Letter to the Editor: Much ado about nothing - Orphan well tax exemption

Published Jun. 25 in the Shreveport Times

Recently the Louisiana legislature passed and the governor signed into law a program to fix “orphan” wells through a tax exemption on oil produced from abandoned wells. 

Although “orphan” wells can be ticking environmental time bombs, no one should expect this exemption will resolve that problem. There are a number of reasons to believe that the exemption will fail to have any noticeable impact on the problem.

According to the Department of Natural Resources, “Orphan wells are abandoned oil and gas wells for which no viable responsible party can be located, or such party has failed to maintain the wellsite in accordance with State rules and regulations.”

I suspect that those not familiar with oil wells might ask, why would anyone abandon a perfectly good oil well? The usual reason is that the well is no longer profitable to operate and the operator abandons it to avoid the cost of proper plugging and abandonment. This is far too common and has been for decades because the financial risk of doing so is quite low.

Oil wells decline in production volume over time and by the time an operator deems a well to be too costly to operate, most have reached “stripper” status. There are three categories of severance tax on oil: “capable” – a well producing 25 barrels or greater a day; “incapable” – a well producing less than 25 barrels but more than 10 barrels a day; and “stripper” – a well producing less than 10 barrels a day.

“Stripper” wells make up the majority of producing wells in the state and most produce considerably less than 10 barrels a day. For example, Caddo Pine Island wells in north Caddo Parish, the number six state oil field by production volume in 2020, average around 0.2 barrels a day.

The severance tax for these well categories are: 12.5% for “capable”, 6.25% for “incapable” and 3.125% for “stripper.''  Since it makes sense that the vast majority of abandoned wells were “strippers” prior to being abandoned by the operator, it is surprising that every media mention of the tax exemption program uses the 12.5% severance tax rate to make the case for how much an operator can save when restoring an “orphan” well to production. 

A more logical comparison would be between the “stripper” rate of 3.125% and the three months of severance free production that an operator would receive for restoring production.  A much less impressive incentive than the erroneous 12.5% example.

Many Louisianians might have an initially favorable view of the exemption program based on how the law has been reported by the media; however upon closer inspection, should anyone realistically expect this will revive any significant number of abandoned wells? Or serve to make even a minor dent in a statewide “orphan” well population of 4,300? 

Skip Peel

TXLA Mineral Consultants, L.L.C.

Shreveport