Taxes are key in oil versus gas well dispute

The Railroad Commission of Texas has denied Pioneer Natural Resources’ request to reclassify several oil wells as gas wells, citing concerns that the company was looking to take advantage of a tax exemption for gas wells.

State regulations allow oil andgasoperators to classify wells as oil-producing or gas-producing, based on their production ratios. But gas wells provide operators with a tax break under adecades-old program, knownasthehigh-costgas credit, that wasputinplace to encourage natural gas production.

But the request also opened a discussion on how the Railroad Commission, whichregulates the oil and gas industry in Texas, classifies wells, specifically if it should addanother category to cover those that produce natural gas liquids, or condensate.

Pioneer made the argument that several of its oil wells in the Eagle Ford basin should be reclassified as gas wells, a claim that the commission’ s staff disputed. The company claimed that the presence of natural gas liquids makes them gas wells.

During a recent meeting, Paul Dubois, a technical examiner for the agency, told the commissioners that Pioneer had provided no proof that it wouldsuffer if the wells retained anoil classification. Dubois also noted that reclassifying themasgaswells “willget them a significant severance tax reduction.”

Pioneer disputed Dubois’ analysis, arguing that the wells wereclearly producing gas and the potential for tax breaks was not the company’ s motive in seeking reclassification.

The commission ultimately denied Pioneer’ s request at its Nov .15 meeting. Commissioner Ryan Sitton, however, raised the issue of creating a third classification to cover natural gas liquids, whichhave a chemical composition similar to natural gas.