1. (a) Applicability.

   1. (1) In accordance with Arkansas Code § 26-58-128, the Director of the Oil and Gas Commission shall determine the well categories for all gas production wells, which will be used by the Department of Finance and Administration to determine the appropriate severance tax rate for each well.
   2. (2) All gas production wells under the jurisdiction of the Oil and Gas Commission are subject to the provisions of this section.

2. (b) Definitions. As used in this section:

   1. (1) “Commission” means the Oil and Gas Commission, on which the Oil and Gas Commission Director of Production and Conservation serves as secretary, but is a nonvoting member;
   2. (2) “Conventional gas well” means a gas well that is not classified as a high-cost gas well;
   3. (3) “Director” means the Oil and Gas Commission Director of Production and Conservation;

   4. (4) “High-cost gas well” means a gas well that:

      1. (A) Produces gas from any shale formation, including but not limited to:

3. (i) The Fayetteville Shale, Woodford Shale, Moorefield Shale, and the Chattanooga Shale; or

   1. (ii) Their stratigraphic equivalents as described in published stratigraphic nomenclature recognized by the Arkansas Geological Survey;

      1. (B) Produces gas from any completion that is located at a depth of more than twelve thousand five hundred feet (12,500’) below the surface of the earth, where the term “depth” means the length of the maximum continuous drilling string of drill pipe used between the drill bit face and the drilling rig’s Kelly bushing;

      2. (C) Produces gas from a tight gas formation which is defined as a formation which:

         1. (i) Has previously been determined to be a low permeability formation by:

4. (a) (a) Oil and Gas Commission orders or field rules for:

   1. (1) (1) Booneville and Chismville (84-2003-07);
   2. (2) (2) Gragg (89-2004-07);
   3. (3) (3) Waveland (86-2004-07);
   4. (4) (4) Rich Mountain (304-2006-09);
   5. (5) (5) Mansfield (28-2003-03);
   6. (6) (6) Witcherville; and
   7. (7) (7) Excelsior (103-2005-07); and

5. (b) (b) 15 CAR § 275-231;

   1. (ii) Is determined by the Director of Production and Conservation to have an estimated in situ permeability of one-tenth millidarcy (0.1 mD) or less; or

      1. (iii) Is determined to be a tight gas formation by field rule, general rule, or orders approved by the Oil and Gas Commission and issued by the Director of Production and Conservation;
      2. (D) Produces gas from a geopressured brine; or
      3. (E) Produces occluded gas from a coal seam;
   2. (5) “Marginal conventional gas well” means a conventional gas well which is incapable of producing more than two hundred fifty (250) Mcf per day, from all zones producing in such well, as determined by the sum of the individual deliverability rates for each zone, using one (1) of the current wellhead deliverability rate methodologies described in subsection (h) of this section, below;
   3. (6) “Marginal high-cost gas well” means a high-cost gas well which is incapable of producing more than one hundred (100) Mcf per day from all zones producing in such well as determined by the sum of the individual deliverability rates for each zone, using one (1) of the current wellhead deliverability rate methodologies described in subsection (h) of this section, below; and

   4. (7) “New discovery gas well” means any conventional gas well for the period commencing on the date of first production and ending on the date that is twenty-four (24) consecutive calendar months following the date of first production.

      1. (c)
   5. (1) On or before January 1, 2009, the Director of Production and Conservation shall determine the initial well category for each existing gas-producing well in the state.
   6. (2) If a well contains two (2) or more separately metered producing zones (sources of supply), and one (1) or more of the producing zones are different categories, the well category shall be based on which zone in the well produces the larger percentage of the total well production, based on the most recent back pressure test methodology specified in 15 CAR § 275-405.

   7. (3) On or before January 1, 2009, the Director of Production and Conservation shall notify each permit holder of each existing well’s determination as a:

      1. (A) High-cost gas well, including whether it is a high-cost gas well producing gas from the date of first production and for a minimum period of thirty-six (36) consecutive calendar months following the date of first production, unless a longer time period is granted by the department in accordance with Arkansas Code § 26-58-127;
      2. (B) Marginal conventional gas well;
      3. (C) Marginal high-cost gas well;
      4. (D) New discovery gas well; or

      5. (E) Conventional gas well.

