II

106TH CONGRESS

1ST SESSION S. 325

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

to encourage production of oil and gas within the United States, and

for other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 28, 1999

Mrs. HUTCHISON (for herself, Mr. DOMENICI, Mr. NICKLES, Mr. MURKOWSKI,

Mr. BINGAMAN, Mr. BREAUX, Mr. BROWNBACK, Mr. COCHRAN, Mr.

CONRAD, Mr. ENZI, Mr. GRAMM, Mr. INHOFE, Ms. LANDRIEU, Mr. ROBERTS, Mr. ROCKEFELLER, Mr. STEVENS, Mr. THOMAS, Mr. BURNS, and

Mr. LOTT) 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

tax incentives to encourage production of oil and gas

within the United States, 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 ‘‘United States Energy

5 Economic Growth Act’’.
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1 TITLE I—PRODUCTION FROM

2 MARGINAL AND INACTIVE

3 WELLS

4 SEC. 101. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND

5 NATURAL GAS WELL PRODUCTION.

6 (a) CREDIT FOR PRODUCING OIL AND GAS FROM

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

8 A of chapter 1 of the Internal Revenue Code of 1986 (re9 lating to business credits) is amended by adding at the

10 end the following new section:

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

12 MARGINAL WELLS.

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

14 the marginal well production credit for any taxable year

15 is an amount equal to the product of—

16 ‘‘(1) the credit amount, and

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

18 qualified natural gas production which is attrib19 utable to the taxpayer.

20 ‘‘(b) CREDIT AMOUNT.—For purposes of this

21 section—

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

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

24 production, and
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1 ‘‘(B) 50 cents per 1,000 cubic feet of

2 qualified natural gas production.

3 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN4 CREASE.—

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

6 amounts under paragraph (1) shall each be re7 duced (but not below zero) by an amount which

8 bears the same ratio to such amount (deter9 mined without regard to this paragraph) as—

10 ‘‘(i) the excess (if any) of the applica11 ble reference price over $14 ($1.56 for

12 qualified natural gas production), bears to

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

14 gas production).

15 The applicable reference price for a taxable

16 year is the reference price for the calendar year

17 preceding the calendar year in which the tax18 able year begins.

19 ‘‘(B) INFLATION ADJUSTMENT.—In the

20 case of any taxable year beginning in a calendar

21 year after 2000, each of the dollar amounts

22 contained in subparagraph (A) shall be in23 creased to an amount equal to such dollar

24 amount multiplied by the inflation adjustment

25 factor for such calendar year (determined under
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1 section 43(b)(3)(B) by substituting ‘1999’ for

2 ‘1990’).

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

4 this paragraph, the term ‘reference price’

5 means, with respect to any calendar year—

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

7 production, the reference price determined

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

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

10 gas production, the Secretary’s estimate of

11 the annual average wellhead price per

12 1,000 cubic feet for all domestic natural

13 gas.

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

15 PRODUCTION.—For purposes of this section—

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

17 oil production’ and ‘qualified natural gas production’

18 mean domestic crude oil or natural gas which is pro19 duced from a marginal well.

20 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

21 WHICH MAY QUALIFY.—

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

23 gas produced during any taxable year from any

24 well shall not be treated as qualified crude oil

25 production or qualified natural gas production
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1 to the extent production from the well during

2 the taxable year exceeds 1,095 barrels or barrel

3 equivalents.

4 ‘‘(B) PROPORTIONATE REDUCTIONS.—

5 ‘‘(i) SHORT TAXABLE YEARS.—In the

6 case of a short taxable year, the limitations

7 under this paragraph shall be proportion8 ately reduced to reflect the ratio which the

9 number of days in such taxable year bears

10 to 365.

11 ‘‘(ii) WELLS NOT IN PRODUCTION EN12 TIRE YEAR.—In the case of a well which is

13 not capable of production during each day

14 of a taxable year, the limitations under

15 this paragraph applicable to the well shall

16 be proportionately reduced to reflect the

17 ratio which the number of days of produc18 tion bears to the total number of days in

19 the taxable year.

