported the measure unanimously, then the Senate, and eventually, Governor Edwards would let his support be known. A bill that offers an incentive to companies to create jobs and increase economic activity, all without impacting Louisiana’s bottom line, is hard not to support.
On July 26, HB 461 was signed into law, becoming Act 421. We would like to thank Representative Stuart Bishop (R-Lafayette) and all other co-authors of this legislation for their hard work in pushing this measure through the process and supporting Louisiana’s oil and gas sector. This is a step in the right direction towards reigniting Louisiana’s oil and gas industry.