II

106TH CONGRESS

1ST SESSION S. 1050

To amend the Internal Revenue Code of 1986 to provide incentives for

gas and oil producers, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 13, 1999

Mr. MURKOWSKI introduced the following bill; which was read twice and

referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

incentives for gas and oil producers, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Energy Security Tax

5 Policy Act of 1999’’.

6 SEC. 2. ELIMINATION OF CERTAIN AMT PREFERENCES FOR

7 OIL AND GAS ASSETS.

8 (a) DEPLETION.—Section 57(a)(1) of the Internal

9 Revenue Code of 1986 (relating to depletion) is amended

10 by striking the second sentence and inserting the fol-
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1 lowing: ‘‘This paragraph shall not apply to any deduction

2 for depletion computed in accordance with section 613A.’’

3 (b) INTANGIBLE DRILLING COSTS.—Section

4 57(a)(2)(E) of the Internal Revenue Code of 1986 (relat5 ing to exception for independent producers) is amended

6 to read as follows:

7 ‘‘(E) TERMINATION OF APPLICATION TO

8 OIL AND GAS PROPERTIES.—In the case of any

9 taxable year beginning after December 31,

10 1998, this paragraph shall not apply in the case

11 of any oil or gas property.’’

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall apply to taxable years beginning after

14 December 31, 1998.

15 SEC. 3. DEPRECIATION ADJUSTMENT NOT TO APPLY TO

16 OIL AND GAS ASSETS.

17 (a) IN GENERAL.—Subparagraph (B) of section

18 56(a)(1) of the Internal Revenue Code of 1986 (relating

19 to depreciation adjustments) is amended to read as fol20 lows:

21 ‘‘(B) EXCEPTIONS.—This paragraph shall

22 not apply to—

23 ‘‘(i) property described in paragraph

24 (1), (2), (3), or (4) of section 168(f), or
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1 ‘‘(ii) property used in the active con2 duct of the trade or business of exploring

3 for, extracting, developing, or gathering

4 crude oil or natural gas.’’

5 (b) DEPRECIATION ADJUSTMENT FOR PURPOSES OF

6 ADJUSTED CURRENT EARNINGS.—Paragraph (4)(A) of

7 section 56(g) of such Code (relating to adjustments based

8 on adjusted current earnings) is amended by adding at

9 the end the following new clause:

10 ‘‘(vi) OIL AND GAS PROPERTY.—In

11 the case of property used in the active con12 duct of the trade or business of exploring

13 for, extracting, developing, or gathering

14 crude oil or natural gas, the amount allow15 able as depreciation or amortization with

16 respect to such property shall be deter17 mined in the same manner as for purposes

18 of computing the regular tax.’’

19 (c) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1998.
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1 SEC. 4. REPEAL CERTAIN ADJUSTMENTS BASED ON AD2 JUSTED CURRENT EARNINGS RELATING TO

3 OIL AND GAS ASSETS.

4 (a) INTANGIBLE DRILLING COSTS.—Clause (i) of

5 section 56(g)(4)(D) of the Internal Revenue Code of 1986

6 (relating to certain other earnings and profits adjust7 ments) is amended by striking the second sentence and

8 inserting the following: ‘‘In the case of any oil or gas well,

9 this clause shall not apply to amounts paid or incurred

10 in taxable years beginning after December 31, 1998.’’

11 (b) DEPLETION.—Clause (ii) of section 56(g)(4)(F)

12 of the Internal Revenue Code of 1986 (relating to deple13 tion) is amended to read as follows:

14 ‘‘(ii) EXCEPTION FOR OIL AND GAS

15 WELLS.—In the case of any taxable year

16 beginning after December 31, 1998, clause

17 (i) (and subparagraph (C)(i)) shall not

18 apply to any deduction for depletion com19 puted in accordance with section 613A.’’