20 ‘‘(3) DEFINITIONS.—

21 ‘‘(A) MARGINAL WELL.—The term ‘mar22 ginal well’ means a domestic well which during

23 the taxable year has marginal production (as

24 defined in section 613A(c)(6)).
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1 ‘‘(B) CRUDE OIL, ETC.—The terms ‘crude

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

3 the meanings given such terms by section

4 613A(e).

5 ‘‘(C) BARREL EQUIVALENT.—The term

6 ‘barrel equivalent’ means, with respect to natu7 ral gas, a conversion ratio of 6,000 cubic feet

8 of natural gas to 1 barrel of crude oil.

9 ‘‘(d) OTHER RULES.—

10 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX11 PAYER.—In the case of a marginal well in which

12 there is more than one owner of operating interests

13 in the well and the crude oil or natural gas produc14 tion exceeds the limitation under subsection (c)(2),

15 qualifying crude oil production or qualifying natural

16 gas production attributable to the taxpayer shall be

17 determined on the basis of the ratio which tax18 payer’s revenue interest in the production bears to

19 the aggregate of the revenue interests of all operat20 ing interest owners in the production.

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

22 credit under this section may be claimed only on

23 production which is attributable to the holder of an

24 operating interest.
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1 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

2 SOURCES EXCLUDED.—In the case of production

3 from a marginal well which is eligible for the credit

4 allowed under section 29 for the taxable year, no

5 credit shall be allowable under this section unless

6 the taxpayer elects not to claim the credit under sec7 tion 29 with respect to the well.’’.

8 (b) CREDIT TREATED AS BUSINESS CREDIT.—Sec9 tion 38(b) of such Code is amended by striking ‘‘plus’’

10 at the end of paragraph (11), by striking the period at

11 the end of paragraph (12) and inserting ‘‘, plus’’, and by

12 adding at the end the following new paragraph:

13 ‘‘(13) the marginal oil and gas well production

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

15 (c) CREDIT ALLOWED AGAINST REGULAR AND MINI16 MUM TAX.—

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

18 of such Code (relating to limitation based on amount

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

20 as paragraph (4) and by inserting after paragraph

21 (2) the following new paragraph:

22 ‘‘(3) SPECIAL RULES FOR MARGINAL OIL AND

23 GAS WELL PRODUCTION CREDIT.—

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

25 marginal oil and gas well production credit—
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1 ‘‘(i) this section and section 39 shall

2 be applied separately with respect to the

3 credit, and

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

5 credit—

6 ‘‘(I) subparagraphs (A) and (B)

7 thereof shall not apply, and

8 ‘‘(II) the limitation under para9 graph (1) (as modified by subclause

10 (I)) shall be reduced by the credit al11 lowed under subsection (a) for the

12 taxable year (other than the marginal

13 oil and gas well production credit).

14 ‘‘(B) MARGINAL OIL AND GAS WELL PRO15 DUCTION CREDIT.—For purposes of this sub16 section, the term ‘marginal oil and gas well pro17 duction credit’ means the credit allowable under

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

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

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

21 by inserting ‘‘or the marginal oil and gas well pro22 duction credit’’ after ‘‘employment credit’’.

23 (d) CARRYBACK.—Subsection (a) of section 39 of

24 such Code (relating to carryback and carryforward of un-
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1 used credits generally) is amended by adding at the end

2 the following new paragraph:

3 ‘‘(3) 10-YEAR CARRYBACK FOR MARGINAL OIL

4 AND GAS WELL PRODUCTION CREDIT.—In the case

5 of the marginal oil and gas well production credit—

6 ‘‘(A) this section shall be applied sepa7 rately from the business credit (other than the

8 marginal oil and gas well production credit),

9 ‘‘(B) paragraph (1) shall be applied by

10 substituting ‘10 taxable years’ for ‘1 taxable

11 years’ in subparagraph (A) thereof, and

12 ‘‘(C) paragraph (2) shall be applied—

13 ‘‘(i) by substituting ‘31 taxable years’

14 for ‘21 taxable years’ in subparagraph (A)

15 thereof, and

16 ‘‘(ii) by substituting ‘30 taxable years’

17 for ‘20 taxable years’ in subparagraph (B)

18 thereof.’’

