Session of 1999
         
HOUSE BILL No. 2245
         
By Committee on Taxation
          
2-3
          
  9             AN  ACT relating to severance taxation; concerning the rate thereof im-
10             posed upon natural gas; amending K.S.A. 79-4219 and K.S.A. 1998
11             Supp. 79-4217 and repealing the existing sections.
12      
13       Be it enacted by the Legislature of the State of Kansas:
14             Section  1. K.S.A. 1998 Supp. 79-4217 is hereby amended to read as
15       follows: 79-4217. (a) There is hereby imposed an excise tax upon the
16       severance and production of coal, oil or gas from the earth or water in
17       this state for sale, transport, storage, profit or commercial use, subject to
18       the following provisions of this section. Such tax shall be borne ratably by
19       all persons within the term "producer" as such term is defined in K.S.A.
20       79-4216, and amendments thereto, in proportion to their respective ben-
21       eficial interest in the coal, oil or gas severed. Such tax shall be applied
22       equally to all portions of the gross value of each barrel of oil severed and
23       subject to such tax and to the gross value of the gas severed and subject
24       to such tax. The rate of such tax shall be 8% of the gross value of all oil
25       or gas severed from the earth or water in this state and subject to the tax
26       imposed under this act. The rate of such tax with respect to coal shall be
27       $1 per ton. For the purposes of the tax imposed hereunder the amount
28       of oil or gas produced shall be measured or determined: (1) In the case
29       of oil, by tank tables compiled to show 100% of the full capacity of tanks
30       without deduction for overage or losses in handling; allowance for any
31       reasonable and bona fide deduction for basic sediment and water, and
32       for correction of temperature to 60 degrees Fahrenheit will be allowed;
33       and if the amount of oil severed has been measured or determined by
34       tank tables compiled to show less than 100% of the full capacity of tanks,
35       such amount shall be raised to a basis of 100% for the purpose of the tax
36       imposed by this act; and (2) in the case of gas, by meter readings showing
37       100% of the full volume expressed in cubic feet at a standard base and
38       flowing temperature of 60 degrees Fahrenheit, and at the absolute pres-
39       sure at which the gas is sold and purchased; correction to be made for
40       pressure according to Boyle's law, and used for specific gravity according
41       to the 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 $87 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 (G) placed in underground storage for recovery at a later
18       date and which was either originally severed outside of the state of Kansas,
19       or as to which the tax levied pursuant to this act has been paid;
20             (2) the severance and production of oil which is: (A) From a lease or
21       production unit whose average daily production is five barrels or less per
22       producing well, which well or wells have not been significantly curtailed
23       by reason of mechanical failure or other disruption of production; (B)
24       from a lease or production unit, the producing well or wells upon which
25       have a completion depth of 2,000 feet or more, and whose average daily
26       production is six barrels or less per producing well or, if the price of oil
27       as determined pursuant to subsection (d) is $16 or less, whose average
28       daily production is seven barrels or less per producing well, or, if the price
29       of oil as determined pursuant to subsection (d) is $15 or less, whose
30       average daily production is eight barrels or less per producing well, or, if
31       the price of oil as determined pursuant to subsection (d) is $14 or less,
32       whose average daily production is nine barrels or less per producing well,
33       or, if the price of oil as determined pursuant to subsection (d) is $13 or
34       less, whose average daily production is 10 barrels or less per producing
35       well, which well or wells have not been significantly curtailed by reason
36       of mechanical failure or other disruption of production; (C) from a lease
37       or production unit, whose production results from a tertiary recovery
38       process. "Tertiary recovery process" means the process or processes de-
39       scribed in subparagraphs (1) through (9) of 10 C.F.R. 212.78(c) as in
40       effect on June 1, 1979; (D) from a lease or production unit, the producing
41       well or wells upon which have a completion depth of less than 2,000 feet
42       and whose average daily production resulting from a water flood process,
43       is six barrels or less per producing well, which well or wells have not been

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

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  1       from any well pursuant to this paragraph shall be valid for a period of 24
  2       months following the month in which oil or gas was first produced from
  3       such pool. The term "pool" means an underground accumulation of oil
  4       or gas in a single and separate natural reservoir characterized by a single
  5       pressure system so that production from one part of the pool affects the
  6       reservoir pressure throughout its extent;
  7             (5) the severance and production of oil or gas from a three-year in-
  8       active well, as determined by the state corporation commission and cer-
  9       tified to the director of taxation, for a period of 10 years after the date of
10       receipt of such certification. As used in this paragraph, "three-year in-
11       active well" means any well that has not produced oil or gas in more than
12       one month in the three years prior to the date of application to the state
13       corporation commission for certification as a three-year inactive well. An
14       application for certification as a three-year inactive well shall be in such
15       form and contain such information as required by the state corporation
16       commission, and shall be made prior to July 1, 1996. The commission
17       may revoke a certification if information indicates that a certified well was
18       not a three-year inactive well or if other lease production is credited to
19       the certified well. Upon notice to the operator that the certification for a
20       well has been revoked, the exemption shall not be applied to the pro-
21       duction from that well from the date of revocation;
22             (6)  (A) The incremental severance and production of oil or gas which
23       results from a production enhancement project begun on or after July 1,
24       1998, shall be exempt for a period of seven years from the startup date
25       of such project. As used in this 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
31       completed.
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 date. Such monthly rate of
40       production decline shall be continued as the decline that would have
41       occurred except for the enhancement project. The calculation of the base
42       production amount shall be evidenced by an affidavit and supporting doc-
43       umentation filed by the applying taxpayer with the state corporation

