44TH LEGISLATURE - STATE OF NEW MEXICO - FIRST SESSION, 1999

RELATING TO TAXATION; PROVIDING A REDUCED OIL AND GAS SEVERANCE TAX RATE OR AN EXEMPTION FROM THE TAX FOR THE FIRST TWO YEARS OF NATURAL GAS AND OIL PRODUCTION FROM CERTAIN NEW WELLS DRILLED DURING LOW PRICE PERIODS; AMENDING SECTIONS OF THE NMSA 1978.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. Section 7-29-2 NMSA 1978 (being Laws 1959, Chapter 52, Section 2, as amended) is amended to read:

"7-29-2. DEFINITIONS.--As used in the Oil and Gas Severance Tax Act:

A. "commission", "department", "division" or "oil and gas accounting division" means the taxation and revenue department, the secretary of taxation and revenue or any employee of the department exercising authority lawfully delegated to that employee by the secretary;

B. "production unit" means a unit of property designated by the department from which products of common ownership are severed;

C. "severance" means the taking from the soil of any product in any manner whatsoever;

D. "value" means the actual price received for products at the production unit, except as otherwise provided in the Oil and Gas Severance Tax Act;

E. "product" or "products" means oil, natural gas or liquid hydrocarbon, individually or any combination thereof, or carbon dioxide;

F. "operator" means any person:

(1) engaged in the severance of products from a production unit; or

(2) owning an interest in any product at the time of severance who receives a portion or all of such product for his interest;

G. "primary recovery" means the displacement of oil and of other liquid hydrocarbons removed from natural gas at or near the wellhead from an oil well or pool as classified by the oil conservation division of the energy, minerals and natural resources department pursuant to Paragraph (11) of Subsection B of Section 70-2-12 NMSA 1978 into the wellbore by means of the natural pressure of the oil well or pool, including but not limited to artificial lift;

H. "purchaser" means a person who is the first purchaser of a product after severance from a production unit, except as otherwise provided in the Oil and Gas Severance Tax Act;

I. "person" means any individual, estate, trust, receiver, business trust, corporation, firm, co-partnership, cooperative, joint venture, association or other group or combination acting as a unit, and the plural as well as the singular number;

J. "interest owner" means a person owning an entire or fractional interest of whatsoever kind or nature in the products at the time of severance from a production unit, or who has a right to a monetary payment that is determined by the value of such products;

K. "new production natural gas well" means a producing crude oil or natural gas well proration unit that begins its initial natural gas production on or after May 1, 1987 as determined by the oil conservation division of the energy, minerals and natural resources department;

L. "qualified enhanced recovery project", prior to January 1, 1994, means the use or the expanded use of carbon dioxide, when approved by the oil conservation division of the energy, minerals and natural resources department pursuant to the Enhanced Oil Recovery Act, for the displacement of oil and of other liquid hydrocarbons removed from natural gas at or near the wellhead from an oil well or pool classified by the oil conservation division pursuant to Paragraph (11) of Subsection B of Section 70-2-12 NMSA 1978;

M. "qualified enhanced recovery project", on and after January 1, 1994, means the use or the expanded use of any process approved by the oil conservation division of the energy, minerals and natural resources department pursuant to the Enhanced Oil Recovery Act for the displacement of oil and of other liquid hydrocarbons removed from natural gas at or near the wellhead from an oil well or pool classified by the oil conservation division pursuant to Paragraph (11) of Subsection B of Section 70-2-12 NMSA 1978, other than a primary recovery process; the term includes but is not limited to the use of a pressure maintenance process, a water flooding process and immiscible, miscible, chemical, thermal or biological process or any other related process;

N. "production restoration project" means the use of any process for returning to production a natural gas or oil well that had thirty days or less of production between January 1, 1993 and December 31, 1994, as approved and certified by the oil conservation division of the energy, minerals and natural resources department pursuant to the Natural Gas and Crude Oil Production Incentive Act;

