Lawmakers hope ‘orphan’ well tax exemption will resolve ongoing problem in oil industry

Lawmakers on Wednesday approved legislation that would establish a program to help fix “orphan” oil wells by offering a tax exemption on oil produced from abandoned wells that are reworked to produce again. While it may resolve the ongoing problem of leaky unsealed wells across Louisiana, one critic pointed out that the legislation simply gives taxpayer money to the oil industry to clean up a mess made by the oil industry.

Senate Bill 171, sponsored by Sen. Bret Allain (R-Franklin), received final passage from both chambers Wednesday and will be sent to the governor for consideration. After going through a conference committee this week, the final version of the legislation incorporated parts of a similar bill sponsored by Rep. Jean-Paul Coussan (R-Lafayette) that some critics saw as a giveaway to oil companies.

If signed into law, the legislation will allow oil and gas operators to apply to the Louisiana Department of Natural Resources for a severance tax exemption on oil extracted from wells that have been orphaned for at least 12 months.

Louisiana’s current severance tax is 12.5% of the resource’s value. The rate is 6% on wells that have been inactive for at least 24 months and 3% for wells that have been inactive for at least 60 months.

According to the bill the Legislature passed, an operator will be able to keep the first three months of tax payments that would otherwise be due, after which they will remit monthly tax payments to the Department of Revenue, which will credit the site-specific trust account of the individual orphaned oil field site. The money in those accounts will be monitored by the Department of Natural Resources and reserved for restoring the respective oil wells.

After site restoration is completed and approved, if the only source of funds used in the restoration was the site-specific trust account, then any remaining balance in the account will be relinquished to the operator. If the operator abandons the well or transfers it to a new operator, the funds will remain in the account until the well is restored.

“We’re trying to get operators to take over the liability and clean up these wells, and this is the incentive we figured out to do it and to get the wells cleaned up,” Rep. Jean-Paul Coussan (R-Lafayette) said in support of the bill on the House floor Wednesday.                

If the site restoration is completed using funds from both the Oilfield Site Restoration Fund and the site-specific trust account, then any funds remaining in the site-specific trust account will be transferred to the Oilfield Site Restoration Fund.

Site-specific trust accounts (SSTAs) are not a new idea. The Department of Natural Resources has been using them as part of the Oilfield Site Restoration Program it established in 1993 to address the growing problem of orphaned wells, of which there are now more than 4,300 across Louisiana. The new legislation would require SSTAs for operators to receive the orphan well tax exemption. 

In addition to being an eyesore, orphan wells pose significant environmental risks, often by leaking gas or other pollutants that can contaminate the air and water if they are left unsealed. The state has been able to seal an average of 46 wells per year with the money in the restoration fund, which relies on a fee of 1.5 cents per barrel of oil produced and less than a half-penny for every thousand cubic feet of gas produced, according to the Department of Natural Resources.

The Department of Natural Resources touts the restoration fund as an asset that uses no taxpayer money, but this legislation would change that. 

Cynthia Sarthou, executive director of the nonprofit Healthy Gulf, said although SB 171 is “slightly better” than Coussan’s bill, it is still ultimately an instrument that uses taxpayer dollars to clean up a mess made by oil companies.

“It still allows a company to produce oil from a well and essentially use taxpayer dollars (payments that would otherwise have been tax revenues) to clean up abandoned oil well sites,” Sarthou said. “It is essentially a way to dedicate tax payment to clean up.” 

The legislation would also authorize the Department of Natural Resources to make any additional rules necessary to administer the program.