20 (c) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to taxable years beginning after

22 December 31, 1998.
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1 SEC. 5. ENHANCED OIL RECOVERY CREDIT AND CREDIT

2 FOR PRODUCING FUEL FROM A NONCONVEN3 TIONAL SOURCE ALLOWED AGAINST MIN4 IMUM TAX.

5 (a) ENHANCED OIL RECOVERY CREDIT ALLOWED

6 AGAINST REGULAR AND MINIMUM TAX.—

7 (1) ALLOWING CREDIT AGAINST MINIMUM

8 TAX.—Subsection (c) of section 38 of the Internal

9 Revenue Code of 1986 (relating to limitation based

10 on amount of tax) is amended by redesignating

11 paragraph (3) as paragraph (4) and by inserting

12 after paragraph (2) the following new paragraph:

13 ‘‘(3) SPECIAL RULES FOR ENHANCED OIL RE14 COVERY CREDIT.—

15 ‘‘(A) IN GENERAL.—In the case of the en16 hanced oil recovery credit—

17 ‘‘(i) this section and section 39 shall

18 be applied separately with respect to the

19 credit, and

20 ‘‘(ii) in applying paragraph (1) to the

21 credit—

22 ‘‘(I) subparagraphs (A) and (B)

23 thereof shall not apply, and

24 ‘‘(II) the limitation under para25 graph (1) (as modified by subclause

26 (I)) shall be reduced by the credit al-
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1 lowed under subsection (a) for the

2 taxable year (other than the enhanced

3 oil recovery credit).

4 ‘‘(B) ENHANCED OIL RECOVERY CRED5 IT.—For purposes of this subsection, the term

6 ‘enhanced oil recovery credit’ means the credit

7 allowable under subsection (a) by reason of sec8 tion 43(a).’’.

9 (2) CONFORMING AMENDMENT.—Subclause (II)

10 of section 38(c)(2)(A)(ii) of such Code is amended

11 by inserting ‘‘or the enhanced oil recovery credit’’

12 after ‘‘employment credit’’.

13 (b) CREDIT FOR PRODUCING FUEL FROM A NON14 CONVENTIONAL SOURCE.—

15 (1) ALLOWING CREDIT AGAINST MINIMUM

16 TAX.—Section 29(b)(6) of the Internal Revenue

17 Code of 1986 is amended to read as follows:

18 ‘‘(6) APPLICATION WITH OTHER CREDITS.—

19 The credit allowed by subsection (a) for any taxable

20 year shall not exceed—

21 ‘‘(A) the regular tax for the taxable year

22 and the tax imposed by section 55, reduced by

23 ‘‘(B) the sum of the credits allowable

24 under subpart A and section 27.’’

25 (2) CONFORMING AMENDMENTS.—
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1 (A) Section 53(d)(1)(B)(iii) of such Code

2 is amended by inserting ‘‘as in effect on the

3 date of the enactment of the Energy Security

4 Tax Policy Act of 1999,’’ after ‘‘29(b)(6)(B),’’.

5 (B) Section 55(c)(2) of such Code is

6 amended by striking ‘‘29(b)(6),’’.

7 (c) EFFECTIVE DATE.—The amendments made by

8 this section shall apply to taxable years beginning after

9 December 31, 1998.

10 SEC. 6. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND

11 NATURAL GAS WELL PRODUCTION.

12 (a) CREDIT FOR PRODUCING OIL AND GAS FROM

13 MARGINAL WELLS.—Subpart D of part IV of subchapter

14 A of chapter 1 of the Internal Revenue Code of 1986 (re15 lating to business credits) is amended by adding at the

16 end the following new section:

17 ‘‘SEC. 45D. CREDIT FOR PRODUCING OIL AND GAS FROM

18 MARGINAL WELLS.

19 ‘‘(a) GENERAL RULE.—For purposes of section 38,

20 the marginal well production credit for any taxable year

21 is an amount equal to the product of—

22 ‘‘(1) the credit amount, and

23 ‘‘(2) the qualified crude oil production and the

24 qualified natural gas production which is attrib25 utable to the taxpayer.
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1 ‘‘(b) CREDIT AMOUNT.—For purposes of this

2 section—

3 ‘‘(1) IN GENERAL.—The credit amount is—

4 ‘‘(A) $3 per barrel of qualified crude oil

5 production, and

6 ‘‘(B) 50 cents per 1,000 cubic feet of

7 qualified natural gas production.

