NONCONVENTIONAL FUEL TAX CREDIT APPLICATION DEADLINE APPROACHES

Oct. 19, 1992
Frank W. Lewis Petroleum Management Systems Inc. Del City, Okla. Eric K. Steger East Central University Ada, Okla. The U.S. Federal Energy Regulatory Commission has established Dec. 31, 1992, as the deadline for producers to file Natural Gas Policy Act applications for gas produced from nonconventional fuel sources. Qualifying wells may receive tax credits ranging from 52/MMBTU to 92/MMBTU depending on the category and year of production. The most commonly eligible wells include tight
Frank W. Lewis
Petroleum Management Systems Inc.
Del City, Okla.
Eric K. Steger
East Central University
Ada, Okla.

The U.S. Federal Energy Regulatory Commission has established Dec. 31, 1992, as the deadline for producers to file Natural Gas Policy Act applications for gas produced from nonconventional fuel sources.

Qualifying wells may receive tax credits ranging from 52/MMBTU to 92/MMBTU depending on the category and year of production. The most commonly eligible wells include tight formations, coalbed methanes, and gas from Devonian shales.

FERC Order 539 allows producers to make application with the state jurisdictional agencies through Dec. 31, 1992.1 Many state jurisdictional agencies are willing to accept partial applications to be completed shortly thereafter.

In practice, many wells spudded in December will not be completed until after yearend. In Order 539-A FERC has agreed any applications forwarded by state agencies and received by FERC by Sept. 30, 1993, will be processed.2

Of major interest to qualifying producers is an Internal Revenue Service private letter ruling suggesting nonconventional fuel tax credits may be taken retroactively from wells with recent NGPA approval.3

As an example, it may be possible for a well spudded on Jan. 1, 1991, with an NGPA filing dated Dec. 31, 1992, and subsequently approved by FERC in 1993 to retroactively qualify for the tax credit from eligible production for both 1991 and 1992. Standard IRS procedures allow amendments to prior year income taxes to be made for up to 3 years.

The FERC order also restricts the eligibility of wells from tight formations with producing zones deeper than 14,500 ft to no more than 2.557 MMcfd from stabilized production prior to stimulation.

Permeability calculations for tight formation areas are also determined to be on an arithmetic averaging rather than geometric basis. Selective minor criteria also apply.

BASIC QUALIFICATIONS

In addition to the NGPA filing deadline, eligible wells must be spudded or recompleted in applicable zones on or before Dec. 31, 1992. Other rulings appear to require continuous activity on the drillsite until completion.

A summary of the basic qualifications from both the FERC and the IRS for nonconventional fuel credits follows:

Devonian shale and coalbed methane gas. Wells producing natural or casinghead gas from Devonian shales or coalbed methanes must be spudded between Jan. 1, 1980, and Dec. 31, 1992, or in older wells the eligible zone must be recompleted in the same period.

The tax credit for both categories of wells is 92/MMBTU for 1991 production and escalated with annual inflation.4 Eligible zones may be reworked to increase production, and, under existing legislation, qualified wells may receive the tax credit for applicable production through 2002.

Tight formation gas. Wells producing natural or casinghead gas from tight formations are not limited solely to tight gas sands but may also include any qualifying tight gas formation. The wells must be spudded between Nov. 6, 1990, and Dec. 31, 1992, or in older wells the eligible zone must be recompleted within the same period.

The initial tight formation applications, which qualify area wide producing zones, must meet the 0.1 md average permeability standard. However, once a producing zone is qualified any drilling or recompletion within the approved zone and area that meets the previous date criteria is not required to meet the 0.1 md test.

Because of the recent increase in tight formation applications, many producers are unaware they have production in approved or pending tight formation areas. Each producer should review his production to determine if any producing zones are within an approved tight formation area.

Subsequent NGPA applications within existing tight formation areas are relatively straightforward and may be filed by either the operator or any interest owner. The state jurisdictional agencies or commercial services can provide location information for approved tight formation areas.

Under existing legislation the tax credit for tight formation gas is 52/MMBTU for production through 2002 and is not adjusted for inflation.

ECONOMIC BENEFITS

Nonconventional fuel tax credits may only be used to offset tax liability and are not applicable against alternative minimum tax (AMT).

However, at this writing legislation had been proposed that might allow more oil and gas producers exemptions from AMT. The tax credits flow to investors based on net revenue interests, and both corporations and individuals may benefit.

There are two major benefits to producers from nonconventional fuel tax credits.

First, the credits increase the revenue stream to investors not limited by AMT. In times of abnormally low gas prices the credits may meet or exceed actual gas prices.

Second, investors with AMT receive benefit from the increased value of their holdings if sold to parties without AMT.

The nonconventional fuel tax credit is now on an apply-for-it-or-lose-it basis. To qualify, you must spud, recomplete, and file your NGPA application on or before Dec. 31, 1992.

The Section 29 tax credit is an excellent and cost effective way for operators to quickly increase production and after-tax income for themselves and their eligible investors through 2002.

REFERENCES

  1. Department of Energy, Federal Energy Regulatory Commission Order 539, Docket No. RM91-8-000, Federal Register, Vol. 57, No. 73, Apr. 15, 1992, pp 13009-13017.

  2. FERC Order 539-A, Docket No. RM91-8-000, Federal Register, Vol. 57, No. 135, July 14, 1992, p 31123.

  3. Internal Revenue Service, letter ruling, LTR 9135028, May 30, 1991.

  4. IRS, Federal Register, Vol. 57, No. 65, Apr. 3, 1992, p. 11543.

Copyright 1992 Oil & Gas Journal. All Rights Reserved.