         1. (d)

   8. (1)

      1. (A) After January 1, 2009, the Director of Production and Conservation shall determine, at the time of permitting each new well, the appropriate well category as specified in subsection (c) of this section, above, which shall be effective the date of first production from the well.
      2. (B) This well category determination, made at the time of the initial new well permit issuance or as amended in accordance with this subsection or subsection (g) of this section, below, shall determine the well category throughout the life of that well.
   9. (2) Once a permit is issued, if a well is completed in two (2) or more separately metered producing zones (sources of supply), and one (1) or more of the producing zones are different categories, with respect to a conventional gas well or a high-cost gas well, the well category shall be based on which zone in the well produces the larger percentage of the total well production, based on the initial back pressure tests required by 15 CAR § 275-405.

   10. (3) The well category determination shall determine the category for that well throughout the life of that well, regardless if other zones are produced within the well at a later date, until such time as the well qualifies as a:

       1. (A) Marginal conventional gas well; or
       2. (B) Marginal high-cost gas well.
6. (e) Following the well category determination for all existing wells on January 1, 2009, and the ongoing categorization for all new wells after January 1, 2009, the permit holder may request at any time, on a form prescribed by the Director of Production and Conservation, another well category determination with respect to the well category definitions specified in subsection (b) of this section, above, in accordance with the application procedures specified in subsection (i) of this section, below.

7. (f)

   1. (1) Upon submission of the application and supporting documentation or other required information, the Director of Production and Conservation shall make a determination within fifteen (15) calendar days from the receipt of such application.

   2. (2) The effective date of the well category determination request shall automatically be the:

      1. (A) First day of the next month following the postmark date the application was mailed to the Director of Production and Conservation; or
      2. (B) Date of the Director of Production and Conservation’s office date stamp, if delivered in person to the Director of Production and Conservation.
   3. (3) If approved by the Director of Production and Conservation, the application shall be sent via first-class mail to the permit holder and a copy forwarded to the department.

   4. (4)

      1. (A) If the application is denied by the Director of Production and Conservation, the permit holder may appeal the Director of Production and Conservation’s determination to the commission by filing an application in accordance with 15 CAR §§ 275-101 and 275-102, and other applicable hearing procedures.

      2. (B)

         1. (i) If the permit holder does not appeal the denial, and the date of the Director of Production and Conservation’s denial occurs after the effective date of the well determination request as defined in subdivision (f)(2) of this section, above, the permit holder may be subject to additional payment provisions in accordance with department procedures.
         2. (ii) If the permit holder appeals the denial, the effective date of the well categorization request shall remain in effect pending the outcome of the appeal.

8. (g)

   1. (1) If following a review of completion reports, monthly production reports, the applicable wellhead deliverability rate, utilizing one (1) of the current methodologies specified in subsection (h) of this section, below, or other information, the Director of Production and Conservation determines a well is not correctly categorized, the Director of Production and Conservation shall determine the correct well category and notify the permit holder.
   2. (2) The corrected well category determination shall become effective on the first day of the month following the month in which the Director of Production and Conservation notifies the permit holder of the corrected well category determination, unless the permit holder files an appeal of the Director of Production and Conservation’s decision in accordance with 15 CAR §§ 275-101 and 275-102, and other applicable hearing procedures.

9. (h) All existing well category determinations under subsection (c) of this section and all new well category determinations under subsection (d) of this section shall be made on the basis of one (1) of the following current wellhead deliverability rate methodologies:

   1. (1) Establishing cumulative deliverability of the well utilizing test methodologies specified in 15 CAR § 275-405; or

   2. (2)

      1. (A) Calculating the cumulative deliverability of the well utilizing the most recent six-month average daily rate of production for the well under actual operating conditions by dividing the total gas reported for the well by the number of days the well produced during the applicable six-month period.

      2. (B) However, this well category determination method is not applicable for wells subject to an exceptional location penalty.

         1. (i) Well category determination and application procedures.

   3. (1) High-cost gas well.

      1. (A)

         1. (i) The high-cost gas well category shall be assigned to all existing wells on January 1, 2009, which satisfy the definition of a high-cost gas well in accordance with subdivision (b)(4) of this section, above.
         2. (ii) If on that date the high-cost gas well has a reported date of first production on or after January 1, 2006, the well shall automatically qualify for a cost recovery period for a period of thirty-six (36) consecutive calendar months following the date of first production, unless a longer time period is granted by the department in accordance with Arkansas Code § 26-58-127.

      2. (B)

         1. (i) On or after January 1, 2009, the high-cost gas well category shall be assigned to all newly permitted wells that satisfy the definition of a high-cost gas well in accordance with subdivision (b)(4) of this section, above, at the time of well categorization in accordance with subsections (d) and (g) of this section, above.
         2. (ii) The well shall automatically qualify for a cost recovery period for a period of thirty-six (36) consecutive calendar months following the date of first production, unless a longer time period is granted by the department in accordance with Arkansas Code § 26-58-127.

