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Gas Unlikely to Benefit From TX Producer Relief

Gas Unlikely to Benefit From TX Producer Relief

Small gas producers might not see much if any benefit from a severance tax relief bill passed by the Texas legislature last week. Oil producers, however, will get a break. Relief specified in the bill is triggered by low commodity prices, and the trigger for oil producers already has been pulled. However, the state comptroller's office does not expect gas prices to dive low enough, long enough to enact relief.

The House last week approved SB 290 in a 128-to-8 vote. The bill previously passed the Senate with a vote of 25 to 1. Gov. George W. Bush signed the bill into law last week. The legislation grants a severance tax exemption to marginal gas and oil wells producing 90 Mcf/d or less or 15 b/d or less. Relief kicks in when the average daily closing price for gas futures drops below $1.80/MMBtu and/or oil drops below $15/barrel for three consecutive months on the New York Mercantile Exchange.

Relief for oil producers takes effect retroactive to Feb. 1 production. While the market has seen Nymex daily closing prices for gas below $1.80, prices have not stayed that low long enough for relief to kick in. The legislation only affects production from Feb. 1 through July 31. While gas prices are currently down and the industry is entering a shoulder month with a large storage overhang, the clock is running on the available relief.

Lindsey Dingmore, Texas Independent Producers and Royalty Owners (TIPRO) vice president for public affairs, said the comptroller's office does not expect gas prices to go low enough long enough to enact relief for gas at all. Total relief to producers also is capped at $45 million in severance tax exemptions. If only oil relief is enacted, that amount likely will not be reached before July 31, when production no longer qualifies, Dingmore said. If gas relief is granted, the cap may be reached, he said.

"There are some marginal [oil] well operators and producers who have whole leases in which every well in the lease will qualify," Dingmore said. "In those cases, this is substantial. This is a removal of severance tax on an entire marginal lease for a six-month period. I've been told by some producers that's enough to encourage them to hold on a little longer to see if we indeed have a price increase in the late spring or summer. For your most marginal producer this is a big impact."

Joe Fisher, Houston

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