8 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN9 CREASE.—

10 ‘‘(A) IN GENERAL.—The $3 and 50 cents

11 amounts under paragraph (1) shall each be re12 duced (but not below zero) by an amount which

13 bears the same ratio to such amount (deter14 mined without regard to this paragraph) as—

15 ‘‘(i) the excess (if any) of the applica16 ble reference price over $14 ($1.56 for

17 qualified natural gas production), bears to

18 ‘‘(ii) $3 ($0.33 for qualified natural

19 gas production).

20 The applicable reference price for a taxable

21 year is the reference price for the calendar year

22 preceding the calendar year in which the tax23 able year begins.

24 ‘‘(B) INFLATION ADJUSTMENT.—In the

25 case of any taxable year beginning in a calendar
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1 year after 2000, each of the dollar amounts

2 contained in subparagraph (A) shall be in3 creased to an amount equal to such dollar

4 amount multiplied by the inflation adjustment

5 factor for such calendar year (determined under

6 section 43(b)(3)(B) by substituting ‘1999’ for

7 ‘1990’).

8 ‘‘(C) REFERENCE PRICE.—For purposes of

9 this paragraph, the term ‘reference price’

10 means, with respect to any calendar year—

11 ‘‘(i) in the case of qualified crude oil

12 production, the reference price determined

13 under section 29(d)(2)(C), and

14 ‘‘(ii) in the case of qualified natural

15 gas production, the Secretary’s estimate of

16 the annual average wellhead price per

17 1,000 cubic feet for all domestic natural

18 gas.

19 ‘‘(c) QUALIFIED CRUDE OIL AND NATURAL GAS

20 PRODUCTION.—For purposes of this section—

21 ‘‘(1) IN GENERAL.—The terms ‘qualified crude

22 oil production’ and ‘qualified natural gas production’

23 mean domestic crude oil or natural gas which is pro24 duced from a marginal well.
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1 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

2 WHICH MAY QUALIFY.—

3 ‘‘(A) IN GENERAL.—Crude oil or natural

4 gas produced during any taxable year from any

5 well shall not be treated as qualified crude oil

6 production or qualified natural gas production

7 to the extent production from the well during

8 the taxable year exceeds 1,095 barrels or barrel

9 equivalents.

10 ‘‘(B) PROPORTIONATE REDUCTIONS.—

11 ‘‘(i) SHORT TAXABLE YEARS.—In the

12 case of a short taxable year, the limitations

13 under this paragraph shall be proportion14 ately reduced to reflect the ratio which the

15 number of days in such taxable year bears

16 to 365.

17 ‘‘(ii) WELLS NOT IN PRODUCTION EN18 TIRE YEAR.—In the case of a well which is

19 not capable of production during each day

20 of a taxable year, the limitations under

21 this paragraph applicable to the well shall

22 be proportionately reduced to reflect the

23 ratio which the number of days of produc24 tion bears to the total number of days in

25 the taxable year.
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1 ‘‘(3) DEFINITIONS.—

2 ‘‘(A) MARGINAL WELL.—The term ‘mar3 ginal well’ means a domestic well—

4 ‘‘(i) the production from which during

5 the taxable year is treated as marginal

6 production under section 613A(c)(6), or

7 ‘‘(ii) which, during the taxable year—

8 ‘‘(I) has average daily production

9 of not more than 25 barrel equiva10 lents, and

11 ‘‘(II) produces water at a rate

12 not less than 95 percent of total well

13 effluent.

14 ‘‘(B) CRUDE OIL, ETC.—The terms ‘crude

15 oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have

16 the meanings given such terms by section

17 613A(e).

18 ‘‘(C) BARREL EQUIVALENT.—The term

19 ‘barrel equivalent’ means, with respect to nat20 ural gas, a conversion ratio of 6,000 cubic feet

21 of natural gas to 1 barrel of crude oil.