O. "well workover project" means any procedure undertaken by the operator of a natural gas or crude oil well that is intended to increase the production from the well and that has been approved and certified by the oil conservation division of the energy, minerals and natural resources department pursuant to the Natural Gas and Crude Oil Production Incentive Act; [and]

P. "new well" means a crude oil or natural gas producing well for which drilling commenced on or after January 1, 1999 or a horizontal crude oil or natural gas well that was recompleted from a vertical well by drilling operations that commenced on or after January 1, 1999 and that has been approved and certified by the oil conservation division as qualified for either a new well incentive tax rate or a new well incentive tax exemption pursuant to the provisions of the Natural Gas and Crude Oil Production Incentive Act; and

[P.] Q. "tax" means the oil and gas severance tax."

Section 2. Section 7-29-4 NMSA 1978 (being Laws 1980, Chapter 62, Section 5, as amended) is amended to read:

"7-29-4. OIL AND GAS SEVERANCE TAX IMPOSED-- COLLECTION--INTEREST OWNER'S LIABILITY TO STATE--INDIAN LIABILITY.--

A. There is imposed and shall be collected by the department a tax on all products that are severed and sold, except as provided in Subsection B of this section. The measure of the tax and the rates are:

(1) on natural gas severed and sold, except as provided in [Paragraph (4)] Paragraphs (4) and (6) of this subsection, three and three-fourths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978;

(2) on oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead, except as provided in Paragraphs (3), [and] (5) and (7) of this subsection, three and three-fourths percent of taxable value determined under Section 7-29-4.1 NMSA 1978;

(3) on oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead produced from a qualified enhanced recovery project, one and seven-eighths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978, provided that the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to the fiscal year in which the tax rate is to be imposed, was less than twenty-eight dollars ($28.00) per barrel;

(4) on the natural gas from a well workover project that is in excess of the production projection certified by the oil conservation division of the energy, minerals and natural resources department in its approval of the well workover project, one and seven-eighths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978, provided that the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to the fiscal year in which the tax rate is to be imposed, was less than twenty-four dollars ($24.00) per barrel;

(5) on the oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead from a well workover project that is in excess of the production projection certified by the oil conservation division of the energy, minerals and natural resources department in its approval of the well workover project, one and seven-eighths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978, provided that the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to the fiscal year in which the tax rate is to be imposed, was less than twenty-four dollars ($24.00) per barrel; [and]

(6) on the natural gas produced during the first twenty-four months following the date of the initial production from a new well certified by the division as qualified for the new well incentive tax rate pursuant to provisions of the Natural Gas and Crude Oil Production Incentive Act, one and seven-eighths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978;

(7) on the oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead produced during the first twenty-four months following the date of the initial production from a new well certified by the division as qualified for a new well incentive tax rate pursuant to the Natural Gas and Crude Oil Production Incentive Act, one and seven-eighths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978; and

[(6)] (8) on carbon dioxide, three and three-fourths percent of the taxable value determined under Section 7-29-4.1 NMSA 1978.

B. The tax imposed in Subsection A of this section shall not be imposed on:

(1) natural gas severed and sold from a production restoration project during the first ten years of production following the restoration of production, provided that the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to each fiscal year in which the tax exemption is to be effective, was less than twenty-four dollars ($24.00) per barrel; [and]

(2) oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead from a production restoration project during the first ten years of production following the restoration of production, provided that the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to each fiscal year in which the tax exemption is to be effective, was less than twenty-four dollars ($24.00) per barrel;

(3) the natural gas produced during the first twenty-four months following the date of the initial production from a new well certified by the division as qualified for the new well incentive tax exemption pursuant to provisions of the Natural Gas and Crude Oil Production Incentive Act; and

(4) oil and on other liquid hydrocarbons removed from natural gas at or near the wellhead produced during the first twenty-four months following the date of the initial production from a new well certified by the division as qualified for a new well incentive tax exemption pursuant to the Natural Gas and Crude Oil Production Incentive Act.

