COPAS

Revenue Committee2017 Legislative & Regulatory Update

April 27, 2016

Wade Hopper

Chevron

Bob Wilkinson

Nate Wolf

ConocoPhillips

2

This presentation only reflects the views of

the authors/presenters and is not intended

as legal, tax or accounting advice.

Each recipient should solicit their own legal,

tax or accounting counsel with respect to

any of these issues.

3

To provide an update of the changes to tax

rates, and other regulatory or legislative

changes impacting severance taxes, and

royalties.

CSHB111 creates base tax rate of 25% until production tax

value is > $60, then an additional 15% tax rate applies

Sliding Scale Production Credits eliminated

Interest on delinquent taxes no longer expires after 3 years

Net operating loss tax credits eliminated; replaced with a

carry-forward loss deduction which is decreased by 1/10th of

its value starting in the 8th year

Carry-forward loss deductions are ring-fenced to the lease

creating the loss

Broadens Department’s ability to disclose taxpayer

information

Ability to borrow against tax credits eliminated

Passed the House, being heard by Senate Committees

Onshore Order 3 – Site Security

Onshore Order 4 – Oil Measurement

Onshore Order 5 – Gas Measurement

❖BLM holding training sessions and

answering questions

❖Extensive question & answer document

has been created

❖Industry still hopes to resolve some

remaining issues

Onshore Order 9 – Waste Prevention (Venting

& Flaring)

1. BLM & ONRR worked on reporting

changes (have not been released)

