As Amended by House Committee
Session of 2000
HOUSE BILL No. 2721
By Committee on Taxation
1-26
11 AN ACT relating
to oil and gas severance taxation; concerning the ex-
12 emption for
incremental production resulting from production en-
13 hancement projects;
amending K.S.A. 1999 Supp. 79-4217 and re-
14 pealing the existing
section.
15
16 Be it enacted by the Legislature of the
State of Kansas:
17 Section
1. K.S.A. 1999 Supp. 79-4217 is hereby amended to read as
18 follows: 79-4217. (a) There is hereby
imposed an excise tax upon the
19 severance and production of coal, oil or
gas from the earth or water in
20 this state for sale, transport, storage,
profit or commercial use, subject to
21 the following provisions of this section.
Such tax shall be borne ratably by
22 all persons within the term ``producer'' as
such term is defined in K.S.A.
23 79-4216, and amendments thereto, in
proportion to their respective ben-
24 eficial interest in the coal, oil or gas
severed. Such tax shall be applied
25 equally to all portions of the gross value
of each barrel of oil severed and
26 subject to such tax and to the gross value
of the gas severed and subject
27 to such tax. The rate of such tax shall be
8% of the gross value of all oil
28 or gas severed from the earth or water in
this state and subject to the tax
29 imposed under this act. The rate of such
tax with respect to coal shall be
30 $1 per ton. For the purposes of the tax
imposed hereunder the amount
31 of oil or gas produced shall be measured or
determined: (1) In the case
32 of oil, by tank tables compiled to show
100% of the full capacity of tanks
33 without deduction for overage or losses in
handling; allowance for any
34 reasonable and bona fide deduction for
basic sediment and water, and
35 for correction of temperature to 60 degrees
Fahrenheit will be allowed;
36 and if the amount of oil severed has been
measured or determined by
37 tank tables compiled to show less than 100%
of the full capacity of tanks,
38 such amount shall be raised to a basis of
100% for the purpose of the tax
39 imposed by this act; and (2) in the case of
gas, by meter readings showing
40 100% of the full volume expressed in cubic
feet at a standard base and
41 flowing temperature of 60 degrees
Fahrenheit, and at the absolute pres-
42 sure at which the gas is sold and
purchased; correction to be made for
43 pressure according to Boyle's law, and used
for specific gravity according
2
1 to the gravity at which the gas is
sold and purchased, or if not so specified,
2 according to the test made by the
balance method.
3 (b) The
following shall be exempt from the tax imposed under this
4 section:
5 (1) The
severance and production of gas which is: (A) Injected into
6 the earth for the purpose of lifting
oil, recycling or repressuring; (B) used
7 for fuel in connection with the
operation and development for, or pro-
8 duction of, oil or gas in the lease
or production unit where severed; (C)
9 lawfully vented or flared; (D)
severed from a well having an average daily
10 production during a calendar month having a
gross value of not more
11 than $87 per day, which well has not been
significantly curtailed by reason
12 of mechanical failure or other disruption
of production; in the event that
13 the production of gas from more than one
well is gauged by a common
14 meter, eligibility for exemption hereunder
shall be determined by com-
15 puting the gross value of the average daily
combined production from all
16 such wells and dividing the same by the
number of wells gauged by such
17 meter; (E) inadvertently lost on the lease
or production unit by reason of
18 leaks, blowouts or other accidental losses;
(F) used or consumed for do-
19 mestic or agricultural purposes on the
lease or production unit from which
20 it is severed; or (G) placed in underground
storage for recovery at a later
21 date and which was either originally
severed outside of the state of Kansas,
22 or as to which the tax levied pursuant to
this act has been paid;
23 (2) the severance
and production of oil which is: (A) From a lease or
24 production unit whose average daily
production is five barrels or less per
25 producing well, which well or wells have
not been significantly curtailed