19 (e) COORDINATION WITH SECTION 29.—Section

20 29(a) of such Code is amended by striking ‘‘There’’ and

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

22 (f) CLERICAL AMENDMENT.—The table of sections

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

24 of such Code is amended by adding at the end the follow25 ing item:

‘‘45D. Credit for producing oil and gas from marginal wells.’’
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1 (g) EFFECTIVE DATE.—The amendments made by

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

3 enactment of this Act.

4 SEC. 102. EXCLUSION OF CERTAIN AMOUNTS RECEIVED

5 FROM RECOVERED INACTIVE WELLS.

6 (a) IN GENERAL.—Part III of subchapter B of chap7 ter 1 of the Internal Revenue Code of 1986 (relating to

8 items specifically excluded from gross income) is amended

9 by redesignating section 139 as section 140 and by insert10 ing after section 138 the following new section:

11 ‘‘SEC. 139. OIL OR GAS PRODUCED FROM A RECOVERED IN12 ACTIVE WELL.

13 ‘‘(a) IN GENERAL.—Gross income does not include

14 income attributable to independent producer oil from a re15 covered inactive well.

16 ‘‘(b) DEFINITIONS.—For purposes of this section—

17 ‘‘(1) INDEPENDENT PRODUCER OIL.—The term

18 ‘independent producer oil’ means crude oil or natu19 ral gas in which the economic interest of the inde20 pendent producer is attributable to an operating

21 mineral interest (within the meaning of section

22 614(d)), overriding royalty interest, production pay23 ment, net profits interest, or similar interest.
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1 ‘‘(2) CRUDE OIL AND NATURAL GAS.—The

2 terms ‘crude oil’ and ‘natural gas’ have the mean3 ings given such terms by section 613A(e).

4 ‘‘(3) RECOVERED INACTIVE WELL.—The term

5 ‘recovered inactive well’ means a well if—

6 ‘‘(A) throughout the time period beginning

7 any time prior to January 15, 1999, and ending

8 on such date, such well is inactive or has been

9 plugged and abandoned, as determined by the

10 agency of the State in which such well is lo11 cated that is responsible for regulating such

12 wells, and

13 ‘‘(B) during the 5-year period beginning on

14 the date of the enactment of this section, such

15 well resumes producing crude oil or natural gas.

16 ‘‘(4) INDEPENDENT PRODUCER.—The term

17 ‘independent producer’ means a producer of crude

18 oil or natural gas whose allowance for depletion is

19 determined under section 613A(c).

20 ‘‘(c) DEDUCTIONS.—No deductions directly con21 nected with amounts excluded from gross income by sub22 section (a) shall be allowed.

23 ‘‘(d) ELECTION.—

24 ‘‘(1) IN GENERAL.—This section shall apply for

25 any taxable year only at the election of the taxpayer.
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1 ‘‘(2) MANNER.—Such election shall be made, in

2 accordance with regulations prescribed by the Sec3 retary, not later than the time prescribed for filing

4 the return (including extensions thereof) and shall

5 be made annually on a property-by-property basis.’’

6 (b) MINIMUM TAX.—Section 56(g)(4)(B) of the In7 ternal Revenue Code of 1986 is amended by adding at the

8 end the following new clause:

9 ‘‘(iii) INACTIVE WELLS.—In the case

10 of income attributable to independent pro11 ducers of oil recovered from an inactive

12 well, clause (i) shall not apply to any

13 amount allowable as an exclusion under

14 section 139.’’

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

16 for part III of subchapter B of chapter 1 of such Code

17 is amended by striking the item relating to section 139

18 and inserting the following:

‘‘Sec. 139. Oil or gas produced from a recovered inactive well.

‘‘Sec. 140. Cross references to other Acts.’’

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

20 this section shall apply to taxable years ending after the

21 date of the enactment of this Act.
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1 TITLE II—OTHER INCENTIVES

2 SEC. 201. ELECTION TO EXPENSE GEOLOGICAL AND GEO3 PHYSICAL EXPENDITURES.

4 (a) IN GENERAL.—Section 263 of the Internal Reve5 nue Code of 1986 (relating to capital expenditures) is

6 amended by adding at the end the following new sub7 section:

8 ‘‘(j) GEOLOGICAL AND GEOPHYSICAL EXPENDI9 TURES FOR DOMESTIC OIL AND GAS WELLS.—Notwith10 standing subsection (a), a taxpayer may elect to treat geo11 logical and geophysical expenses incurred in connection

12 with the exploration for, or development of, oil or gas with13 in the United States (as defined in section 638) as ex14 penses which are not chargeable to capital account. Any

15 expenses so treated shall be allowed as a deduction in the

16 taxable year in which paid or incurred.’’