C. Every interest owner shall be liable for the tax to the extent of his interest in such products. Any Indian tribe, Indian pueblo or Indian shall be liable for the tax to the extent authorized or permitted by law.

D. The tax imposed by this section may be referred to as the "oil and gas severance tax".

Section 3. Section 7-29B-2 NMSA 1978 (being Laws 1995, Chapter 15, Section 2) is amended to read:

"7-29B-2. DEFINITIONS.--As used in the Natural Gas and Crude Oil Production Incentive Act:

A. "department" means the taxation and revenue department;

B. "division" means the oil conservation division of the energy, minerals and natural resources department;

C. "natural gas" means any combustible vapor composed chiefly of hydrocarbons occurring naturally;

D. "new well" means:

(1) a crude oil or natural gas producing well for which drilling commenced on or after January 1, 1999 and that qualifies for a new well incentive tax rate or new well incentive tax exemption as determined by the division; or

(2) a horizontal crude oil or natural gas producing well that was recompleted from a vertical well by drilling operations that commenced on or after January 1, 1999 and that qualifies for a new well incentive tax rate or new well incentive tax exemption as determined by the division;

E. "new well incentive tax exemption" means the tax exemption set forth in Paragraphs (3) and (4) of Subsection B of Section 7-29-4 NMSA 1978 for natural gas or oil produced from a new well for which drilling commenced in a fiscal year that qualified the new well for the tax exemption;

F. "new well incentive tax rate" means the tax rate set forth in Paragraphs (6) and (7) of Subsection A of Section 7-29-4 NMSA 1978 on the natural gas or oil from a new well for which drilling commenced in a fiscal year that qualified the new well for the tax rate;

[D.] G. "operator" means the person responsible for the actual physical operation of a natural gas or oil well;

[E.] H. "person" means any individual or other legal entity, including any group or combination of individuals or other legal entities acting as a unit;

[F.] I. "production projection" means the estimate of the productive capacity of a natural gas or oil well that is certified by the division pursuant to the provisions of the Natural Gas and Crude Oil Production Incentive Act as the future rate of production from the well prior to the operator of the well performing a well workover project on the well;

[G.] J. "production restoration incentive tax exemption" means the tax exemption set forth in Paragraphs (1) and (2) of Subsection B of Section 7-29-4 NMSA 1978 for natural gas or oil produced from a production restoration project;

[H.] K. "production restoration project" means the use of any process for returning to production a natural gas or oil well that had thirty days or less of production between January 1, 1993 and December 31, 1994 as approved and certified by the division;

[I.] L. "severance" means the taking from the soil of any product in any manner whatsoever;

[J.] M. "well workover incentive tax rate" means the tax rate set forth in Paragraphs (4) and (5) of Subsection A of Section 7-29-4 NMSA 1978 on the natural gas or oil produced in excess of the production projection from a well workover project; and

[K.] N. "well workover project" means any procedure undertaken by the operator of a natural gas or oil well that is intended to increase the production from the well and that has been approved and certified by the division."

Section 4. Section 7-29B-3 NMSA 1978 (being Laws 1995, Chapter 15, Section 3) is amended to read:

"7-29B-3. APPROVAL OF PRODUCTION RESTORATION PROJECTS, [AND] WELL WORKOVER PROJECTS AND NEW WELLS.--

A. A natural gas or oil well shall be approved by the division as a production restoration project if:

(1) the operator of the well makes application to the division in accordance with the provisions of the Natural Gas and Crude Oil Production Incentive Act and rules and regulations adopted pursuant to that act for approval of a production restoration project; and

(2) the division records show that the well had thirty days or less of production between January l, 1993 and December 31, 1994.

