II

104TH CONGRESS

1ST SESSION S. 32

To amend the Internal Revenue Code of 1986 to provide a tax credit for

the production of oil and gas from existing marginal oil and gas wells

and from new oil and gas wells.

IN THE SENATE OF THE UNITED STATES

JANUARY 4, 1995

Mr. BREAUX (for himself and Mr. JOHNSTON) 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

a tax credit for the production of oil and gas from

existing marginal oil and gas wells and from new oil

and gas wells.

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

3 SECTION 1. TAX CREDIT FOR MARGINAL AND NEW DOMES4 TIC OIL AND NATURAL GAS PRODUCTION.

5 (a) CREDIT FOR PRODUCING OIL AND GAS FROM

6 NEW WELLS AND MARGINAL WELLS.—Subpart D of part

7 IV of subchapter A of chapter 1 of the Internal Revenue
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1 Code of 1986 (relating to business credits) is amended by

2 adding at the end the following new section:

3 ‘‘SEC. 45C. CREDIT FOR PRODUCING OIL AND GAS FROM

4 NEW WELLS AND MARGINAL WELLS.

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

6 the new and marginal well production credit for any tax7 able year is an amount equal to the product of—

8 ‘‘(1) the credit amount, and

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

10 qualified natural gas production which is attrib11 utable to the taxpayer.

12 ‘‘(b) CREDIT AMOUNT.—For purposes of this sec13 tion—

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

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

16 production, and

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

18 qualified natural gas production.

19 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN20 CREASE.—

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

22 amounts under paragraph (1) shall each be re23 duced (but not below zero) by an amount which

24 bears the same ratio to such amount (deter25 mined without regard to this paragraph) as—
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1 ‘‘(i) the amount by which the ref2 erence price for the calendar year preced3 ing the calendar year in which the taxable

4 year begins exceeds $14 ($2.49 for quali5 fied natural gas production), bears to

6 ‘‘(ii) $6 ($1.06 for qualified natural

7 gas production).

8 ‘‘(B) INFLATION ADJUSTMENT.—In the

9 case of any taxable year beginning in a calendar

10 year after 1995, each of the dollar amounts

11 contained in subparagraph (A) shall be in12 creased to an amount equal to such dollar

13 amount multiplied by the inflation adjustment

14 factor for such calendar year (determined under

15 section 43(c)(3)(B) by substituting ‘1994’ for

16 ‘1990’).

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

18 this paragraph, the term ‘reference price’

19 means with respect to any calendar year—

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

21 production, the reference price determined

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

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

24 gas production, the Secretary’s estimate of

25 the annual average wellhead price per
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1 1,000 cubic feet for all domestic natural

2 gas.

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

4 PRODUCTION.—For purposes of this section—

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

6 oil production’ and ‘qualified natural gas production’

7 mean domestic crude oil or natural gas which is pro8 duced from—

9 ‘‘(A) a marginal well, or

10 ‘‘(B) a new well.

11 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

12 WHICH MAY QUALIFY.—

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

14 gas produced during any taxable year from any

15 well shall not be treated as qualified crude oil

16 production or qualified natural gas production

17 to the extent production from the well during

18 the taxable year exceeds—

19 ‘‘(i) in the case of a marginal well,

20 1,095 barrels or barrel equivalents, or

21 ‘‘(ii) in the case of a new well, 5,475

22 barrels or barrel equivalents.

23 ‘‘(B) SPECIAL RULE WHERE WELL PRO24 DUCES BOTH.—In the case of a new well which

25 produces crude oil and natural gas, the limita-
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1 tion for any taxable year applicable to natural

2 gas produced from the well shall be reduced by

3 the barrel equivalents (expressed in cubic feet)

4 of the crude oil produced from the well during

5 the taxable year.

6 ‘‘(C) PROPORTIONATE REDUCTIONS.—

7 ‘‘(i) SHORT TAXABLE YEARS.—In the

8 case of a short taxable year, the limitations

9 under this paragraph shall be proportion10 ately reduced to reflect the ratio which the

11 number of days in the year bears to 365.

12 ‘‘(ii) WELLS NOT IN PRODUCTION EN13 TIRE YEAR.—In the case of a well which is

14 not capable of production during each day

15 of a taxable year, the limitations under

16 this paragraph applicable to the well shall

17 be proportionately reduced to reflect the

18 ratio which the number of days of produc19 tion bears to the total number of days in

20 the taxable year.

21 ‘‘(3) DEFINITIONS.—

22 ‘‘(A) MARGINAL WELL.—The term ‘mar23 ginal well’ means a domestic well (other than a

24 new well)—
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1 ‘‘(i) the production from which during

2 the taxable year is treated as marginal

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

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

5 ‘‘(I) has average daily production

6 of not more than 25 barrel equiva7 lents, and

8 ‘‘(II) produces water at a rate

9 not less than 95 percent of total well

10 effluent.

11 ‘‘(B) NEW WELL.—The term ‘new well’

12 means a domestic well drilled after December

13 31, 1994.

14 ‘‘(C) 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 ‘‘(D) BARREL EQUIVALENT.—The term

19 ‘barrel equivalent’ means, with respect to natu20 ral 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 or new well

25 in which there is more than one owner of operating
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1 interests in the well and the crude oil or natural gas

2 production exceeds the limitation under subsection

3 (c)(2), qualifying crude oil production or qualifying

4 natural gas production attributable to the taxpayer

5 shall be determined on the basis of the ratio which

6 taxpayer’s revenue interest in the production bears

7 to 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 as defined in section 614(d).

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 such Code is amended by striking ‘‘plus’’

22 at the end of paragraph (10), by striking the period at

23 the end of paragraph (11) and inserting ‘‘, plus’’, and by

24 adding at the end the following new paragraph:
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1 ‘‘(12) the new and marginal oil and gas well

2 production credit determined under section 45C(a).’’

3 (c) CREDIT ALLOWED AGAINST REGULAR AND MINI4 MUM TAX.—

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

6 of such Code (relating to limitation based on amount

7 of tax) is amended by redesignating paragraph (3)

8 as paragraph (4) and by inserting after paragraph

9 (2) the following new paragraph:

10 ‘‘(3) SPECIAL RULES FOR OIL AND GAS PRO11 DUCTION CREDIT.—

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

13 and gas production credit—

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

15 be applied separately with respect to the

16 credit, and

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

18 credit—

19 ‘‘(I) subparagraph (A) shall not

20 apply, and

21 ‘‘(II) the limitation under para22 graph (1) (as modified by subclause

23 (I)) shall be reduced by the credit al24 lowed under subsection (a) for the
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1 taxable year (other than the oil and

2 gas production credit).

3 ‘‘(B) OIL AND GAS PRODUCTION CRED4 IT.—For purposes of this subsection, the term

5 ‘oil and gas production credit’ means the credit

6 allowable under subsection (a) by reason of sec7 tion 45C(a).’’

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

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

10 by inserting ‘‘or the oil and gas production credit’’

11 after ‘‘employment credit’’.

12 (d) COORDINATION WITH SECTION 29.—Section

13 29(a) of such Code is amended by striking ‘‘There’’ and

14 inserting ‘‘At the election of the taxpayer, there’’.

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

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

17 of such Code is amended by adding at the end the follow18 ing item:

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

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

20 this section shall apply to production after the date of the

21 enactment of this Act.

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