| (a) The provisions of this section apply only to the computation of taxable capital. (b) Corporations with $1 million or more in taxable capital must choose one of the following four methods for estimating the volume of oil and gas reserves to be used in amortizing intangible drilling costs for franchise tax reports originally due on or after January 1, 1988. (1) Reserves per Securities Exchange Commission reporting. The estimates of reserves used by the corporation in complying with Securities Exchange Commission (SEC) Regulation SX 210.4-10, or a subsequent regulation which supersedes this regulation. (2) Evaluation by registered engineer. An evaluation of the volume of reserves performed by a person who is an engineer registered with the State Board of Registration for Professional Engineers under Texas Civil Statutes, Article 3271a, or under a comparable law of the jurisdiction in which the property being
evaluated is located, and who is proficient in petroleum engineering. (3) Volume per ad valorem valuation. (A) The volume of reserves calculated for ad valorem tax purposes by the central appraisal district for the Texas county in which the property being evaluated is located. (B) The volume of reserves calculated for ad valorem tax purposes by a property taxing jurisdiction outside of Texas in which the property being evaluated is located, provided: (i) the out-of-state jurisdiction's law requires a complete and full evaluation of reserves that is reasonably comparable to that required by Texas law; and (ii) the other jurisdiction provides corporations a convenient opportunity to contest such evaluations prior to formal suit in a court of law and in a manner reasonably comparable to that provided under Texas law. (4) Volume per standard industry reserve estimating
equations. An evaluation performed by the corporation using the following standard industry reserve estimating equations, with the following qualifications. (A) For oil wells. (i) Wells under five years old. For wells that have been producing for less than five years, the corporation shall calculate oil reserves attributable to the corporation's property using the industry standard exponential decline equation. (ii) Wells over five years old. For wells that have been producing for over five years, the corporation may have the option of using the industry standard exponential decline equation as in clause (i) of this subparagraph, or calculating oil reserves attributable to the corporation's property using the industry standard hyperbolic decline equation. (iii) All wells. (I) Calculations using the exponential and hyperbolic decline equations shall be based on production data
submitted to the Texas Railroad Commission under Texas law, or on data comparable to that submitted to the Texas Railroad Commission but submitted to another jurisdiction under that jurisdiction's law, where applicable. (II) Production data and estimated decline rates used to calculate reserves for ad valorem tax purposes by a central appraisal district for the Texas county in which a property is located are acceptable substitutes for such data obtained directly from the Texas Railroad Commission. The corporation may obtain comparable data used to calculate reserves for ad valorem tax purposes by a property taxing jurisdiction outside of Texas in which the property being evaluated is located, provided: (-a-) the out-of-state jurisdiction's law requires a complete and full evaluation of reserves that is reasonably comparable to that required by Texas law; and (-b-) the other jurisdiction provides corporations a
convenient opportunity to contest such evaluations prior to formal suit in a court of law and in a manner reasonably comparable to that provided under Texas law. (III) All corporations opting to perform their own evaluations using the exponential or hyperbolic decline equations shall use an abandonment flow rate of 1.5 barrels per day per well. Corporations using a higher abandonment flow rate are required to justify such deviations based on regional, economic, or well-specific criteria. The burden of proof in supporting such deviations shall rest with the corporation. (B) For gas wells. (i) Exponential decline method. For gas wells, the corporation may calculate gas reserves attributable to the corporation's property using the industry standard exponential decline equation. All corporations electing to use this method must use a reasonable abandonment flow rate based on regional, economic, or well-specific criteria. The
burden of proof in supporting the abandonment flow rate shall rest with the corporation. (ii) P/Z reserves method. As an alternative to using the exponential decline equation in clause (i) of this subparagraph, the corporation may calculate gas reserves attributable to the corporation's property by using the industry standard equation for curve fitting the decline of reservoir pressure versus cumulative production. Abandonment pressures must be reasonably related to the local pipeline pressures. A graph of p/z versus cumulative production shall be extrapolated to the abandonment pressure point. Using this method, reserves equal the cumulative production at abandonment minus the cumulative production to date. (iii) Rules applicable to either method. (I) Calculations using the exponential decline or the p/z reserves methods shall be based on production data submitted to the Texas Railroad Commission under Texas law, or on
data comparable to that submitted to the Texas Railroad Commission but submitted to another jurisdiction under that jurisdiction's laws, where applicable. (II) Production data and estimated decline rates used to calculate reserves for ad valorem tax purposes by the central appraisal district for the Texas county in which a property is located are acceptable substitutes for data obtained directly from the Texas Railroad Commission. The corporation may obtain comparable data used to calculate reserves for ad valorem tax purposes by a property taxing jurisdiction outside of Texas in which the property being evaluated is located, provided: (-a-) the out-of-state jurisdiction's law requires a complete and full evaluation of reserves that is reasonably comparable to that required by Texas law; and (-b-) the other jurisdiction provides taxpayers a convenient opportunity to contest such evaluations prior to formal suit in a
court of law and in a manner reasonably comparable to that provided under Texas law. (c) The method chosen to calculate the volume of reserves must be used to amortize intangible drilling costs under the successful efforts or full-cost methods of accounting, as described in SEC Regulation SX 210.4-10. (d) Requests made to central appraisal districts for oil and gas reserve volume calculated for ad valorem purposes should be made on the form set out in Exhibit A as follows. It is the responsibility of each corporation to correctly identify the property on which a reserve volume is requested. Appraisal districts will only provide an aggregate volume for a property. Each corporation must break out its fractional interest in the reserve volume provided by the appraisal district. Attached Graphic
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