2. Western Energy Alliance & IPAA filed

lawsuit

3. US House passed bill disapproving of the

rule (CRA); Senate has not voted yet

4. DOI Secretary requested rule be reviewed

for possible changes or repealing

Initiative impacting Colorado oil & gas severance

taxes may appear on the November ballot

Levies 10% tax on income from the sale of oil

and gas; eliminates the credits for property taxes

paid; the Ad Valorem tax deduction; and stripper

well exemptions

Opportunity to comment will be in April, and the

Colorado Petroleum Council will submit

information regarding initial fiscal impacts

Ballot passed single-subject requirement

Past ballot initiatives have not been successful

The State put together a work group looking

at more clearly defining allowable deductions

for severance tax purposes

Could result in regulatory/legislative changes

Draft of proposed rule for comments expected

April 21

EIA requesting to expand their reporting of the

EIA-914 to additional 5 states or production

areas, and to include the volume inputs and

outputs at stand-alone stabilizers

New states/areas - Alabama, Michigan,

Mississippi, Virginia, federal offshore Pacific

NGSA to work with API & IPAA to submit joint

association comments

OMB will still need to approve EIA’s request

EIA plans to request Gas Processing Plant

survey – most likely 2019

2017 Reporting

ONRR Director Greg Gould announced

USEITI successful and will be mainstreamed,

incorporating all of the transparency goals

into DOI operations

The US will not be seeking validation

Remaining 2017 MSG meetings cancelled

ONRR does not have resources to expand

current reporting to meet EITI requirements

Waiting on direction from DOI Secretary

Could fall under new RPC committee

HB54 – would add a “Hydrocarbon Processing

Facilities Use Tax” of up to 3% of hydrocarbon

value. If this new tax stands, then no severance

taxes would be collected

HB55 removes a prohibition on the collection of

additional taxes on gas, authorizes a fee on the

transportation of gas, and creates a fund for any

excess funds collected

HB60 is a relative to HB55 and establishes a fee

on the transportation of gas at $0.50/mcf, and it is

in addition to any severance tax collected

HB98 removes the requirement that the

Oilfield site restoration fee must be in direct

proportion to the amount of severance taxes

being collected

Bill referred to the Natural Resources and

Environment committee

HB170 repeals the severance tax exemption

for horizontally drilled wells

Bill referred to the Ways & Means committee

HB355/HB364 proposes to reduce the tax rate on

oil from 12.5% to 8% of value and reducing the tax

rate on distillate, condensate, or similar natural

resources severed from the soil or water either with

oil or gas from 12.5% to 8% of value

It also changes the new horizontally drilled and

recompletion well by extending the duration of the

exemption from 24 months or until payout to 60

months or until payout

Amount of exemption changed from being based of

the price of the commodity to 50% of the tax rate

Bill referred to the Ways and Means Committee

HB461 proposes the severance tax

exemption for production of oil and gas from

an inactive well from a 100% tax exemption

for five years to a 50% tax exemption for 10

years

It also adds a new exemption for production

from an orphan well providing a 75% rate

reduction for 10 years

Bill referred to Ways and Means Committee

HB516 proposes to eliminate the requirement that

the Dept. of Revenue to certify the status of a well

before it is eligible to be taxed at a reduced rate

Requires the severer to submit a production report

to the office of conservation evidencing the reduced

capability of the well

Adds a new tier of reduced severance tax on natural

gas for wells incapable of producing an average of 5

mcf of gas per day and defines the well as a

marginal incapable well

The rate of the tax for gas produced from a marginal

incapable well is $0.0065¢ per thousand cubic feet

Bill referred to the Ways and Means Committee

HB63 passed and it requires withholding

annual returns (associated with royalties paid)

to be filed with the state earlier (from February

28 to January 31).

SB86 passed and it applies to the incremental

production on secondary & tertiary oil

recovery programs

Increases trigger price from $30 to $54/bbl.

Only applies to new projects

SB317 changes interest rate of delinquent

taxes and deficiency assessments from 12%

to four percentage points above the prime

rate published by the federal reserve system

7(a)(i)(B)(ii)

Currently, the Bank Prime Rate is 4%

The bill passed the House and Senate,

currently being enrolled

New Tax & Royalty Reporting System

Agencies developing new systems separately

TRD – Severance Tax Reporting

PUNs replaced by OCD Property/Pool

number (ONRR agreement number part of

key fields for units & comms)

Eliminates some columns & adds new ones

Amendments to be filed with just replacement

line (no longer reversal & rebook line)

First half 2018 is latest go-live date

Payment allocation issues still being resolved

SLO – State Royalty Reporting

Property identifiers could be:1. Legacy PUNs

2. Agreement number for Unit/Comm & overlap

wells; Legacy PUN for regular lease wells

3. Agreement number for Unit/Comm & overlap

wells; API & Pool for regular lease wells

Amendments will continue to be reversal &

rebook lines

Third quarter 2018 latest estimated

implementation date

HB1257 lessens the requirement for

unitization plans to approval from more than

55% of royalty interests (it was 60%). Same

percentage required to dissolve unitization.

Signed by the Governor

HCR3027 directs study of incentivizing the

refracturing of existing oil wells by providing

an oil extraction tax exemption.

Passed the House and Senate, filed with

Secretary of State

SB2013 amended to retain Commissioner of

University and School Lands current

interpretation of “gross market”, “market

value” and “gross proceeds” until 6/30/2019

Amendment allows continuation of deducting

post production costs

Senate did not concur with House

amendments, conference committee

appointed

State was planning to send out letter saying

no deductions were allowed for gas royalties

State requested industry’s legal opinion on

School Lands new interpretation

NDPC drafted a response documenting the

court cases that support deductions for North

Dakota royalties

HB49 is the Governor’s biennium budget bill

It includes several tax increases most

notably increasing the severance tax to 6.5

percent for oil, condensate and natural gas,

and 4.5 percent on processed hydrocarbons

such as natural gas liquids

State of the State address did not contain

plan to increase state’s severance tax on oil

and gas

SB225 exempts certain publicly traded

partnerships from the out-of-state royalty

withholding tax

Passed House & Senate, sent to Governor

SB731 impacts royalty payment admin by

proposing to: a) eliminate compounding of

late payment interest; b) when certain

payments should be paid to the Unclaimed

Property Act; and c) establishing liability for

withholding certain royalty payments.

