Session of 1999
         
HOUSE BILL No. 2038
         
By Representatives McKinney, Minor, Alldritt, Edmonds, Feuerborn,
          
Grant, Johnson, Larkin, Phelps, Reinhardt, Showalter and Shriver
          
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10             AN  ACT relating to severance taxation; exempting the production and
11             severance of oil therefrom; amending K.S.A. 1998 Supp. 79-4217 and
12             repealing the existing section.
13      
14       Be it enacted by the Legislature of the State of Kansas:
15             Section  1. K.S.A. 1998 Supp. 79-4217 is hereby amended to read as
16       follows: 79-4217. (a) There is hereby imposed an excise tax upon the
17       severance and production of coal, oil or gas from the earth or water in
18       this state for sale, transport, storage, profit or commercial use, subject to
19       the following provisions of this section. Such tax shall be borne ratably by
20       all persons within the term "producer" as such term is defined in K.S.A.
21       79-4216, and amendments thereto, in proportion to their respective ben-
22       eficial interest in the coal, oil or gas severed. Such tax shall be applied
23       equally to all portions of the gross value of each barrel of oil severed and
24       subject to such tax and to the gross value of the gas severed and subject
25       to such tax. The rate of such tax shall be 8% of the gross value of all oil
26       or gas severed from the earth or water in this state and subject to the tax
27       imposed under this act. The rate of such tax with respect to coal shall be
28       $1 per ton. For the purposes of the tax imposed hereunder the amount
29       of oil or gas produced shall be measured or determined: (1) In the case
30       of oil, by tank tables compiled to show 100% of the full capacity of tanks
31       without deduction for overage or losses in handling; allowance for any
32       reasonable and bona fide deduction for basic sediment and water, and
33       for correction of temperature to 60 degrees Fahrenheit will be allowed;
34       and if the amount of oil severed has been measured or determined by
35       tank tables compiled to show less than 100% of the full capacity of tanks,
36       such amount shall be raised to a basis of 100% for the purpose of the tax
37       imposed by this act; and (2) in the case of gas, by meter readings showing
38       100% of the full volume expressed in cubic feet at a standard base and
39       flowing temperature of 60 degrees Fahrenheit, and at the absolute pres-
40       sure at which the gas is sold and purchased; correction to be made for
41       pressure according to Boyle's law, and used for specific gravity according
42       to the gravity at which the gas is sold and purchased, or if not so specified,
43       according to the test made by the balance method.

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  1             (b) The following shall be exempt from the tax imposed under this
  2       section:
  3             (1) The severance and production of gas which is: (A) Injected into
  4       the earth for the purpose of lifting oil, recycling or repressuring; (B) used
  5       for fuel in connection with the operation and development for, or pro-
  6       duction of, oil or gas in the lease or production unit where severed; (C)
  7       lawfully vented or flared; (D) severed from a well having an average daily
  8       production during a calendar month having a gross value of not more
  9       than $87 per day, which well has not been significantly curtailed by reason
10       of mechanical failure or other disruption of production; in the event that
11       the production of gas from more than one well is gauged by a common
12       meter, eligibility for exemption hereunder shall be determined by com-
13       puting the gross value of the average daily combined production from all
14       such wells and dividing the same by the number of wells gauged by such
15       meter; (E) inadvertently lost on the lease or production unit by reason of
16       leaks, blowouts or other accidental losses; (F) used or consumed for do-
17       mestic or agricultural purposes on the lease or production unit from which
18       it is severed; or (G) placed in underground storage for recovery at a later
19       date and which was either originally severed outside of the state of Kansas,
20       or as to which the tax levied pursuant to this act has been paid;
21             (2) the severance and production of oil which is: (A) From a lease
22       or production unit whose average daily production is five barrels or less
23       per producing well, which well or wells have not been significantly cur-
24       tailed by reason of mechanical failure or other disruption of production;
25       (B) from a lease or production unit, the producing well or wells upon
26       which have a completion depth of 2,000 feet or more, and whose average
27       daily production is six barrels or less per producing well or, if the price
28       of oil as determined pursuant to subsection (d) is $16 or less, whose
29       average daily production is seven barrels or less per producing well, or,
30       if the price of oil as determined pursuant to subsection (d) is $15 or less,
31       whose average daily production is eight barrels or less per producing well,
32       or, if the price of oil as determined pursuant to subsection (d) is $14 or
33       less, whose average daily production is nine barrels or less per producing
34       well, or, if the price of oil as determined pursuant to subsection (d) is $13
35       or less, whose average daily production is 10 barrels or less per producing
36       well, which well or wells have not been significantly curtailed by reason
37       of mechanical failure or other disruption of production; (C) from a lease
38       or production unit, whose production results from a tertiary recovery
39       process. "Tertiary recovery process" means the process or processes de-
40       scribed in subparagraphs (1) through (9) of 10 C.F.R. 212.78(c) as in
41       effect on June 1, 1979; (D) from a lease or production unit, the producing
42       well or wells upon which have a completion depth of less than 2,000 feet
43       and whose average daily production resulting from a water flood process,

