TAX CREDITS IN OIL AND GAS OPERATIONS

1
TAX CREDITS IN OIL AND GAS OPERATIONS

• Patrick Hennessee Ph.D., CPA

2
ENERGY TAX CREDITS

• SECTION 29 CREDIT
• THE NONCONVENTIONAL FUELS CR.
• SECTION 43 CREDIT
• ENHANCED RECOVERY CREDIT

3
SECTION 29 NONCONVENTIONAL FUELS CREDIT

• 3/ BBL (OR BTU EQUIVALENT) adjusted for
  inflation
• 5.8 MILLION BTUS PER BBL
• PRODUCED DOMESTICALLY
• FROM A WELL DRILLED BEFORE 1-1-93 (EXCEPT BIOMASS
  GAS SYNTHETIC COAL - 1-1-1997)
• FUELS SOLD BEFORE 2003 (2008 FOR BIOMAS GAS
  SYN. COAL)
• CREDIT IS REDUCED BY GENERAL BUSINESS CREDIT
  (SEC. 43 CR.)
• NO REDUCTION IF SEC. 43 CR. IS FORGONE

4
QUALIFYING NONCONVENTIONAL FUELS

• OIL FROM TAR SANDS OR SHALE
• GAS FROM
• GEOPRESSURED BRINE
• DEVONIAN SHALE
• COAL SEAMS
• TIGHT FORMATIONS
• BIOMASS GAS
• SYNTHETIC FUELS FROM COAL
• (SOLID, LIQUID, OR GAS)

5
(No Transcript)
6
Shale Oil
7
Tar Sands
8
TIGHT FORMATION GAS

• RARE PRIOR TO 1990
• 1990 ACT LIBERALIZED DEFINITION
• MUST BE FROM A WELL DRILLED AFTER NOV. 5, 1990 OR
  
• HAVE BEEN COMMITTED TO INTERSTATE COMMERCE AS OF
  APR. 20, 1977

9
CREDIT COMPUTATION

• BBL OF OIL BTU EQUIVALENT
• X 3 (ADJUSTED FOR INFLATION)
• SECTION 29 CREDIT
• PHASED-OUT OVER 6 AS THE AVG. PRICE OF CRUDE gt
  23.50 (ADJUSTED FOR INFLATION)
• NO INFLATION ADJUSTMENT FOR TIGHT SANDS GAS

10
CREDIT CALCULATION

• CR. /BBL RP - (23.50 x i)
• OF OIL (3x i) --------------------------
  x (3 x i)
• EQUIV. (29.50 - 23.50) x i

RP REFERENCE PRICE i INFLATION FACTOR (NO
INFLATION FACTOR FOR TIGHT SANDS)
11

YEAR REF. PRICE INFLA. FACTOR CR./
BBL

12
SECTION 29 EXAMPLE

• WELL DRILLED IN 1991, GAS SOLD IN 1998
• SOLD 100,000 MILLION BTU OF GAS
• IF TIGHT SANDS
• CR. 3 X (100,000/5.8) 51,724
• IF OTHER THAN TIGHT SANDS
• CR. 6.12 X (100,000/5.8) 105,517

13
ENHANCED OIL RECOVERY CREDIT
Section 43 Credit
Injection Well
Production Well

14
SECTION 43 - ENHANCED OIL RECOVERY CREDIT

• PART OF THE GENERAL BUSINESS CREDIT
• 3 YEAR CARRYBACK 15 YEAR CARRYFORWARD
• THE CREDIT STARTED - JAN. 1, 1991
• CREDIT 15 OF QUALIFIED DOMESTIC EOR COSTS
• ANY CREDIT TAKEN REDUCES
• RELATED DEDUCTION OR
• RELATED AMOUNT CAPITALIZED
• PHASED OUT OVER 6 AS OIL REACHES 28/BBL
  (ADJUSTED FOR INFLATION)

15
QUALIFYING COSTS

• INJECTANTS (EXPENSE OR TAKE CR.)
• IDC
• TANGIBLE PROPERTY (EQUIP)

16
QUALIFIED PROJECTS

• TERTIARY METHOD
• DOMESTIC PROJECT
• EXPECT TO RESULT IN MORE THAN INSIGNIFICANT
  INCREASE IN ULTIMATE CRUDE PRODUCED
• USE SOUND ENGINEERING PRINCIPLES
• INJECTION BEGAN AFTER 1990
• SUBMIT ENGINEERS CERTIFICATION

17
TERTIARY METHODS

• MISCIBLE FLUID DISPLACEMENT
• STEAM-DRIVE INJECTION
• MICRO EMULSION
• INSITU COMBUSTION
• POLYMER-AUGMENTED WATER FLOODING
• CYCLIC STEAM INJECTION
• ALKALINE FLOODING
• CARBONATED WATER FLOODING
• IMMISCIBLE CO2 DISPLACEMENT
• IMMISCIBLE NON-HYDROCARBON GAS DISPLACEMENT
• ANY OTHER IRS APPROVED METHOD

18
GAS INJECTION
Production Well
Injection Well
19
EXAMPLE - INTEGRATED OIL CO.

• QUALIFIED EOR COST 1,000,000 OF IDC (MAY
  EXP. 70)
• 
  200,000 OF EQUIPMENT
• 
  100,000 OF INJECTANTS
• 
  1,300,000 TOTAL QUALIFIED COSTS
• CREDIT .15 X 1,300,000 195,000
• IDC EXPENSED 70 X
  1,000,000 700,000
• 
  LESS CREDIT - 105,000
• 
  IDC EXPENSED 595,000
• CAPITALIZED IDC
• 300,000 - (15
  X 300,000) 255,000
• CAPITALIZED EQUIPMENT
• 200,000 -
  (15 X 200,000) 170,000
• EXPENSE 85,000 OF THE INJECTANTS