26 by reason of mechanical failure or other
disruption of production; (B)
27 from a lease or production unit, the
producing well or wells upon which
28 have a completion depth of 2,000 feet or
more, and whose average daily
29 production is six barrels or less per
producing well or, if the price of oil
30 as determined pursuant to subsection (d) is
$16 or less, whose average
31 daily production is seven barrels or less
per producing well, or, if the price
32 of oil as determined pursuant to subsection
(d) is $15 or less, whose
33 average daily production is eight barrels
or less per producing well, or, if
34 the price of oil as determined pursuant to
subsection (d) is $14 or less,
35 whose average daily production is nine
barrels or less per producing well,
36 or, if the price of oil as determined
pursuant to subsection (d) is $13 or
37 less, whose average daily production is 10
barrels or less per producing
38 well, which well or wells have not been
significantly curtailed by reason
39 of mechanical failure or other disruption
of production; (C) from a lease
40 or production unit, whose production
results from a tertiary recovery
41 process. ``Tertiary recovery process''
means the process or processes de-
42 scribed in subparagraphs (1) through (9) of
10 C.F.R. 212.78(c) as in
43 effect on June 1, 1979; (D) from a lease or
production unit, the producing
3
1 well or wells upon which have a
completion depth of less than 2,000 feet
2 and whose average daily production
resulting from a water flood process,
3 is six barrels or less per producing
well, which well or wells have not been
4 significantly curtailed by reason of
mechanical failure or other disruption
5 of production; (E) from a lease or
production unit, the producing well or
6 wells upon which have a completion
depth of 2,000 feet or more, and
7 whose average daily production
resulting from a water flood process, is
8 seven barrels or less per producing
well or, if the price of oil as deter-
9 mined pursuant to subsection (d) is
$16 or less, whose average daily pro-
10 duction is eight barrels or less per
producing well, or, if the price of oil
11 as determined pursuant to subsection (d) is
$15 or less, whose average
12 daily production is nine barrels or less
per producing well, or, if the price
13 of oil as determined pursuant to subsection
(d) is $14 or less, whose
14 average daily production is 10 barrels or
less per producing well, which
15 well or wells have not been significantly
curtailed by reason of mechanical
16 failure or other disruption of production;
(F) test, frac or swab oil which
17 is sold or exchanged for value; or (G)
inadvertently lost on the lease or
18 production unit by reason of leaks or other
accidental means;
19 (3) (A) any
taxpayer applying for an exemption pursuant to subsec-
20 tion (b)(2)(A) and (B) shall make
application annually to the director of
21 taxation therefor. Exemptions granted
pursuant to subsection (b)(2)(A)
22 and (B) shall be valid for a period of one
year following the date of cer-
23 tification thereof by the director of
taxation; (B) any taxpayer applying for
24 an exemption pursuant to subsection
(b)(2)(D) or (E) shall make appli-
25 cation annually to the director of taxation
therefor. Such application shall
26 be accompanied by proof of the approval of
an application for the utili-
27 zation of a water flood process therefor by
the corporation commission
28 pursuant to rules and regulations adopted
under the authority of K.S.A.
29 55-152 and amendments thereto and proof
that the oil produced there-
30 from is kept in a separate tank battery and
that separate books and records
31 are maintained therefor. Such exemption
shall be valid for a period of
32 one year following the date of
certification thereof by the director of
33 taxation; and (C) notwithstanding the
provisions of paragraph (A) or (B),
34 any exemption in effect on the effective
date of this act affected by the
35 amendments to subsection (b)(2) by this act
shall be redetermined in
36 accordance with such amendments. Any such
exemption, and any new
37 exemption established by such amendments
and applied for after the
38 effective date of this shall be valid for a
period commencing with May 1,
39 1998, and ending on April 30, 1999.
