US producers win long-sought relief for marginal wells

Bob Tippee

Congress can act constructively on energy and doesn't need omnibus legislation to do it.

It demonstrated this ability recently by passing tax relief oil and gas producers have sought for many years.

Congress first extended through 2005 its suspension of the net-income limitation on percentage depletion for marginal wells—those that produce no more than 15 b/d of oil or 60 Mcfd of gas or that produce heavy oil.

It then passed a tax credit for marginal wells effective when oil and gas prices are low.

The measures won't cost the Treasury much and will keep barely economic wells on production in times of price distress.

Both were part of comprehensive energy legislation, which seems destined not to be passed again this year. In fact they, along with other tax adjustments sought by producers, might well have died with the larger, more unwieldy bill.

Instead, lawmakers considered the net-income limitation measure in a package of provisions attached to the Working Families Tax Relief Act just before passage. They passed the countercyclical marginal-well tax credit as a last-minute addition to the American Jobs Creation Act.

The net-income limitation, suspended for several years for marginal wells, applies property by property, capping percentage depletion at 100% of net income.

Percentage depletion, a deduction generally of 15% of gross income from a property, is available only to independent producers and limited to production of 1,000 b/d of oil or an equivalent amount of gas.

The countercyclical tax credit applies to highly water-cut wells—those producing 25 b/d or 150 Mcfd or less with 95% water—as well as marginal wells. It's available for a well's first 3 b/d of oil or 18 Mcfd or gas at a rate of at most $3/bbl and 50¢/Mcf. The credit phases in as average annual oil and gas prices drop below $18/bbl and $2/Mcf, reaching the maximum levels at $15/bbl and $1.67/Mcf.

Work remains to be done on tax changes beneficial to independent producers. Action on the net-income limitation and marginal-well credit shows what's possible on energy when Congress doesn't try to do everything at once.

(Author's e-mail: bobt@ogjonline.com)

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