SEVERANCE TAXATION OF GAS USED IN GAS INJECTION OPERATIONS

RAB-92-6. This bulletin explains the taxation of natural gas severed from a Michigan oil well (casing head gas) or from a Michigan gas well which is subsequently reinjected into the same or another reservoir to enhance oil production.

Natural gas and oil are subject to the severance tax based on its gross cash market value at the time and place of production. [MCL 205.303(l); MSA 7.353(l)] In addition, a fee is imposed upon the production of natural gas and oil to cover the costs incurred by the Supervisor of Wells in overseeing the development, use and exploitation of oil and gas within this state. The fee, not to exceed 1% of gross cash market value, is determined annually. [MCL 319.22; MSA 13.139(22)]

In a gas injection operation, severed gas is reinjected into a reservoir to increase the pressure within the reservoir, thereby enhancing oil production. Reinjected gas will be commingled with unsevered, and therefore untaxed, gas.

For administrative convenience, severed gas used in a gas injection operation is not subject to the tax or fee, provided such gas does not enter the market between severance and reinjection. In other words, such gas must not be sold, bartered, or in any way traded for value before it is used in an injection operation. Gas which is sold, bartered, or traded for value is subject to the tax and fee, even if it is subsequently used in an injection operation. (See Revenue Administrative Bulletin 1989-13 for the severance taxation of previously severed, taxed, and reinjected gas upon subsequent withdrawal from the reservoir.)

It is irrelevant whether the severed gas is injected into the reservoir containing the well from which it came, injected into another well on the same lease, or injected into a well within a pooled or unitized group of leases. It is not subject to the tax or fee unless sold, bartered, or traded for value for such purposes.

Untaxed, injected gas will be subject to the tax or fee if, or when, it is severed again and sold or consumed in a taxable manner.