40 (4) the severance
and production of gas or oil from any pool from
41 which oil or gas was first produced on or
after April 1, 1983, as determined
42 by the state corporation commission and
certified to the director of tax-
43 ation, and continuing for a period of 24
months from the month in which
4
1 oil or gas was first produced from
such pool as evidenced by an affidavit
2 of completion of a well, filed with
the state corporation commission and
3 certified to the director of
taxation. Exemptions granted for production
4 from any well pursuant to this
paragraph shall be valid for a period of 24
5 months following the month in which
oil or gas was first produced from
6 such pool. The term ``pool'' means an
underground accumulation of oil
7 or gas in a single and separate
natural reservoir characterized by a single
8 pressure system so that production
from one part of the pool affects the
9 reservoir pressure throughout its
extent;
10 (5) the severance
and production of oil or gas from a three-year in-
11 active well, as determined by the state
corporation commission and cer-
12 tified to the director of taxation, for a
period of 10 years after the date of
13 receipt of such certification. As used in
this paragraph, ``three-year in-
14 active well'' means any well that has not
produced oil or gas in more than
15 one month in the three years prior to the
date of application to the state
16 corporation commission for certification as
a three-year inactive well. An
17 application for certification as a
three-year inactive well shall be in such
18 form and contain such information as
required by the state corporation
19 commission, and shall be made prior to July
1, 1996. The commission
20 may revoke a certification if information
indicates that a certified well was
21 not a three-year inactive well or if other
lease production is credited to
22 the certified well. Upon notice to the
operator that the certification for a
23 well has been revoked, the exemption shall
not be applied to the pro-
24 duction from that well from the date of
revocation;
25 (6) (A) The
incremental severance and production of oil or gas which
26 results from a production enhancement
project begun on or after July 1,
27 1998, shall be exempt for a period of seven
years from the startup date
28 of such project. As used in this paragraph
(6):
29 (1) ``Incremental
severance and production'' means the amount of oil
30 or natural gas which is produced as the
result of a production enhance-
31 ment project which is in excess of the base
production of oil or natural
32 gas, and is determined by subtracting the
base production from the total
33 monthly production after the production
enhancement projects is
34 completed.
35 (2) ``Base
production'' means the average monthly amount of pro-
36 duction for the twelve-month period
immediately prior to the production
37 enhancement project beginning date, minus
the monthly rate of produc-
38 tion decline for the well or project for
each month beginning 180 days
39 prior to the project beginning date. The
monthly rate of production de-
40 cline shall be equal to the average
extrapolated monthly decline rate for
41 the well or project for the twelve-month
period immediately prior to the
42 production enhancement project beginning
date, except that the monthly
43 rate of production decline
shall be equal to zero in the case where the
5
1 well or project has experienced no
monthly decline during the twelve-
2 month period immediately prior to
the production enhancement project
3 beginning date. Such monthly
rate of production decline shall be contin-
4 ued as the decline that would have
occurred except for the enhancement
5 project. Any well or project which
may have produced during the twelve-
6 month period immediately prior to
the production enhancement project
7 beginning date but is not capable
of production on the project beginning
8 date shall have a base production
equal to zero. The calculation of the
9 base production amount shall be
evidenced by an affidavit and supporting
10 documentation filed by the applying
taxpayer with the state corporation
11 commission.
12 (3) ``Workover''
means any downhole operation in an existing oil or
13 gas well that is designed to sustain,
restore or increase the production
14 rate or ultimate recovery of oil or gas,
including but not limited to aci-
15 dizing, reperforation, fracture treatment,
sand/paraffin/scale removal or
16 other wellbore cleanouts, casing repair,
squeeze cementing, initial instal-
17 lation, or enhancement of artificial lifts
including plunger lifts, rods,
18 pumps, submersible pumps and coiled tubing
velocity strings, downsizing
19 existing tubing to reduce well loading,
downhole commingling, bacteria
20 treatments, polymer treatments, upgrading
the size of pumping unit
21 equipment, setting bridge plugs to isolate
water production zones, or any
22 combination of the aforementioned
operations; ``workover'' shall not
23 mean the routine maintenance, routine
repair, or like for-like replace-
24 ment of downhole equipment such as rods,
pumps, tubing packers or
25 other mechanical device.
