As Amended by Senate Committee
Session of 1998
SENATE BILL No. 603
By Committee on Assessment and Taxation
2-5
10
AN ACT relating to severance taxation; providing for
exemptions there-
11 from; amending K.S.A.
79-4217 and repealing the existing section.
12
13 Be it enacted by the Legislature of the
State of Kansas:
14 Section 1. K.S.A.
79-4217 is hereby amended to read as follows:
15 79-4217. (a) There is hereby imposed an
excise tax upon the severance
16 and production of coal, oil or gas from the
earth or water in this state for
17 sale, transport, storage, profit or
commercial use, subject to the following
18 provisions of this section. Such tax shall
be borne ratably by all persons
19 within the term ``producer'' as such term
is defined in K.S.A. 79-4216,
20 and amendments thereto, in proportion to
their respective beneficial in-
21 terest in the coal, oil or gas severed.
Such tax shall be applied equally to
22 all portions of the gross value of each
barrel of oil severed and subject to
23 such tax and to the gross value of the gas
severed and subject to such tax.
24 The rate of such tax shall be 8% of the
gross value of all oil or gas severed
25 from the earth or water in this state and
subject to the tax imposed under
26 this act. The rate of such tax with respect
to coal shall be $1 per ton. For
27 the purposes of the tax imposed hereunder
the amount of oil or gas pro-
28 duced shall be measured or determined: (1)
In the case of oil, by tank
29 tables compiled to show 100% of the full
capacity of tanks without de-
30 duction for overage or losses in handling;
allowance for any reasonable
31 and bona fide deduction for basic sediment
and water, and for correction
32 of temperature to 60 degrees Fahrenheit
will be allowed; and if the
33 amount of oil severed has been measured or
determined by tank tables
34 compiled to show less than 100% of the full
capacity of tanks, such amount
35 shall be raised to a basis of 100% for the
purpose of the tax imposed by
36 this act; and (2) in the case of gas, by
meter readings showing 100% of
37 the full volume expressed in cubic feet at
a standard base and flowing
38 temperature of 60 degrees Fahrenheit, and
at the absolute pressure at
39 which the gas is sold and purchased;
correction to be made for pressure
40 according to Boyle's law, and used for
specific gravity according to the
41 gravity at which the gas is sold and
purchased, or if not so specified,
42 according to the test made by the balance
method.
43 (b) The following shall
be exempt from the tax imposed under this
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1 section:
2 (1) The severance
and production of gas which is: (A) Injected into
3 the earth for the purpose of lifting
oil, recycling or repressuring; (B) used
4 for fuel in connection with the
operation and development for, or pro-
5 duction of, oil or gas in the lease
or production unit where severed; (C)
6 lawfully vented or flared; (D)
severed from a well having an average daily
7 production during a calendar month
having a gross value of not more
8 than $81 per day, which well has not
been significantly curtailed by reason
9 of mechanical failure or other
disruption of production; in the event that
10 the production of gas from more than one
well is gauged by a common
11 meter, eligibility for exemption hereunder
shall be determined by com-
12 puting the gross value of the average daily
combined production from all
13 such wells and dividing the same by the
number of wells gauged by such
14 meter; (E) inadvertently lost on the lease
or production unit by reason of
15 leaks, blowouts or other accidental losses;
(F) used or consumed for do-
16 mestic or agricultural purposes on the
lease or production unit from which
17 it is severed; or
or (G) placed in underground storage for recovery at
a
18 later date and which was either originally
severed outside of the state of
19 Kansas, or as to which the tax levied
pursuant to this act has been paid;
20 or (H) used or consumed in this
state as fuel for the purpose of irrigating
21 land devoted to agricultural
use;
22 (2) the severance and
production of oil which is: (A) From a lease or
23 production unit whose average daily
production is two barrels or less per
24 producing well, which well or wells have
not been significantly curtailed
25 by reason of mechanical failure or other
disruption of production; (B)
26 from a lease or production unit, the