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  1       is six barrels or less per producing well, which well or wells have not been
  2       significantly curtailed by reason of mechanical failure or other disruption
  3       of production; (E) from a lease or production unit, the producing well or
  4       wells upon which have a completion depth of 2,000 feet or more, and
  5       whose average daily production resulting from a water flood process, is
  6       seven barrels or less per producing well or, if the price of oil as deter-
  7       mined pursuant to subsection (d) is $16 or less, whose average daily pro-
  8       duction is eight barrels or less per producing well, or, if the price of oil
  9       as determined pursuant to subsection (d) is $15 or less, whose average
10       daily production is nine barrels or less per producing well, or, if the price
11       of oil as determined pursuant to subsection (d) is $14 or less, whose
12       average daily production is 10 barrels or less per producing well, which
13       well or wells have not been significantly curtailed by reason of mechanical
14       failure or other disruption of production; (F) test, frac or swab oil which
15       is sold or exchanged for value; or (G) inadvertently lost on the lease or
16       production unit by reason of leaks or other accidental means;
17             (3)  (A) any taxpayer applying for an exemption pursuant to subsec-
18       tion (b)(2)(A) and (B) shall make application annually to the director of
19       taxation therefor. Exemptions granted pursuant to subsection (b)(2)(A)
20       and (B) shall be valid for a period of one year following the date of cer-
21       tification thereof by the director of taxation; (B) any taxpayer applying for
22       an exemption pursuant to subsection (b)(2)(D) or (E) shall make appli-
23       cation annually to the director of taxation therefor. Such application shall
24       be accompanied by proof of the approval of an application for the utili-
25       zation of a water flood process therefor by the corporation commission
26       pursuant to rules and regulations adopted under the authority of K.S.A.
27       55-152 and amendments thereto and proof that the oil produced there-
28       from is kept in a separate tank battery and that separate books and records
29       are maintained therefor. Such exemption shall be valid for a period of
30       one year following the date of certification thereof by the director of
31       taxation; and (C) notwithstanding the provisions of paragraph (A) or (B),
32       any exemption in effect on the effective date of this act affected by the
33       amendments to subsection (b)(2) by this act shall be redetermined in
34       accordance with such amendments. Any such exemption, and any new
35       exemption established by such amendments and applied for after the
36       effective date of this shall be valid for a period commencing with May 1,
37       1998, and ending on April 30, 1999.
38             (4) the severance and production of gas or oil from any pool from
39       which oil or gas was first produced on or after April 1, 1983, as determined
40       by the state corporation commission and certified to the director of tax-
41       ation, and continuing for a period of 24 months from the month in which
42       oil or gas was first produced from such pool as evidenced by an affidavit
43       of completion of a well, filed with the state corporation commission and

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  1       certified to the director of taxation. Exemptions granted for production
  2       from any well pursuant to this paragraph shall be valid for a period of 24
  3       months following the month in which oil or gas was first produced from
  4       such pool. The term "pool" means an underground accumulation of oil
  5       or gas in a single and separate natural reservoir characterized by a single
  6       pressure system so that production from one part of the pool affects the
  7       reservoir pressure throughout its extent;
  8             (5) the severance and production of oil or gas from a three-year
  9       inactive well, as determined by the state corporation commission and
10       certified to the director of taxation, for a period of 10 years after the date
11       of receipt of such certification. As used in this paragraph, "three-year
12       inactive well" means any well that has not produced oil or gas in more
13       than one month in the three years prior to the date of application to the
14       state corporation commission for certification as a three-year inactive
15       well. An application for certification as a three-year inactive well shall be
16       in such form and contain such information as required by the state cor-
17       poration commission, and shall be made prior to July 1, 1996. The com-
18       mission may revoke a certification if information indicates that a certified
19       well was not a three-year inactive well or if other lease production is
20       credited to the certified well. Upon notice to the operator that the cer-
21       tification for a well has been revoked, the exemption shall not be applied
22       to the production from that well from the date of revocation;
23             (6)  (A) The incremental severance and production of oil or gas
24       which results from a production enhancement project begun on or after
25       July 1, 1998, shall be exempt for a period of seven years from the startup
26       date of such project. As used in this paragraph (6):
27             (1) "Incremental severance and production" means the amount of
28       oil or natural gas which is produced as the result of a production en-
29       hancement project which is in excess of the base production of oil or
30       natural gas, and is determined by subtracting the base production from
31       the total monthly production after the production enhancement projects
32       is completed.
33             (2) "Base production" means the average monthly amount of pro-
34       duction for the twelve-month period immediately prior to the production
35       enhancement project beginning date, minus the monthly rate of produc-
36       tion decline for the well or project for each month beginning 180 days
37       prior to the project beginning date. The monthly rate of production de-
38       cline shall be equal to the average extrapolated monthly decline rate for
39       the well or project for the twelve-month period immediately prior to the
40       production enhancement project beginning date. Such monthly rate of
41       production decline shall be continued as the decline that would have
42       occurred except for the enhancement project. The calculation of the base
43       production amount shall be evidenced by an affidavit and supporting doc-