26 (4) ``Production
enhancement project'' means performing or causing
27 to be performed the following:
28 (i) Workover;
29 (ii) recompletion
to a different producing zone in the same well bore,
30 except recompletions in formations and
zones subject to a state corpo-
31 ration commission proration order;
32 (iii) secondary
recovery projects;
33 (iv) addition of
mechanical devices to dewater a gas or oil well;
34 (v) replacement
or enhancement of surface equipment;
35 (vi) installation
or enhancement of compression equipment, line
36 looping or other techniques or equipment
which increases production
37 from a well or a group of wells in a
project;
38 (vii) new
discoveries of oil or gas which are discovered as a result of
39 the use of new technology, including, but
not limited to, three dimen-
40 sional seismic studies.
41 (B) The state
corporation commission shall adopt rules and regula-
42 tions necessary to efficiently and properly
administer the provisions of
43 this paragraph (6) including rules and
regulations for the qualification of
6
1 production enhancement projects, the
procedures for determining the
2 monthly rate of production decline,
criteria for determining the share of
3 incremental production attributable
to each well when a production en-
4 hancement project includes a group of
wells, criteria for determining the
5 start up date for any project for
which an exemption is claimed, and
6 determining new qualifying
technologies for the purposes of paragraph
7 (6)(A)(4)(vii).
8 (C) Any
taxpayer applying for an exemption pursuant to this para-
9 graph (6) shall make application to
the director of taxation. Such appli-
10 cation shall be accompanied by a state
corporation commission certifi-
11 cation that the production for which an
exemption is sought results from
12 a qualified production enhancement project
and certification of the base
13 production for the enhanced wells or group
of wells, and the rate of
14 decline to be applied to that base
production. The secretary of revenue
15 shall provide credit for any taxes paid
between the project startup date
16 and the certification of qualifications by
the commission.
17 (D) The
exemptions provided for in this paragraph (6) shall not apply
18 for 12 months beginning July 1 of the year
subsequent to any calendar
19 year during which: (1) In the case of oil,
the secretary of revenue deter-
20 mines that the weighted average price of
Kansas oil at the wellhead has
21 exceeded $20.00 per barrel; or (2) in the
case of natural gas the secretary
22 of revenue determines that the weighted
average price of Kansas gas at
23 the wellhead has exceeded $2.50 per
Mcf.
24 (E) The
provisions of this paragraph (6) shall not affect any other
25 exemption allowable pursuant to this
section; and
26 (7) for the
calendar year 1988, and any year thereafter, the severance
27 or production of the first 350,000 tons of
coal from any mine as certified
28 by the state geological survey.
29 (c) No exemption
shall be granted pursuant to subsection (b)(3) or
30 (4) to any person who does not have a valid
operator's license issued by
31 the state corporation commission, and no
refund of tax shall be made to
32 any taxpayer attributable to any production
in a period when such tax-
33 payer did not hold a valid operator's
license issued by the state corporation
34 commission.
35 (d) On April 15,
1988, and on April 15 of each year thereafter, the
36 secretary of revenue shall determine from
statistics compiled and pro-
37 vided by the United States department of
energy, the average price per
38 barrel paid by the first purchaser of crude
oil in this state for the six-
39 month period ending on December 31 of the
preceding year. Such price
40 shall be used for the purpose of
determining exemptions allowed by sub-
41 section (b)(2)(B) or (E) for the
twelve-month period commencing on May
42 1 of such year and ending on April 30 of
the next succeeding year.
43 Sec. 2. K.S.A. 1999 Supp.
79-4217 is hereby repealed.
7
1 Sec. 3. This act
shall take effect and be in force from and after its
2 publication in the statute book.