B. A natural gas or oil well shall be approved by the division as a well workover project if:

(1) the operator of the well makes application to the division in accordance with the provisions of the Natural Gas and Crude Oil Production Incentive Act and rules and regulations adopted pursuant to that act for approval of a well workover project;

(2) the division determines that the procedure proposed to be undertaken by the operator of the well is a procedure intended to increase the production from the well, but is not routine maintenance that would be performed by a prudent operator to maintain the well in operation. Such procedures may include, but are not limited to:

(a) re-entry into the well to drill deeper, to sidetrack to a different location or to recomplete for production;

(b) recompletion by reperforation of a zone from which natural gas or oil has been produced or by perforation of a different zone;

(c) repair or replacement of faulty or damaged casing or related downhole equipment;

(d) fracturing, acidizing or installing compression equipment; or

(e) squeezing, cementing or installing equipment necessary for removal of excessive water, brine or condensate from the wellbore in order to establish, continue or increase production from the well; and

(3) the operator of the well submits to the division an estimate of the productive capacity of the well based on at least twelve months of established production, and the division, based on its verification of that estimate, determines the future rate of production from the well prior to the operator of the well performing the well workover project on the well and certifies that as the production projection for the project.

C. A natural gas or crude oil well shall be approved by the division as a new well if:

(1) the operator makes application to the division in accordance with the provisions of the Natural Gas and Crude Oil Production Incentive Act and the rules adopted pursuant to that act for approval of new wells;

(2) the division records show that it is either a crude oil or natural gas producing well for which drilling commenced on or after January 1, 1999 or a horizontal crude oil or natural gas well that was recompleted from a vertical well by drilling operations that commenced on or after January 1, 1999; and

(3) the annual average price of west Texas intermediate crude oil, determined by the department by averaging the posted prices in effect on the last day of each month of the twelve-month period ending on May 31 prior to the fiscal year in which the drilling of the well commenced, was less than twenty-four dollars ($24.00) per barrel. If the average annual price for that period was greater than eighteen dollars ($18.00) but less than twenty-four dollars ($24.00) per barrel, the division shall approve the new well as qualified for the new well incentive tax rate. If the average annual price for that period was equal to or less than eighteen dollars ($18.00) per barrel, the division shall approve the new well as qualified for the new well incentive tax exemption."

Section 5. Section 7-29B-4 NMSA 1978 (being Laws 1995, Chapter 15, Section 4) is amended to read:

"7-29B-4. APPLICATION PROCEDURES--CERTIFICATION OF APPROVAL--RULES AND REGULATIONS--ADMINISTRATION.--

A. The operator of a proposed production restoration project, [or] well workover project or new well shall apply to the division for approval of a production restoration project, [or a] well workover project or new well in the form and manner prescribed by the division and shall provide any relevant material and information the division requires for that approval.

B. Upon a determination that the project complies with the provisions of the Natural Gas and Crude Oil Production Incentive Act and rules and regulations adopted pursuant to that act, the division shall approve the application and shall issue a certification of approval to the operator and designate the natural gas or oil well as a production restoration project, [or] well workover project or new well as applicable.

C. At the time of issuing a certification of approval to an operator of a natural gas or oil well for a well workover project, the division shall also certify the production projection for that project.

D. In addition to the powers enumerated in Section 70-2-12 NMSA 1978, the division shall adopt, promulgate and enforce rules and regulations to carry out the provisions of [Sections 1 through 5 of] the Natural Gas and Crude Oil Production Incentive Act.

E. The division shall consider and approve applications for approval of a production restoration project, [or] well workover project or new well without holding hearings on the applications. If the division denies approval of an application pursuant to such a process, the division, upon the request of the applicant, shall set a hearing of the application before an examiner appointed by the division to conduct the hearing. The hearing shall be conducted in accordance with the provisions of the Oil and Gas Act for such hearings."

