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A major slowdown in oil drilling may not be the only phenomenon cutting into state revenue in coming years. Efforts by producers to have some of their oil wells reclassified as natural gas wells may cost the state hundreds of millions of dollars in tax collections and refunds — and renew scrutiny of Texas’ largest tax incentive for natural gas drilling.
The Texas Railroad Commission, the state’s drilling regulator, reclassified nearly 850 oil wells as natural gas wells during the 2015 budget year. That’s more than triple the number from the previous year and nearly six times the reclassifications in 2013.
The trend means more operators can claim a generous tax credit for natural gas wells, and the growth in reclassifications is drawing the interest of state Comptroller Glenn Hegar and other budget watchers.
“If such reclassifications were expanded, it could adversely affect revenues as a result of refunds and reduced natural gas tax collections,” Hegar wrote this month in his certified revenue estimate.
Operators commonly free up oil and gas from the same well. But Texas law defines wells as either oil or gas — not both. It’s up to the Railroad Commission to sort out where each one falls. The commission’s initial decision, however, isn’t etched in stone. Operators can fill out a one-page request that a well be reclassified, based on how much gas is coming out of the ground.
In 2013, the commission reclassified 145 wells from oil to gas. The number ballooned to 844 in the 2015 fiscal year, according to Railroad Commission data.
Gas-to-oil switches also surged during that period, but on a much smaller scale —from 68 to 239.
The bureaucratic reshuffling might sound unimportant, but it matters plenty for state coffers and helps determine who qualifies for a tax credit covering “high-cost natural gas drilling” that has drawn scrutiny in recent years.