      3. (C)

         1. (i) At the conclusion of the cost recovery period, specified in subdivisions (i)(1)(A) and (B) of this section above, the well shall:
10. (a) (a) Automatically be reclassified as a high-cost gas well no longer subject to the tax rate for the cost recovery period; and

11. (b) (b) Be subject to the applicable severance tax rate specified in Arkansas Code § 26-58-111(5)(D) unless an application is made for classification as a marginal high-cost gas well in accordance with subdivision (i)(3)(B) of this section, below.

    1. (ii) The effective date of the automatic reclassification shall be the first day of the month following the month in which the specified recovery period expired.

    2. (2) New discovery gas well.

       1. (A) The new discovery gas well category shall be assigned to all existing conventional wells on January 1, 2009, which as of that date have a reported date of first production on or after January 1, 2007.

       2. (B)

          1. (i) The new discovery gas well category shall be automatically assigned to all newly permitted conventional wells on or after January 1, 2009, at the time of well categorization in accordance with subsections (d) and (g) of this section, above.
          2. (ii) The well category determination shall remain in effect for twenty-four (24) consecutive calendar months following the date of first production.

       3. (C)

          1. (i) At the conclusion of the twenty-four (24) consecutive calendar months following the date of first production, the new discovery gas well determination shall automatically terminate.
          2. (ii) The effective date of the automatic termination shall be the first day of the month following the month in which the actual date of termination occurred.
          3. (iii) The well shall be automatically reclassified as a conventional gas well subject to the applicable severance tax rate specified in Arkansas Code § 26-58-111(5)(D), unless application is made for classification as a marginal conventional gas well in accordance with subdivision (i)(3)(B) of this section, below.

    3. (3) Marginal conventional gas well and marginal high-cost gas well.

       1. (A) The applicable marginal gas well category shall be assigned to all existing conventional gas wells and high-cost gas wells on January 1, 2009, that qualify as either a marginal conventional gas well or a marginal high-cost gas well and which, as of that date, do not qualify as either a:

          1. (i) New discovery gas well during the cost recovery period set forth in subdivisions (i)(2)(A) and (B), above; or
          2. (ii) High-cost gas well during the cost recovery period set forth in subdivisions (i)(1)(A) and (B) above.

       2. (B)

          1. (i) When a conventional gas well qualifies as a marginal conventional gas well, or a high-cost gas well qualifies as a marginal high-cost gas well, a permit holder may apply to the Director of Production and Conservation for a marginal conventional gas well or marginal high-cost gas well category determination.
          2. (ii) The request shall be on a form prescribed by the Director of Production and Conservation and shall include a copy of the most recent well head deliverability rate determination for all producing zones based on one (1) of the current wellhead deliverability rate methodologies specified in subsection (h) of this section, above.
       3. (C) The effective date of the applicable marginal gas well determination shall be the first day of the month following the month in which the permit holder’s application was received in accordance with subsection (f) of this section above.

       4. (D)

          1. (i) A permit holder shall immediately notify the Director of Production and Conservation in writing when a well, which has been previously determined to be a marginal conventional gas well no longer qualifies as a marginal conventional gas well, or a marginal high-cost gas well no longer qualifies as a marginal high-cost gas well.
          2. (ii) When a previously determined marginal conventional gas well becomes capable of producing more than two hundred fifty (250) Mcf per day over a thirty-day period or a well previously determined to be a marginal high-cost gas well becomes capable of producing more than one hundred (100) Mcf per day over a thirty-day period, the permit holder shall submit a copy of the most recent well head deliverability rates for each producing zone in the well based on one (1) of the current wellhead deliverability rate methodologies specified in subsection (h) of this section, above, along with the required written notice to the Director of Production and Conservation.
    4. (4) Wells not classified as a high-cost gas well, new discovery gas well, marginal conventional gas well, or marginal high-cost gas well, as described above, shall be automatically classified as a conventional gas well subject to the severance tax rate specified in Arkansas Code § 26-58-111(5)(D).
12. (j) Failure to comply with any provision of this section may result in the initiation of enforcement actions in accordance with 15 CAR § 275-104, including the assessment of a civil penalty not to exceed two thousand five hundred dollars ($2,500) per day for each day of the violation.

Codification Notes: “Mcf” means one thousand cubic feet (1,000 ft3). This section as promulgated prior to codification into the Code of Arkansas Rules provided as follows: "(Source: new rule November 16, 2008; amended June 5, 2009)"