86th Texas Legislative Session for Oil & Gas: Positive But Storm Clouds on the Horizon
By Chris Hosek
The Texas Legislative Session has come and gone, leaving in its wake good news for the oil and gas industry. The energy industry had an overall successful session. Here are a few of the notable successes as well as the failures of bad legislation that would have negatively impacted the industry.
First, the big picture: every two years in Texas we see the legislative process unfold for 140 days. Typically, the session starts out slowly, with the momentum and intensity building until the last few days. This session was no different. In the end, the Texas Legislature passed a $250 billion two-year budget, which is made up of state taxes and fees, local property tax dollars, and federal funds. It is a 16 percent spending increase over the two-year budget from the 2017 Legislative Session.
Along this whole process, the oil and gas industry always encounters both good and bad energy proposed legislation. Advocating on sound energy policy can be challenging, and key legislation can come down to passing on literally the last few days of the session – which can make or break the session for oil and gas.
Here’s how the top issues and bills relevant to the oil and gas industry fared this session:
School Financing, Property Tax Relief, Property Tax Election Caps:
The “Big Three” in Texas, Governor Greg Abbott, Lt. Governor Dan Patrick and new Speaker of the House Dennis Bonnen, laid out an aggressive agenda to reform school financing and property taxes. Add more funding to education, teacher pay raises and cutting property taxes were the key provisions of their plan. Several different proposals were debated during the whole process. Eliminating certain parts of the tax code (more below), increasing the sales tax to buy down property taxes and using existing revenue were just a few of the policy choices discussed. Also, included in their plan was a law requiring cities, counties, and other taxing units to hold an election if they want to raise property tax revenue by a certain percent from the previous year.
In the end, the Big Three delivered on their promises. The results: over $9 billion in new education funding, over $5 billion in property tax relief, $2 billion to teacher pay raises and an automatic election if cities, counties and other taxing units increase property tax revenue 3.5% or more from the previous year.
Legislators filed several bills this session to eliminate different sections of the tax code, which would have had an adverse impact on the industry. One bill sought to eliminate the high cost gas exemption. Several bills were filed which would have increased taxes on heavy rental equipment. Another proposal to increase in the sales tax, even though that would provide property tax relief, would still have had a negative impact on the bottom line of energy companies. Luckily, all these failed and the school financing/property tax plan was funded through existing funds, a forecast of larger growth in taxes from the Texas Comptroller and a new funding stream through an online lawsuit settlement.
A positive bill for the oil and gas industry that passed this session will provide a five-year severance tax exemption for qualified inactive wells brought back to production. Bringing these inactive wells back online will benefit the state through increased sales taxes, property taxes, and employment. Signed by Governor Abbott on May 7, the bill actually goes in effect on September 1, 2019.
As the industry continues to grow, it is putting more and more pressure on the local highway systems. In 2013, the Texas Legislature passed a bill to create a system to distribute state funds to projects in energy producing areas to improve county roads. Clearly, the Legislature has recognized that county roads were not equipped to handle this type of heavy vehicle traffic.
This session, the current Legislature modified parts of the 2013 law in order to maximize the greatest funds flow to energy producing counties. In addition to this change in the law, the Legislature also authorized an additional $250 million for country roads in energy producing regions of Texas.
The use of eminent domain was the most important issue facing the energy industry this session. It doesn’t matter if you are producer, service company, pipeline company or refinery, moving oil and natural gas to the market in a safe and efficient manner impacts the industry as a whole. This session came out in our favor.
In the 2017 session, a group of large landowners formed “Texans for Property Rights” to address several issues they saw as wrong with the current process of using eminent domain. Working with some legislators, they filed a bill that included a long list of perceived grievances. Some of these issues included forcing the industry to pay for their attorneys’ fees, venue location, aggressive sale tactics by the right of way agents, “low-ball” offers, and the lack of oversight to file a complaint against perceived abuse of the system. This bill failed during the 2017 session.
Another version of eminent domain reform was filed this year during the 2019 session. The energy industry tirelessly negotiated for the last several years to find changes to the law that would help improve landowner satisfaction without imposing unreasonable and/or unachievable requirements on entities with the power of eminent domain. Ultimately however, the industry’s best efforts to compromise proved to be in vain when the landowner groups obstinately refused to settle for anything less than 100% of their proposed changes to the law. This bill failed in the final days. Therefore, for now, eminent domain proceedings will continue as status quo, and we will likely see the same type of bill next session.
Once again, water was a major policy debate in this Legislative Session. Several bills passed this session that were positive for the industry. For example, HB 3246 addressed the ownership of produced water by clarifying that whoever takes possession of that waste for the purpose of treating the waste for a subsequent beneficial use owns the water.
Another positive for the oil and gas industry was the passage of HB 2771. This bill grants the authority of the Texas Commission on Environmental Quality to issue national discharge permits, if this authority is delegated from the federal government.
Also, several water recycling incentive bills were filed this session. However, none of these bills were passed, but given the discussion surrounding these bills and the issues itself, anticipate seeing interim studies on this subject.
Unfortunately, the oil and gas industry has seen a rise in environmental terrorism. Hiding under the cloak of protest, individuals are brazenly trespassing on private property and purposefully committing acts of vandalism, endangering themselves and the public. HB 3557 seeks to stop this action by enhancing the criminal liability for causing damage to or destruction of a critical infrastructure facility. The good news is that this bill passed.
Railroad Commission Funding:
This session the Railroad Commission advocated for and received about $200 million for the next two years, an increase of 10.5% from the last budget. This will include an increase of 22 new oil, gas, and pipeline safety inspectors. Also, included in the budget was about $25 million to replace the agency’s antiquated mainframe permitting system, and about $39 million to fund the well plugging and site remediation program. These increases are positive news.
For the energy industry, the 2019 legislative session can be scored as successful. Tax relief and limits on the growth of local governments will create a better working environment in Texas. Strengthening water policy, adding additional road funding, and protecting property will no doubt benefit the oil and gas industry.
However, there are storm clouds on the horizon. The Texas economy needs to perform at a high level in order for Texas not to see a significant budget shortfall next session. Eminent domain is an issue that will not go away and only failed in the last days of session. We have seen a larger growth of anti-oil and gas members of both Republicans and Democrats in both houses of the Texas legislature. So, while this session is good news, the oil and gas industry should prepare for the upcoming challenges in the future.
Chris Hosek is an Energy Consultant in Austin Texas