22 ‘‘(d) OTHER RULES.—

23 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX24 PAYER.—In the case of a marginal well in which

25 there is more than one owner of operating interests
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1 in the well and the crude oil or natural gas produc2 tion exceeds the limitation under subsection (c)(2),

3 qualifying crude oil production or qualifying natural

4 gas production attributable to the taxpayer shall be

5 determined on the basis of the ratio which tax6 payer’s revenue interest in the production bears to

7 the aggregate of the revenue interests of all oper8 ating interest owners in the production.

9 ‘‘(2) OPERATING INTEREST REQUIRED.—Any

10 credit under this section may be claimed only on

11 production which is attributable to the holder of an

12 operating interest.

13 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

14 SOURCES EXCLUDED.—In the case of production

15 from a marginal well which is eligible for the credit

16 allowed under section 29 for the taxable year, no

17 credit shall be allowable under this section unless

18 the taxpayer elects not to claim the credit under sec19 tion 29 with respect to the well.’’

20 (b) CREDIT TREATED AS BUSINESS CREDIT.—Sec21 tion 38(b) of the Internal Revenue Code of 1986 (relating

22 to current year business credit) is amended by striking

23 ‘‘plus’’ at the end of paragraph (11), by striking the period

24 at the end of paragraph (12) and inserting ‘‘, plus’’, and

25 by adding at the end the following new paragraph:
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1 ‘‘(13) the marginal oil and gas well production

2 credit determined under section 45D(a).’’.

3 (c) CREDIT ALLOWED AGAINST REGULAR AND MIN4 IMUM TAX.—

5 (1) IN GENERAL.—Subsection (c) of section 38

6 of the Internal Revenue Code of 1986 (relating to

7 limitation based on amount of tax), as amended by

8 section 5(a)(1), is amended by redesignating para9 graph (4) as paragraph (5) and by inserting after

10 paragraph (3) the following new paragraph:

11 ‘‘(4) SPECIAL RULES FOR MARGINAL OIL AND

12 GAS WELL PRODUCTION CREDIT.—

13 ‘‘(A) IN GENERAL.—In the case of the

14 marginal oil and gas well production credit—

15 ‘‘(i) this section and section 39 shall

16 be applied separately with respect to the

17 credit, and

18 ‘‘(ii) in applying paragraph (1) to the

19 credit—

20 ‘‘(I) subparagraphs (A) and (B)

21 thereof shall not apply, and

22 ‘‘(II) the limitation under para23 graph (1) (as modified by subclause

24 (I)) shall be reduced by the credit al25 lowed under subsection (a) for the
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1 taxable year (other than the marginal

2 oil and gas well production credit).

3 ‘‘(B) MARGINAL OIL AND GAS WELL PRO4 DUCTION CREDIT.—For purposes of this sub5 section, the term ‘marginal oil and gas well pro6 duction credit’ means the credit allowable under

7 subsection (a) by reason of section 45D(a).’’.

8 (2) CONFORMING AMENDMENTS.—

9 (A) Subclause (II) of section

10 38(c)(2)(A)(ii) of such Code, as amended by

11 section 5(a)(2), is amended by striking ‘‘or the

12 enhanced oil recovery credit’’ and inserting ‘‘the

13 enhanced oil recovery credit, or the marginal oil

14 and gas well production credit’’.

15 (B) Subclause (II) of section

16 38(c)(3)(A)(ii) of such Code, as added by sec17 tion 5(a)(1), is amended by inserting ‘‘or the

18 marginal oil and gas well production credit’’

19 after ‘‘recovery credit’’.

20 (d) COORDINATION WITH SECTION 29.—Section

21 29(d) of the Internal Revenue Code of 1986 (relating to

22 other definitions and special rules) is amended by adding

23 at the end the following new paragraph:

24 ‘‘(9) ELECTION NOT TO TAKE CREDIT.—No

25 credit shall be allowed under subsection (a) with re-
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1 spect to production from any marginal well (as de2 fined in section 45D(c)(3)(A)) if the taxpayer elects

3 to not have this section apply to such well.’’

4 (e) CLERICAL AMENDMENT.—The table of sections

5 for subpart D of part IV of subchapter A of chapter 1

6 of the Internal Revenue Code of 1986 is amended by add7 ing at the end the following new item:

‘‘45D. Credit for producing oil and gas from marginal wells.’’