producing well or wells upon which
27 have a completion depth of 2,000 feet or
more, and whose average daily
28 production is three barrels or less per
producing well or, if the price of
29 oil as determined pursuant to subsection
(d) is $30 or less, whose average
30 daily production is four barrels or less
per producing well, or, if the price
31 of oil as determined pursuant to subsection
(d) is $24 or less, whose
32 average daily production is five barrels or
less per producing well, or, if
33 the price of oil as determined pursuant to
subsection (d) is $16 or less,
34 whose average daily production is six
barrels or less per producing well,
35 or, if the price of oil as determined
pursuant to subsection (d) is $10 or
36 less, whose average daily production is
seven barrels or less per producing
37 well, which well or wells have not been
significantly curtailed by reason
38 of mechanical failure or other disruption
of production; (C) from a lease
39 or production unit, whose production
results from a tertiary recovery
40 process. ``Tertiary recovery process''
means the process or processes de-
41 scribed in subparagraphs (1) through (9) of
10 C.F.R. 212.78(c) as in
42 effect on June 1, 1979; (D) from a lease or
production unit, the producing
43 well or wells upon which have a completion
depth of less than 2,000 feet
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1 and whose average daily production
resulting from a water flood process,
2 is three barrels or less per
producing well, which well or wells have not
3 been significantly curtailed by
reason of mechanical failure or other dis-
4 ruption of production; (E) from a
lease or production unit, the producing
5 well or wells upon which have a
completion depth of 2,000 feet or more,
6 and whose average daily production
resulting from a water flood process,
7 is four barrels or less per producing
well or, if the price of oil as deter-
8 mined pursuant to subsection (d) is
$30 or less, whose average daily pro-
9 duction is five barrels or less per
producing well, or, if the price of oil as
10 determined pursuant to subsection (d) is
$24 or less, whose average daily
11 production is six barrels or less per
producing well, or, if the price of oil
12 as determined pursuant to subsection (d) is
$16 or less, whose average
13 daily production is seven barrels or less
per producing well, or, if the price
14 of oil as determined pursuant to subsection
(d) is $10 or less, whose
15 average daily production is eight barrels
or less per producing well, which
16 well or wells have not been significantly
curtailed by reason of mechanical
17 failure or other disruption of production;
(F) test, frac or swab oil which
18 is sold or exchanged for value; or (G)
inadvertently lost on the lease or
19 production unit by reason of leaks or other
accidental means;
20 (3) (A) any
taxpayer applying for an exemption pursuant to subsec-
21 tion (b)(2)(A) and (B) shall make
application annually to the director of
22 taxation therefor. Exemptions granted
pursuant to subsection (b)(2)(A)
23 and (B) shall be valid for a period of one
year following the date of cer-
24 tification thereof by the director of
taxation; (B) any taxpayer applying for
25 an exemption pursuant to subsection
(b)(2)(D) or (E) shall make appli-
26 cation annually to the director of taxation
therefor. Such application shall
27 be accompanied by proof of the approval of
an application for the utili-
28 zation of a water flood process therefor by
the corporation commission
29 pursuant to rules and regulations adopted
under the authority of K.S.A.
30 55-152 and amendments thereto and proof
that the oil produced there-
31 from is kept in a separate tank battery and
that separate books and records
32 are maintained therefor. Such exemption
shall be valid for a period of
33 one year following the date of
certification thereof by the director of
34 taxation;
35 (4) the severance and
production of gas or oil from any pool from
36 which oil or gas was first produced on or
after April 1, 1983, as determined
37 by the state corporation commission and
certified to the director of tax-
38 ation, and continuing for a period of 24
months from the month in which
39 oil or gas was first produced from such
pool as evidenced by an affidavit
40 of completion of a well, filed with the
state corporation commission and
41 certified to the director of taxation.