17 (b) CONFORMING AMENDMENT.—Section 263A(c)(3)

18 of the Internal Revenue Code of 1986 is amended by in19 serting ‘‘263(j),’’ after ‘‘263(i),’’.

20 (c) EFFECTIVE DATE.—

21 (1) IN GENERAL.—The amendments made by

22 this section shall apply to expenses paid or incurred

23 after the date of the enactment of this Act.

24 (2) TRANSITION RULE.—In the case of any ex25 penses described in section 263(j) of the Internal
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1 Revenue Code of 1986, as added by this section,

2 which were paid or incurred on or before the date

3 of the enactment of this Act, the taxpayer may elect,

4 at such time and in such manner as the Secretary

5 of the Treasury may prescribe, to amortize the

6 unamortized portion of such expenses over the 36-

7 month period beginning with the month in which the

8 date of the enactment of this Act occurs. For pur9 poses of this paragraph, the unamortized portion of

10 any expense is the amount remaining unamortized

11 as of the first day of the 36-month period.

12 SEC. 202. ELECTION TO EXPENSE DELAY RENTAL PAY13 MENTS.

14 (a) IN GENERAL.—Section 263 of the Internal Reve15 nue Code of 1986 (relating to capital expenditures), as

16 amended by section 201(a), is amended by adding at the

17 end the following new subsection:

18 ‘‘(k) DELAY RENTAL PAYMENTS FOR DOMESTIC OIL

19 AND GAS WELLS.—

20 ‘‘(1) IN GENERAL.—Notwithstanding subsection

21 (a), a taxpayer may elect to treat delay rental pay22 ments incurred in connection with the development

23 of oil or gas within the United States (as defined in

24 section 638) as payments which are not chargeable

25 to capital account. Any payments so treated shall be
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1 allowed as a deduction in the taxable year in which

2 paid or incurred.

3 ‘‘(2) DELAY RENTAL PAYMENTS.—For purposes

4 of paragraph (1), the term ‘delay rental payment’

5 means an amount paid for the privilege of deferring

6 development of an oil or gas well.’’

7 (b) CONFORMING AMENDMENT.—Section 263A(c)(3)

8 of the Internal Revenue Code of 1986, as amended by sec9 tion 201(b), is amended by inserting ‘‘263(k),’’ after

10 ‘‘263(j),’’.

11 (c) EFFECTIVE DATE.—

12 (1) IN GENERAL.—The amendments made by

13 this section shall apply to payments made or in14 curred after the date of the enactment of this Act.

15 (2) TRANSITION RULE.—In the case of any

16 payments described in section 263(k) of the Internal

17 Revenue Code of 1986, as added by this section,

18 which were made or incurred on or before the date

19 of the enactment of this Act, the taxpayer may elect,

20 at such time and in such manner as the Secretary

21 of the Treasury may prescribe, to amortize the

22 unamortized portion of such payments over the 36-

23 month period beginning with the month in which the

24 date of the enactment of this Act occurs. For pur25 poses of this paragraph, the unamortized portion of
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1 any payment is the amount remaining unamortized

2 as of the first day of the 36-month period.

3 SEC. 203. EXTENSION OF SPUDDING RULE.

4 (a) IN GENERAL.—Section 461(i)(2)(A) of the Inter5 nal Revenue Code of 1986 (relating to special rule for

6 spudding of oil or gas wells) is amended by striking ‘‘90th

7 day’’ and inserting ‘‘180th day’’.

