Royalty owners should be aware that they are entitled to severance tax refunds on gas wells drilled in certain “tight sand” formations, including the Barnett Shale. If a field is designated as a “tight sand,” Texas law provides for a reduction in severance tax from 7.5% to 2% for a period of ten years, or until the operator has recovered one-half of the well’s drilling and completion costs, whichever comes first. But the operator must apply for this exemption to the Texas State Comptroller’s office after the well has been completed. Until the exemption is granted for the well, the operator pays severance tax at the 7.5% rate, and once the exemption is granted the Comptroller refunds the excess tax paid to the operator. The operator should then pass on to the royalty owners their share of the refund, since the royalty owner bears his/her share of the severance tax. This refund could occur several months after production first commences.
According to Gene Powell’s Barnett Shale Newsletter, there are 1,452 Barnett Shale wells in the “pending file” at the Texas Railroad Commission. Wells in the pending file have not yet been assigned a lease code number. Until a lease number has been assignd by the Railroad Commission, the operator cannot file for a tight sand exemption to the Comptroller. Powell says that the 1,452 pending wells have been producing for an average of eight months, so the operators of those wells are entitled to severance tax refunds of millions of dollars, once the paperwork is done.
Royalty owners should inquire with their lessees as to the status of the lessee’s severance tax exemption. The additional royalty resulting from the exemption should be 5% of the gas royalties previously paid, from date of first production.
