Update on Louisiana Severance Tax Exemption

On June 19, 2015, Louisiana severance tax exemptions were revised for horizontal wells that commence production on or after July 1, 2015. On that date, Act No. 120 became law to amend Louisiana Revised Statute 47:633(7)(c)(iii) and to enact new Louisiana Revised Statute 47:633(7)(d).

The statute, as revised, keeps in place an exemption from severance taxes on any horizontally drilled well or, any horizontally drilled recompletion well. As before, the exemption lasts for the earlier of 24 months or when payout of the well cost is achieved. But the amount of this exemption for any horizontally drilled well, or any horizontally drilled recompletion well, that commences production on or after July 1, 2015 is now based on a sliding scale determined by the commodity prices for oil and natural gas.

Horizontal drilling is defined by the statute as high angle directional drilling of bore holes with at least fifty feet (50′) of lateral penetration through productive reservoirs. Horizontal recompletion is defined as horizontal drilling in an existing well bore. Payout of well cost is defined as the cost of completing the well to the commencement of production as determined by the Department of Natural Resources (DNR).

On July first of each year, the DNR Secretary is to determine the oil price/natural gas price upon which the exemption shall be based for the ensuing 12 months based on the average New York Mercantile Exchange price per barrel/million BTU per month on the close of business June 30th for the prior 12 months.

The exemption starts at one hundred 100% percent for oil if the price of oil is at or below $70.00 per barrel and 100% for gas if the price of gas is at or below $4.50 per million BTU. From there, the exemption decreases on a sliding scale as the price of each commodity increases. The exemption for oil is reduced to zero once the price of oil exceeds $110.00 per barrel, and the exemption for gas is reduced to zero once the price of gas exceeds $7.00 per million BTU.

In the near future, the effect of the statute would appear to be muted due to the low commodity price environment at present. However, if you should have any questions about the recent change in the severance tax exemption under this statute or any other severance tax related inquiries, please do not hesitate to contact us.

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