8 (b) EFFECTIVE DATE.—The amendment made by

9 this section shall apply to taxable years beginning after

10 December 31, 1998.

11 SEC. 204. ENHANCED OIL RECOVERY CREDIT EXTENDED TO

12 CERTAIN NONTERTIARY RECOVERY METH13 ODS.

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

15 of the Internal Revenue Code of 1986 (defining qualified

16 enhanced oil recovery project) is amended to read as fol17 lows:

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

19 accordance with sound engineering prin20 ciples) of—

21 ‘‘(I) one or more tertiary recov22 ery methods (as defined in section

23 193(b)(3)) which can reasonably be

24 expected to result in more than an in25 significant increase in the amount of
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1 crude oil which will ultimately be re2 covered, or

3 ‘‘(II) one or more nontertiary re4 covery methods which are required to

5 recover oil with traditionally immobile

6 characteristics or from formations

7 which have proven to be uneconomical

8 or noncommercial under conventional

9 recovery methods.’’

10 (b) QUALIFIED NONTERTIARY RECOVERY METH11 ODS.—Section 43(c)(2) of the Internal Revenue Code of

12 1986 is amended by adding at the end the following new

13 subparagraphs:

14 ‘‘(C) QUALIFIED NONTERTIARY RECOVERY

15 METHOD.—For purposes of this paragraph—

16 ‘‘(i) IN GENERAL.—The term ‘quali17 fied nontertiary recovery method’ means

18 any recovery method described in clause

19 (ii), (iii), or (iv), or any combination there20 of.

21 ‘‘(ii) ENHANCED GRAVITY DRAINAGE

22 (EGD) METHODS.—The methods described

23 in this clause are as follows:

24 ‘‘(I) HORIZONTAL DRILLING.—

25 The drilling of horizontal, rather than
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1 vertical, wells to penetrate any hydro2 carbon-bearing formation which has

3 an average in situ calculated per4 meability to fluid flow of less than or

5 equal to 12 or less millidarcies and

6 which has been demonstrated by use

7 of a vertical wellbore to be uneco8 nomical unless drilled with lateral hor9 izontal lengths in excess of 1,000 feet.

10 ‘‘(II) GRAVITY DRAINAGE.—The

11 production of oil by gravity flow from

12 drainholes that are drilled from a

13 shaft or tunnel dug within or below

14 the oil-bearing zone.

15 ‘‘(iii) MARGINALLY ECONOMIC RES16 ERVOIR REPRESSURIZATION (MERR) METH17 ODS.—The methods described in this

18 clause are as follows, except that this

19 clause shall only apply to the first

20 1,000,000 barrels produced in any project:

21 ‘‘(I) CYCLIC GAS INJECTION.—

22 The increase or maintenance of pres23 sure by injection of hydrocarbon gas

24 into the reservoir from which it was

25 originally produced.
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1 ‘‘(II) FLOODING.—The injection

2 of water into an oil reservoir to dis3 place oil from the reservoir rock and

4 into the bore of a producing well.

5 ‘‘(iv) OTHER METHODS.—Any method

6 used to recover oil having an average lab7 oratory measured air permeability less

8 than or equal to 100 millidarcies when

9 averaged over the productive interval being

10 completed, or an in situ calculated per11 meability to fluid flow less than or equal to

12 12 millidarcies or oil defined by the De13 partment of Energy as being immobile.

14 ‘‘(D) AUTHORITY TO ADD OTHER NONTER15 TIARY RECOVERY METHODS.—The Secretary

16 shall provide procedures under which—

17 ‘‘(i) the Secretary may treat methods

18 not described in clause (ii), (iii), or (iv) of

19 subparagraph (C) as qualified nontertiary

20 recovery methods, and

21 ‘‘(ii) a taxpayer may request the Sec22 retary to treat any method not so de23 scribed as a qualified nontertiary recovery

24 method.
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1 The Secretary may only specify methods as

2 qualified nontertiary recovery methods under

3 this subparagraph if the Secretary determines

4 that such specification is consistent with the

5 purposes of subparagraph (C) and will result in

6 greater production of oil and natural gas.’’

7 (c) CONFORMING AMENDMENT.—Clause (iii) of sec8 tion 43(c)(2)(A) of the Internal Revenue Code of 1986

9 is amended to read as follows:

10 ‘‘(iii) with respect to which—

11 ‘‘(I) in the case of a tertiary re12 covery method, the first injection of

13 liquids, gases, or other matter com14 mences after December 31, 1990, and

15 ‘‘(II) in the case of a qualified

16 nontertiary recovery method, the im17 plementation of the method begins

18 after December 31, 1998.’’

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

20 this section shall apply to taxable years ending after De21 cember 31, 1998.

Æ