Passed the Senate and House, Senate

reviewing House amendments

SB475 expands tax collections to oil

collected from salt water disposal wells and it

stipulates a method of allocation of the oil

recovered to its respective source

Unanimously passed the Senate, received

“Do Pass” from House committee

Two amendments were filed to increase the

gross production tax rate to 5% for all

incentives effective with production after

7/1/2017, and establishing a 7% rate for all

wells. It is unknown if they will be approved

Governor’s budget includes 6.5% severance

tax with a credit for impact fee paid

HB113 assesses a tax of 3.5% of the gross

value of units severed at the wellhead. This

is on top of the Local Impact Tax

SB245 establishes the Pay It Forward Pay It

Back Pennsylvania Program. It imposes a

5% natural gas severance tax on the gross

value of the units of natural gas severed at

the wellhead on top of the Local Impact Tax

SB138 stipulates royalty payments must be

made within 90 days, and delineates the audit

rights of a royalty owner.

Passed the Senate and is now in the House

HB557 imposes a minimum one-eighth royalty

on the gross proceeds, and only applies to

production after the effective date. The bill also

imposes treble damages if the lessee acted

willfully in failing to pay the minimum royalty

HB129 consent is needed to provide

payment detail in another manner than

accompanying the payment

Substitute reported favorably

HB2277 fixes date Comptroller must adopt

median cost of a high-cost gas well that will be

used in the setting of the rate reduction for the year

Prohibits a taxpayer from amending its report of

drilling and completion costs after March 1;

Establishes refunds of overpaid production taxes to

be refunded to the person who paid the tax and not

necessarily to the producer;

Strikes the authority for a taxpayer to receive a

credit for overpaid tax, and limits refunds to a

taxpayer who applied and received approval from

the Comptroller for the tax reduction

Was reported favorably as substituted

HB2621 provides an exemption from oil

severance taxes for approved tertiary

recovery programs

Applies only to oil produced from the tertiary

recovery project on or after the second

anniversary of the date RRC designates the

tertiary recovery project and through the

expiration date

Referred to House Ways & Means committee

HB3201 reestablishes the 2-year inactive

incentive which expired February

2010. Once the well is qualified, it receives a

10-year severance tax exemption

Proposal was made to amend the bill:

❖ Exempting wells that never produced

❖ Exempting wells associated with an EOR

program

❖ Reducing exemption from 10 to 5 years

Referred to House Ways & Means committee

Public hearing scheduled for April 26

HB3232 relates to the penalty imposed on

certain delinquent oil and gas severance

taxes; explains how a person is not subject

to the penalty if additional tax due does not

exceed 25 percent and if the amended report

and payment is filed within 730 days

Committee substitute reported favorably

HB3471 entitles person who paid sales taxes

in error the option of getting a refund by

taking a credit on their severance tax return

Referred to House Ways & Means committee

Public hearing scheduled for April 26

SB1008/SJR41 provides for foregoing the

transfer of oil and gas production tax

revenue to the economic stabilization fund if

the ending fund balance for the preceding

fiscal year is greater than $5 billion

Reduces oil & gas tax rates by amounts

sufficient to equal the foregone transfer

Public hearing held, left pending in

committee

SB17 passed and it authorizes the tax

commission to hold meetings not open to

the public to provide guidance to employees

on the interpretation and application of the tax

laws following action by the commission

or issuance of a commission or court decision

HB405 passed and provides for an oil and

gas severance tax credit for a taxpayer that

produces natural gas for use in the production

of hydrogen fuel for zero emission motor

vehicles.

HB2169 extends the existing local gas

severance tax sunset date 2 years until

January 1, 2020

It passed and Governor approved it

Several bills died in committee: Operator tax reporting

Reduction in the severance tax rate on new wells by

2% for 48 months

DOR could suspend processing amended gross

products tax returns below $10,000 until all returns

from that taxpayer total $1,000,000 or more or until

December 31 of each calendar year

New DO requirements “where before the date on which

payment is due, subsequent to any transfer by

assignment, sale or other disposition of ownership

interest, a lessee, operator or other party legally

responsible for payment for oil or gas production shall

send a division order to all interest owners”

COPAS has two distribution lists for

which we send out updates:

Taxes – Severance, Conservation

Royalties – Federal/Indian, State, Private

Provide us your email address and identify

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