American Geological Institute

Government Affairs Program


Domestic Oil and Gas Incentives Legislation Update (11-6-98)

In the last few months, the U.S. economy has been doing well, despite problems in the Asian market. Low energy prices, a key to the upswing in the economy, are viewed by many on Wall Street as a good indication of potential growth. On the other hand, the low international price of crude oil is damaging to the many owners of the millions of domestic, marginal wells. Marginal oil wells are defined as wells that produce less than 15 barrels a day or produce heavy oil, and marginal gas wells are defined as wells that produce less than 90 Mcf (thousand cubic feet) a day. In the U.S., the collective production of independent oil and gas wells is equivalent to the annual imports of Saudi Arabian crude oil. According to a news report released by the Independent Petroleum Association of America (IPAA), "in real terms, oil prices have dropped to levels not seen since the 1930s."

During the 105th Congress, several bills were introduced to encourage domestic oil and gas development, including the National Energy Security Act of 1997, the Inactive Well Recovery Act, and bills to establish a tax credit for existing marginal wells. None of the bills passed during this session of Congress, and attempts to attach tax cuts for marginal wells and G&G exploration to the FY99 tax bill were not successful. In 1997, however, Congress passed tax-cut legislation that contained language to encourage oil and gas development, land conservation, research, and several other topics.

Extensive information on this topic is available from IPAA on their Crude Oil Price Alert website.

Tax Credit for Existing Marginal Wells
On April 1, 1998, Rep. Wes Watkins (R-OK) introduced H.R. 3688, a bill to amend the Internal Revenue Code of 1986 to provide a tax credit for marginal oil and natural gas well production. A day later, Senator Kay Bailey Hutchison (R-TX) introduced S. 1929, a companion bill. The House gained 24 cosponsors, and the Senate bill had 10 cosponsors, but neither made it out of committee.

The bills would allow a $3 tax credit per barrel for the first three barrels of daily production from an existing marginal well and a $0.50 tax credit per Mcf (1,000 cubic feet) for the first 18 Mcf of daily production. The tax credits would be phased in and out to follow the rise and fall of oil and natural gas prices. Language in both bills allow these tax credits to be "offset against regular and the alternative minimum tax," and the tax credits would have a 10-year carry back for producers without taxable income for the current tax year. The Senate bill, S. 1929, allows for geological and geophysical expenditures for development and exploration costs to be deducted from gross income at the time of the cost to the well producer.

National Energy Security Act of 1997
On May 14, Representative Wes Watkins (R-OK) introduced H.R. 1648, the National Energy Security Act of 1997. A week later, Assistant Senate Majority Leader Don Nickles (R-OK) introduced a companion bill, S. 770, the Domestic Oil and Gas Preservation Act. Both bills were referred to committee.

In a "Dear Colleague" letter asking for cosponsors, Rep. Watkins explained the purpose of H.R. 1648 as "encouraging domestic production of oil and gas through a variety of tax incentives." The bill revises existing laws to ensure producers can deduct ordinary and necessary costs related to oil and natural gas production. It eliminates the net income limitation on percentage depletion, includes a recovery tax credit, and allows deductions for geological and geophysical expenses.

The reaction among oil and natural gas producers has been very favorable. Denise Bode, then president of IPAA, responded, "It's time to update the tax code to reflect the high-cost, high-tech changes occurring within the oil and gas industry."

Inactive Well Recovery Act
Rep. Mac Thornberry (R-TX) introduced H.R. 2072, the Inactive Well Recovery Act on June 26, 1997. The bill amends the Internal Revenue Code to exclude income attributable to independent producer oil from a recovered inactive well from gross income. The bill includes both oil and natural gas in the definition of "independent producer oil" and prohibits deductions directly connected with amounts so excluded. The gained 21 cosponsors and was been referred to the House Committee on Ways and Means.

Tax Provisions
Oil and gas provisions are also included in tax cut legislation. The tax bill suspended the property-income limitation for percentage depletion of marginal oil and gas properties for two years beginning in 1998. Rep. Watkins, an instrumental supporter of the provision, explained, "Our provision is directed at ending the tax penalties on the most economically at-risk segment of the domestic oil and natural gas industry. This tax incentive will keep our marginal and stripper wells in operation rather than producers being forced to plug or abandon wells." Under present law, the maximum percentage depletion deduction for a particular property is 100% of the net income from that property. More information on tax provisions and the budget process for 1998 is available on the AGI Government Affairs web site.

Sources: IPAA press releases, Upstream Politics, The Daily Oklahoman, Library of Congress 


Please send any comments or requests for information to the AGI Government Affairs Program.

Contributed by Kasey Shewey White, AGI Government Affairs and Margaret Baker, AGI Government Affairs Intern.

Posted September 9, 1997; Last updated on November 6, 1998


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