DOE CITES BENEFITS IN NEW U.S. BUDGET LAW

The U.S. oil and gas industry may benefit by nearly $2 billion during 5 years from tax incentives in the Omnibus Budget Reconciliation Act.

A Department of Energy official estimates those provisions may increase domestic production 177,000 b/d by 1995 and nearly 500,000 b/d by 2000.

Michael McElwrath, deputy assistant secretary of energy for fossil energy, told the Interstate Oil Compact Commission in Phoenix some congressmen had complained the law is giving the oil industry a handout when oil prices are rising.

"But how many people recognize that the action taken this fall was the first really positive congressional movement to address oil and gas production since 1954, the year they passed a joint resolution confirming that intangible drilling costs were deductible?" McElwrath asked.

"And as for congressional treatment of oil and gas production-the two fuels that constitute 65% of our energy consumption-it has all been downhill ever since.

"Even the actions taken in the 1980s-oil price decontrol, repeal of the 'windfall profits' tax, gas decontrol-these were simply removing constraints slapped on the industry years or decades earlier."

NONCONVENTIONAL FUELS

The new budget law extends the Section 29 tax credit for nonconventional fuels, equal to a $3/bbl adjusted for inflation (OGJ, Nov. 5, p. 20).

The former law required such fuels to be produced from a well drilled or a facility placed in service before Jan. 1, 1991, and applied to fuels sold before Jan. 1, 2001.

Qualified fuels include oil produced from shale and tar sands, gas from geopressured brine, Devonian shale, coal seams, tight formations or biomass, and liquid, gaseous, or solid synthetic fuels produced from coal.

Congress extended the drilled or placed in service date and the sunset date of the credit for 2 years. So the credit will apply to fuels from wells drilled before Jan. 1, 1993, and fuels sold before Jan. 1, 2003.

Conferees also specified that the credit allowable for enhanced oil recovery projects must be reduced by the amount of general business credit claimed for that taxable year.

McElwrath said extension of the Section 29 credit will continue the drilling boom for coal seam gas and add the equivalent of nearly 100,000 b/d of oil production by 1995.

The joint tax committee of Congress estimates the credit will deny the government $597 million in revenue during the next 5 fiscal years or about $115 million in a typical year.

Congress also extended the alcohol fuels tax credit through Dec. 31, 2000, but reduced it from 60/gal for ethanol fuels to 54. At the same time, Congress allowed an added 10/gal credit for small producers of ethanol, defined as those making less than 30 million gal/year. Those provisions are expected to deny the government $221 million in revenue during 5 years.

EOR COSTS, TRANSFER RULE

The new law permits a 15% credit toward qualified costs of an enhanced oil recovery project. Although the Senate had proposed a similar credit for exploratory drilling costs, conferees did not allow it.

To the extent the credit is allowed, the taxpayer must reduce the amount otherwise deductible or required to be capitalized and recovered through depreciation, depletion, or amortization.

Qualified EOR costs are the cost of property, intangible drilling and development costs, and the cost of tertiary injectants.

The Treasury Department is scheduled to issue regulations regarding the EOR credit, detailing which EOR methods will be eligible for the credit.

McElwrath said the credit could add about 10,000 b/d of production by 1995.

"But, as the other credits hold steady or decline, the EOR credit could stimulate as much as 320,000 b/d of added production by 2000," he said

"In macro numbers, our Bartlesville Project Office has estimated the tax credit could increase EOR reserves by up to 6.4 billion bbl, assuming a West Texas intermediate price of $26/bbl in 1990 dollars. Drop the WTI price to $22/bbl, and the incentive would increase EOR reserves by nearly twofold, from 4.9 billion to 9.8 billion bbl."

The joint tax committee estimates the provision will cost the government $40-50 million year, totaling $213 million during 5 years.

Also, under current law, independent producers cannot claim percentage depletion on leases they buy from majors. The new law repealed that.

It also increased percentage depletion rates on marginal properties by 1 percentage point to a maximum 10% for each whole dollar the average domestic wellhead price of crude is less than $20/bbl, not adjusted for inflation.

McElwrath said that will add 17,000 b/d by 1995.

The joint tax committee estimates that it will cost $50 million/year, or $278 million during 5 years.

IDCS AND MINIMUM TAX

The new law provides a special deduction for oil and gas producers from the alternative minimum tax (AMT).

That deduction is calculated by determining the taxpayer's intangible drilling cost preference and marginal production depletion preferences and making adjustments.

The special deduction cannot exceed 40% of the alternative minimum taxable income and may not be carried forward.

It will be phased out in taxable years in which the price of crude exceeds $28/bbl and will be eliminated if the average price of oil is $34/bbl.

The law also expands and relaxes deductions for intangible drilling costs.

McElwrath said the changes could add about 50,000 b/d by 1995.

The joint tax committee said the AMT changes will cost $188 million in fiscal 1992 and about $756 million during the 5 year period. The IDC changes will cost $84 million in fiscal 1992 and $404 million during the period.