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  1       umentation filed by the applying taxpayer with the state corporation
  2       commission.
  3             (3) "Workover" means any downhole operation in an existing oil or
  4       gas well that is designed to sustain, restore or increase the production
  5       rate or ultimate recovery of oil or gas, including but not limited to aci-
  6       dizing, reperforation, fracture treatment, sand/paraffin/scale removal or
  7       other wellbore cleanouts, casing repair, squeeze cementing, initial instal-
  8       lation, or enhancement of artificial lifts including plunger lifts, rods,
  9       pumps, submersible pumps and coiled tubing velocity strings, downsizing
10       existing tubing to reduce well loading, downhole commingling, bacteria
11       treatments, polymer treatments, upgrading the size of pumping unit
12       equipment, setting bridge plugs to isolate water production zones, or any
13       combination of the aforementioned operations; "workover" shall not
14       mean the routine maintenance, routine repair, or like for-like replace-
15       ment of downhole equipment such as rods, pumps, tubing packers or
16       other mechanical device.
17             (4) "Production enhancement project" means performing or causing
18       to be performed the following:
19             (i) Workover;
20             (ii) recompletion to a different producing zone in the same well bore,
21       except recompletions in formations and zones subject to a state corpo-
22       ration commission proration order;
23             (iii) secondary recovery projects;
24             (iv) addition of mechanical devices to dewater a gas or oil well;
25             (v) replacement or enhancement of surface equipment;
26             (vi) installation or enhancement of compression equipment, line
27       looping or other techniques or equipment which increases production
28       from a well or a group of wells in a project;
29             (vii) new discoveries of oil or gas which are discovered as a result of
30       the use of new technology, including, but not limited to, three dimen-
31       sional seismic studies.
32             (B) The state corporation commission shall adopt rules and regula-
33       tions necessary to efficiently and properly administer the provisions of
34       this paragraph (6) including rules and regulations for the qualification of
35       production enhancement projects, the procedures for determining the
36       monthly rate of production decline, criteria for determining the share of
37       incremental production attributable to each well when a production en-
38       hancement project includes a group of wells, criteria for determining the
39       start up date for any project for which an exemption is claimed, and
40       determining new qualifying technologies for the purposes of paragraph
41       (6)(A)(4)(vii).
42             (C) Any taxpayer applying for an exemption pursuant to this para-
43       graph (6) shall make application to the director of taxation. Such appli-

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  1       cation shall be accompanied by a state corporation commission certifi-
  2       cation that the production for which an exemption is sought results from
  3       a qualified production enhancement project and certification of the base
  4       production for the enhanced wells or group of wells, and the rate of
  5       decline to be applied to that base production. The secretary of revenue
  6       shall provide credit for any taxes paid between the project startup date
  7       and the certification of qualifications by the commission.
  8             (D) The exemptions provided for in this paragraph (6) shall not apply
  9       for 12 months beginning July 1 of the year subsequent to any calendar
10       year during which: (1) In the case of oil, the secretary of revenue deter-
11       mines that the weighted average price of Kansas oil at the wellhead has
12       exceeded $20.00 per barrel; or (2) in the case of natural gas the secretary
13       of revenue determines that the weighted average price of Kansas gas at
14       the wellhead has exceeded $2.50 per Mcf.
15             (E) The provisions of this paragraph (6) shall not affect any other
16       exemption allowable pursuant to this section; and
17             (7) the severance and production of oil occurring on and after May
18       1, 1999, and before June 20, 2000; and
19             (7) (8) for the calendar year 1988, and any year thereafter, the sev-
20       erance or production of the first 350,000 tons of coal from any mine as
21       certified by the state geological survey.
22             (c) No exemption shall be granted pursuant to subsection (b)(3) or
23       (4) to any person who does not have a valid operator's license issued by
24       the state corporation commission, and no refund of tax shall be made to
25       any taxpayer attributable to any production in a period when such tax-
26       payer did not hold a valid operator's license issued by the state corporation
27       commission.
28             (d) On April 15, 1988, and on April 15 of each year thereafter, the
29       secretary of revenue shall determine from statistics compiled and pro-
30       vided by the United States department of energy, the average price per
31       barrel paid by the first purchaser of crude oil in this state for the six-
32       month period ending on December 31 of the preceding year. Such price
33       shall be used for the purpose of determining exemptions allowed by sub-
34       section (b)(2)(B) or (E) for the twelve-month period commencing on May
35       1 of such year and ending on April 30 of the next succeeding year. 
36       Sec.  2. K.S.A. 1998 Supp. 79-4217 is hereby repealed.
37         Sec.  3. This act shall take effect and be in force from and after its
38       publication in the Kansas register.