Section 6. Section 7-29B-5 NMSA 1978 (being Laws 1995, Chapter 15, Section 5) is amended to read:

"7-29B-5. NOTICE TO SECRETARY OF TAXATION AND REVENUE.--The division shall notify immediately the secretary of taxation and revenue upon:

A. adoption of rules and regulations pursuant to the provisions of the Natural Gas and Crude Oil Production Incentive Act;

B. certification of the date that production has been restored on a production restoration project; [and]

C. certification of the date that a well workover project has been completed; and

D. certification for each new well and shall provide the following:

(1) the date that a new well has been certified by the division;

(2) certification of the date that drilling of the new well commenced; and

(3) certification that the new well qualifies for either the new well incentive tax rate or the new well incentive tax exemption."

Section 7. Section 7-29B-6 NMSA 1978 (being Laws 1995, Chapter 15, Section 6) is amended to read:

"7-29B-6. QUALIFICATION FOR PRODUCTION RESTORATION INCENTIVE TAX EXEMPTION AND WELL WORKOVER AND NEW WELL INCENTIVE TAX RATE--SECRETARY OF TAXATION AND REVENUE APPROVAL--REFUND.--

A. The person responsible for paying the oil and gas severance tax on natural gas or oil produced from a production restoration project shall qualify to receive a ten-year production restoration incentive tax exemption upon:

(1) application to the department in the form and manner prescribed by the department for approval for the ten-year production restoration incentive tax exemption;

(2) submission of the certification of approval from the division and designation of the natural gas or oil well as a production restoration project; and

(3) submission of any other relevant material that the secretary of taxation and revenue deems necessary to administer the applicable provisions of the Natural Gas and Crude Oil Production Incentive Act.

B. The person responsible for payment of the oil and gas severance tax on natural gas or oil produced from a well workover project shall qualify for the well workover incentive tax rate on the natural gas or oil produced in excess of the production projection for that project upon:

(1) application to the department in the form and manner prescribed by the department for approval to apply the well workover incentive tax rate to the natural gas or oil produced in excess of the production projection from a well workover project;

(2) submission of the certification from the division of approval and designation of the natural gas or oil well as a well workover project and of the production projection for the well workover project; and

(3) any other relevant material that the department considers necessary to administer the applicable provisions of the Natural Gas and Crude Oil Production Incentive Act.

C. The person responsible for paying the oil and gas severance tax on natural gas or oil produced from a new well shall qualify for the new well incentive tax rate or the new well incentive tax exemption, as applicable, on the natural gas or oil produced from the new well upon submission of:

(1) the certification from the division of approval and designation of the natural gas or oil well as a new well;

(2) the certification from the division that the new well qualifies for the new well incentive tax rate or the new well incentive tax exemption, as applicable; and

(3) any other relevant material that the department considers necessary to administer the applicable provisions of the Natural Gas and Crude Oil Production Incentive Act.

[C.] D. The production restoration incentive tax exemption shall apply to natural gas or oil produced from a production restoration project beginning the first day of the month following the date the division certifies that production has been restored and ending the last day of the tenth year of production following that date. The well workover incentive tax rate applies to the natural gas or oil produced in excess of the production projection from a well workover project beginning the first day of the month following the date the division certifies that the well workover project has been completed. The new well incentive tax rate or the new well incentive tax exemption, as applicable, applies to the natural gas or oil produced from a new well beginning the first day of the month following the date of first production of the new well, as certified by the division, and ending the last day of the month twenty-four months later.

[D.] E. The person responsible for payment of the oil and gas severance tax on natural gas or oil production from an approved well workover project may file a claim for refund in accordance with Section 7-1-26 NMSA 1978 for taxes paid in excess of the amount due using the well workover incentive tax rate. Notwithstanding the provisions of Subsection E of Section 7-1-26 NMSA 1978, any such refund granted shall be made in the form of a credit against any future oil and gas severance tax liabilities incurred by the taxpayer.

[E.] F. The secretary of taxation and revenue may adopt and promulgate rules and regulations to enforce the provisions of this section."

Section 8. EFFECTIVE DATE.--The effective date of the provisions of this act is July 1, 1999.