Exemptions granted for production
42 from any well pursuant to this paragraph
shall be valid for a period of 24
43 months following the month in which oil or
gas was first produced from
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1 such pool. The term ``pool'' means an
underground accumulation of oil
2 or gas in a single and separate
natural reservoir characterized by a single
3 pressure system so that production
from one part of the pool affects the
4 reservoir pressure throughout its
extent;
5 (5) the severance
and production of oil or gas from a three-year in-
6 active well, as determined by the
state corporation commission and cer-
7 tified to the director of taxation,
for a period of 10 years after the date of
8 receipt of such certification. As
used in this paragraph, ``three-year in-
9 active well'' means any well that has
not produced oil or gas in more than
10 one month in the three years prior to the
date of application to the state
11 corporation commission for certification as
a three-year inactive well. An
12 application for certification as a
three-year inactive well shall be in such
13 form and contain such information as
required by the state corporation
14 commission, and shall be made prior to July
1, 1996. The commission
15 may revoke a certification if information
indicates that a certified well was
16 not a three-year inactive well or if other
lease production is credited to
17 the certified well. Upon notice to the
operator that the certification for a
18 well has been revoked, the exemption shall
not be applied to the pro-
19 duction from that well from the date of
revocation; and
20 (6) (A) The
incremental severance and production of oil or gas which
21 results from a production enhancement
project begun on or after July 1,
22 1998, shall be exempt for a period
of 10 years from the date of
completion
23 of such project, or until
project payback, whichever comes first, or for the
24 time period otherwise specified
in this subsection seven years from
the
25 startup date of such
project. As used in this
section paragraph
(6):
26 (1) ``Incremental
severance and production'' means the amount of oil
27 or natural gas which is produced as the
result of a production enhance-
28 ment project which is in excess of the
base production of oil or natural
29 gas, and is determined by subtracting
the base production from the total
30 monthly production after the production
enhancement projects is com-
31 pleted.
32
(2) ``Base production'' means the average
monthly amount of pro-
33 duction for the twelve-month
period immediately prior to the production
34 enhancement project beginning
date, minus the monthly rate of produc-
35 tion decline for the well or
project for each month beginning 180 days
36 prior to the project beginning
date. The monthly rate of production de-
37 cline shall be equal to the
average extrapolated monthly decline rate for
38 the well or project for the
twelve-month period immediately prior to the
39 production enhancement project
beginning state, as determined by the
40 state corporation commission
based on the production history of the well,
41 field or project, its current
status, and sound reservoir engineering prin-
42 ciples.
``Base production'' means the average monthly amount of
pro-
43 duction for the twelve-month period
immediately prior to the pro-
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5
1 duction enhancement project
beginning date, minus the monthly
2 rate of production decline for
the well or project for each month
3 beginning 180 days prior to the
project beginning date. The
4 monthly rate of production
decline shall be equal to the average
5 extrapolated monthly decline
rate for the well or project for the
6 twelve-month period immediately
prior to the production enhance-
7 ment project beginning date.
Such monthly rate of production de-
8 cline shall be continued as the
decline that would have occurred
9 except for the enhancement
project. The calculation of the base pro-
10 duction amount shall be evidenced by
an affidavit and supporting
11 documentation filed by the applying
taxpayer with the state cor-
12 poration commission.
13 (3) ``Workover''
means any downhole operation in an existing
14 oil or gas well that is designed to
sustain, restore or increase the
15 production rate or ultimate recovery
of oil or gas, including but not
16 limited to acidizing, reperforation,
fracture treatment, sand/paraf-
17 fin/scale removal or other wellbore
cleanouts, casing repair,
18 squeeze cementing, initial
installation, or enhancement of artificial
19 lifts including plunger lifts, rods,
pumps, submersible pumps and
20 coiled tubing velocity strings,
downsizing existing tubing to reduce
21 well loading, downhole commingling,
bacteria treatments, polymer
22 treatments, upgrading the size of
pumping unit equipment, setting
23 bridge plugs to isolate water
production zones, or any combination
24 of the aforementioned operations;
``workover'' shall not mean the
25 routine maintenance, routine repair,
or like for-like replacement of
26 downhole equipment such as rods,
pumps, tubing packers or other
27 mechanical device.
28
(3) (4) ``Production
enhancement project'' means performing or
29 causing to be performed
the following:
30
(i) ``Workover'' means any downhole operation
in an existing oil or
31 gas well that is designed to
sustain, restore or increase the production
32 rate or ultimate recovery of oil
or gas, including, but not limited to aci-
33 dizing, reperforation, fracture
treatment, sand/paraffin/scale removal or
34 other wellbore cleanouts, casing
repair, squeeze cementing, initial instal-
35 lation, replacement or
enhancement of artificial lifts on gas wells
including
36 plunger lifts, rods, pumps,
submersible pumps and coiled tubing velocity
37 strings, downsizing existing
tubing to reduce well loading, downhole com-
38 mingling, bacteria treatments,
upgrading the size of pumping unit equip-
39 ment, setting bridge plugs to
isolate water production zones, or any com-
40 bination of the aforementioned
operations; ``workover'' shall not mean the
41 routine maintenance, routine
repair, or like-for-like replacement of down-
42 hole equipment such as rods,
pumps, tubing, packers or other mechanical
43 device.