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

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  1       cation that the production for which an exemption is sought results from
  2       a qualified production enhancement project and certification of the base
  3       production for the enhanced wells or group of wells, and the rate of
  4       decline to be applied to that base production. The secretary of revenue
  5       shall provide credit for any taxes paid between the project startup date
  6       and the certification of qualifications by the commission.
  7             (D) The exemptions provided for in this paragraph (6) shall not apply
  8       for 12 months beginning July 1 of the year subsequent to any calendar
  9       year during which: (1) In the case of oil, the secretary of revenue deter-
10       mines that the weighted average price of Kansas oil at the wellhead has
11       exceeded $20.00 per barrel; or (2) in the case of natural gas the secretary
12       of revenue determines that the weighted average price of Kansas gas at
13       the wellhead has exceeded $2.50 per Mcf.
14             (E) The provisions of this paragraph (6) shall not affect any other
15       exemption allowable pursuant to this section; and
16             (7) the severance and production of natural gas occurring on and
17       after July 1, 2003; and
18             (7) (8) for the calendar year 1988, and any year thereafter, the sev-
19       erance or production of the first 350,000 tons of coal from any mine as
20       certified by the state geological survey.
21             (c) No exemption shall be granted pursuant to subsection (b)(3) or
22       (4) to any person who does not have a valid operator's license issued by
23       the state corporation commission, and no refund of tax shall be made to
24       any taxpayer attributable to any production in a period when such tax-
25       payer did not hold a valid operator's license issued by the state corporation
26       commission.
27             (d) On April 15, 1988, and on April 15 of each year thereafter, the
28       secretary of revenue shall determine from statistics compiled and pro-
29       vided by the United States department of energy, the average price per
30       barrel paid by the first purchaser of crude oil in this state for the six-
31       month period ending on December 31 of the preceding year. Such price
32       shall be used for the purpose of determining exemptions allowed by sub-
33       section (b)(2)(B) or (E) for the twelve-month period commencing on May
34       1 of such year and ending on April 30 of the next succeeding year.
35             Sec.  2. K.S.A. 79-4219 is hereby amended to read as follows: 79-
36       4219. (a) There shall be allowed to each taxpayer who is liable for ad
37       valorem property taxes upon oil property as defined by K.S.A. 79-329,
38       and amendments thereto, a credit against the tax levied under K.S.A. 79-
39       4217, and amendments thereto, upon the severance and production of
40       oil, in an amount equal to 3.67% of the gross value of oil severed and
41       taxable under this act, and in which the taxpayer has a beneficial interest.
42             (b) There shall be allowed to each taxpayer who is liable for ad va-
43       lorem property taxes upon gas property as defined by K.S.A. 79-329, and

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  1       amendments thereto, a credit against the tax levied under K.S.A. 79-4217,
  2       and amendments thereto, upon the severance and production of gas, in
  3       an amount equal to the following amounts: (1) 2% of the gross value of
  4       gas severed and taxable under this act, and in which the taxpayer has a
  5       beneficial interest for the fiscal year commencing on July 1, 1994, and
  6       ending on June 30, 1995; (2) 3% of the gross value of gas severed and
  7       taxable under this act, and in which the taxpayer has a beneficial interest
  8       for the fiscal year commencing on July 1, 1995, and ending on June 30,
  9       1996; and (3) 3.67% 4% of the gross value of gas severed and taxable
10       under this act, and in which the taxpayer has a beneficial interest for the
11       fiscal year commencing on July 1, 1996, and all fiscal years thereafter
12       1999, and ending on June 30, 2000; (2) 5% of the gross value of gas severed
13       and taxable under this act, and in which the taxpayer has a beneficial
14       interest, for the fiscal year commencing on July 1, 2000, and ending on
15       June 30, 2001; (3) 6% of the gross value of gas severed and taxable under
16       this act, and in which the taxpayer has a beneficial interest, for the fiscal
17       year commencing on July 1, 2001, and ending on June 30, 2002; and (4)
18       7% of the gross value of gas severed and taxable under this act, and in
19       which the taxpayer has a beneficial interest, for the fiscal year commenc-
20       ing on July 1, 2002, and ending on June 30, 2003. 
21       Sec.  3. K.S.A. 79-4219 and K.S.A. 1998 Supp. 79-4217 are hereby
22       repealed.
23        Sec.  4. This act shall take effect and be in force from and after its
24       publication in the statute book.