Pioneer denied request to reclassify oil wells

The Railroad Commission of Texas last week 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 and gas operators to classify wells as oil-producing or gas-producing, based on their production ratios. But gas wells grant operators a decades-old tax credit, known as the high-cost gas credit, which was put in place to encourage natural gas production.

But the request also opened a discussion on how the Railroad Commission, which regulates the oil and gas industry, classifies wells, specifically if it should add another category.

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

During an October meeting, Paul Dubois, a technical examiner for the agency, told the commissioners that Pioneer had given them no proof that it would suffer if the wells retained an oil classification. But, Dubois pointed out, reclassifying them as as gas wells  “will get them a significant severance tax reduction.”

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

The commission ultimately denied Pioneer’s request during it’s Nov. 15 meeting, but Commission Ryan Sitton raised the issue of creating a third classification to cover natural gas condensate, or liquids. Natural gas liquids are considered valuable and useable, but regulators aren’t sure if it should be declared natural gas or oil.

“The essential issue in this case is how we consider condensate,” said Sitton. “There is a a long record of saying it is not oil, but there is no precedent considering it gas.”