workover;
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6
1
(ii) Recompletion to a different producing zone in the same
well bore,
2 except recompletions in
formations and zones subject to a state cor-
3 poration commission proration
order;
4 (iii) secondary
recovery projects;
5 (iv) addition
of mechanical devices to dewater a gas or oil well;
6
(v) initial installation,
replacement or enhancement of surface equip-
7 ment;
8
(vi) installation or enhancement of compression equipment,
line loop-
9 ing or other techniques or
equipment which increases production from a
10 well or a group of wells in a
project. The severance tax exemption
on
11 incremental production achieved
by this activity shall be for a period of
12 seven years from the date of
completion of the project, and shall not be
13 limited or extended based on
project payback;
14 (vii) new discoveries
of oil or gas which are discovered as a result of
15 the use of new technology, including,
but not limited to, three dimensional
16 seismic studies.
17 (B) The
secretary of revenue in conjunction with
the state corporation
18 commission shall adopt rules and
regulations necessary to efficiently and
19 properly administer the provisions of
this paragraph (6) including rules
20 and regulations for the qualification of
production enhancement projects,
21 the procedures for determining the
monthly rate of production decline,
22 the establishment of appropriate
payback indicators for the determination
23 of project payback for each of
the exemptions authorized by this para-
24 graph (6),
criteria for determining the share of incremental
produc-
25 tion attributable to each well when a
production enhancement pro-
26 ject includes a group of
wells, criteria for determining the start up
date
27 for any project for which an exemption
is claimed, and determining new
28 qualifying technologies for the purposes
of paragraph (6)(A)(4)(vii).
29 (C) Any
taxpayer applying for an exemption pursuant to this
30 paragraph (6) shall make application
to the director of taxation.
31 Such application shall be accompanied
by a state corporation com-
32 mission certification that the
production for which an exemption is
33 sought results from a qualified
production enhancement project and
34 certification of the base production
for the enhanced wells or group
35 of wells, and the rate of decline to
be applied to that base produc-
36 tion. The secretary of revenue shall
provide credit for any taxes paid
37 between the project startup date and
the certification of qualifica-
38 tions by the commission.
39 (D) The exemptions
provided for in this paragraph (6) shall not
40 apply for 12 months beginning July 1
of the year subsequent to any
41 calendar year during which: (1) In
the case of oil, the secretary of
42 revenue determines that the weighted
average price of Kansas oil
43 at the wellhead has exceeded $20.00
per barrel; or (2) in the case
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7
1 of natural gas the secretary of
revenue determines that the weighted
2 average price of Kansas gas at
the wellhead has exceeded $2.50 per
3 Mcf.
4
(C) (E) The
provisions of this paragraph (6) shall not affect any other
5 exemption allowable pursuant to
this section.
6 (6)
(7) for the calendar year 1988, and any year
thereafter, the sev-
7 erance or production of the first
350,000 tons of coal from any mine as
8 certified by the state geological
survey.
9 (c) No exemption
shall be granted pursuant to subsection (b)(3) or
10 (4) to any person who does not have a valid
operator's license issued by
11 the state corporation commission, and no
refund of tax shall be made to
12 any taxpayer attributable to any production
in a period when such tax-
13 payer did not hold a valid operator's
license issued by the state corporation
14 commission.
15 (d) On April 15, 1988,
and on April 15 of each year thereafter, the
16 secretary of revenue shall determine from
statistics compiled and pro-
17 vided by the United States department of
energy, the average price per
18 barrel paid by the first purchaser of crude
oil in this state for the six-
19 month period ending on December 31 of the
preceding year. Such price
20 shall be used for the purpose of
determining exemptions allowed by sub-
21 section (b)(2)(B) or (E) for the
twelve-month period commencing on May
22 1 of such year and ending on April 30 of
the next succeeding year.
23 Sec. 2. K.S.A.
79-4217 is hereby repealed.
24 Sec. 3. This act
shall take effect and be in force from and after its
25 publication in the statute book.
26