TIGHT GAS SAND TAX CREDIT YIELDS OPPORTUNITIES

Frank W. Lewis
Petroleum Management Systems
Del City, Okla.

Ann S. Osburn
Certified public accountant
Norman, Okla.

The U.S. Internal Revenue Service on Apr. 1, 1991, released the inflation adjustments used in the calculations of Non-Conventional Fuel Tax Credits for 1990.1

The inflation adjustment, 1.6730, when applied to the base price of $3/bbl of oil equivalent, adjusts the tax credit to $5.019/bbl for oil and 86.53/MMBTU for gas. The conversion factor for equivalent fuels is 5.8 MMBTU/bbl.

Unfortunately, the tax credit for tight formation gas continues to be unadjusted for inflation and remains 520/MMBTU.

As many producers are aware, the Omnibus Budget Reconciliation Act of 1990 expanded the dates of eligibility and the usage for Non-Conventional Fuel Tax Cred-its. 3

Among other provisions, eligible wells may be placed in service until Jan. 1, 1993, and once in place may utilize the credit for production through Dec. 31, 2002. Both dates are 2 year extensions from previous regulations.

ELIGIBILITY WIDENED

Of major interest for producers with tight formation prospects was the deletion of the requirement that only regulated tight formation gas was eligible for the tax credit.

Most wells spudded since Apr. 19, 1977, are deregulated; therefore, most tight formation wells were not eligible for the credit as of Jan. 1, 1985, and thereafter.

The reconciliation act provided qualification for gas from newly drilled wells spudded after Dec. 31, 1990, or from wells on acreage committed or dedicated to interstate commerce as of Apr. 20, 1977.

The revisions apply to all qualified gas produced after Dec. 31, 1990, and would continue to allow wells not subject to price decontrol to remain qualified plus create the potential for eligibility among newly spudded wells.

There is some debate regarding the applicability of the Dec. 31, 1990, date, as the conference committee agreement stated an effective date upon enactment, Nov. 5, 1990.

To bring its regulations within congressional intent, the Federal Energy Regulatory Commission on Mar. 29, 1990, issued a Notice of Proposed Rule Making, "Qualifying Certain Tight Formation Gas for Tax Credit; Proposed Rulemaking."2

PROPOSED RULEMAKING

The proposed rulemaking has three major changes from the earlier rules for tight formation qualifications:

The commission proposed to increase the depth eligibility to below 15,000 ft.
Wells deeper than 15,000 ft were deregulated in 1979 and hence were not eligible for the tax credit. The table delineates gas production limits through 19,500 ft. Both the gas production limit and the oil production limit of 5 b/d are prior to stimulation.
The commission would allow jurisdictional agencies to qualify tight formations meeting the production standards but not the permeability standards of 0.1 md if the state agency can demon-strate the tax credit is necessary to support production from the formation.
The FERC would also allow infill drilling not permitted in the initial regulations if certified by the state agency that such wells would not be drilled without the credit.

The proposed amendments would do much to stimulate drilling in areas with tight formations that under current economic conditions would not be explored.

Purchasers are aware these new regulations do not affect the price at which gas is sold but instead offer additional economic incentives to producers allocable on the basis of net revenue inter-ests.

Producers in any new well should review the logs before completion to determine if gas production may be available from tight formation zones. With the credit, many marginal zones previously ig-nored may be economically viable.

Producers should inform engineers that the economic criteria for perforation should include cash flow plus tax credits.

Much exploration in the continental U.S. has become marginal because of depressed and unpredictable prices for crude oil and natu-ral gas.

The Non-Conventional Fuel Tax Credit for tight formations and other eligible fuels offers producers and production incentive outside the normal return on investment.

REFERENCES

Department of Energy, Federal Energy Regulatory Commission, Qualifying Certain Tight Formation Gas for Tax Credit, Docket No. RM91-8-000, Notice of Proposed Rulemaking, Federal Register, Vol. 56, No. 61, Mar. 29, 1991, p. 13094.
Internal Revenue Service, Nonconventional Source Fuel Credit; Publication of Inflation Adjustment Factor and Reference Price for Calendar Year 1990, Federal Register, Vol. 56, No. 62, Apr. 1, 1991, p. 13361.
Omnibus Budget Reconciliation Act of 1990.