8 (f) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to production in taxable years end10 ing after the date of the enactment of this Act.

11 SEC. 7. ALLOWANCE OF ADDITIONAL ENHANCED OIL RE12 COVERY METHOD.

13 (a) IN GENERAL.—Clause (i) of section 43(c)(2)(A)

14 of the Internal Revenue Code of 1986 (defining qualified

15 enhanced oil recovery project) is amended to read as fol16 lows:

17 ‘‘(i) which involves the application (in

18 accordance with sound engineering prin19 ciples) of—

20 ‘‘(I) one or more tertiary recov21 ery methods (as defined in section

22 193(b)(3)) which can reasonably be

23 expected to result in more than an in24 significant increase in the amount of
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1 crude oil which will ultimately be re2 covered, or

3 ‘‘(II) a qualified horizontal drill4 ing method which can reasonably be

5 expected to result in more than an in6 significant increase in the amount of

7 crude oil which will ultimately be re8 covered or lead to the discovery or de9 lineation of previously undeveloped ac10 cumulations of crude oil,’’

11 (b) QUALIFIED HORIZONTAL DRILLING METHOD.—

12 Section 43(c)(2) of the Internal Revenue Code of 1986

13 (relating to qualified enhanced oil recovery project) is

14 amended by adding at the end the following new subpara15 graph:

16 ‘‘(C) QUALIFIED HORIZONTAL DRILLING

17 METHOD.—For purposes of this paragraph—

18 ‘‘(i) IN GENERAL.—The term ‘quali19 fied horizontal drilling method’ means the

20 drilling of a horizontal well in order to

21 penetrate hydrocarbon bearing formations

22 located north of latitude 54 degrees North.

23 ‘‘(ii) HORIZONTAL WELL.—The term

24 ‘horizontal well’ means a well which is

25 drilled—
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1 ‘‘(I) at an inclination of at least

2 70 degrees off the vertical, and

3 ‘‘(II) for a distance in excess of

4 1,000 feet.’’

5 (c) CONFORMING AMENDMENT.—Clause (iii) of sec6 tion 43(c)(2)(A) of the Internal Revenue Code of 1986

7 is amended to read as follows:

8 ‘‘(iii) with respect to which—

9 ‘‘(I) in the case of a tertiary re10 covery method, the first injection of

11 liquids, gases, or other matter com12 mences after December 31, 1990, and

13 ‘‘(II) in the case of a qualified

14 horizontal drilling method, the imple15 mentation of the method begins after

16 December 31, 1998.’’

17 (d) EFFECTIVE DATE.—The amendments made by

18 this section shall apply to taxable years ending after De19 cember 31, 1998.

20 SEC. 8. NATURAL GAS GATHERING LINES TREATED AS 7-

21 YEAR PROPERTY.

22 (a) IN GENERAL.—Subparagraph (C) of section

23 168(e)(3) of the Internal Revenue Code of 1986 (relating

24 to classification of certain property) is amended by redes-
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1 ignating clause (ii) as clause (iii) and by inserting after

2 clause (i) the following new clause:

3 ‘‘(ii) any natural gas gathering line,

4 and’’.

5 (b) NATURAL GAS GATHERING LINE.—Subsection (i)

6 of section 168 of the Internal Revenue Code of 1986 is

7 amended by adding at the end the following new para8 graph:

9 ‘‘(15) NATURAL GAS GATHERING LINE.—The

10 term ‘natural gas gathering line’ means the pipe,

11 equipment, and appurtenances used to deliver nat12 ural gas from the wellhead to the point at which

13 such gas first reaches—

14 ‘‘(A) a gas processing plant,

15 ‘‘(B) an interconnection with an interstate

16 natural-gas company (as defined in section 2(6)

17 of the Natural Gas Act (15 U.S.C. 717a(6))),

18 or

19 ‘‘(C) an interconnection with an intrastate

20 transmission pipeline.’’

21 (c) EFFECTIVE DATE.—The amendments made by

22 this section shall apply to property placed in service be23 fore, on, or after the date of the enactment of this Act.

Æ