II

106TH CONGRESS

2D SESSION S. 2265

To amend the Internal Revenue Code of 1986 to preserve marginal domestic

oil and natural gas well production, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MARCH 21, 2000

Mrs. HUTCHISON (for herself, Mr. BREAUX, Mr. LOTT, Mr. BROWNBACK, Mr.

BINGAMAN, Mr. GRAMM, Mr. THOMAS, and Mr. INHOFE) 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 preserve

marginal domestic oil and natural gas well production,

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; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Marginal Well Preservation Act of 2000’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND

4 NATURAL GAS WELL PRODUCTION.

5 (a) PURPOSE.—The purpose of this section is to pre6 vent the abandonment of marginal oil and gas wells re7 sponsible for half of the domestic production of oil and

8 gas in the United States.

9 (b) CREDIT FOR PRODUCING OIL AND GAS FROM

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

11 A of chapter 1 (relating to business credits) is amended

12 by adding at the end the following new section:

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

14 MARGINAL WELLS.

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

16 the marginal well production credit for any taxable year

17 is an amount equal to the product of—

18 ‘‘(1) the credit amount, and

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

20 qualified natural gas production which is attrib21 utable to the taxpayer.

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

23 section—

24 ‘‘(1) IN GENERAL.—The credit amount is—
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1 ‘‘(A) $3 per barrel of qualified crude oil

2 production, and

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

4 qualified natural gas production.

5 ‘‘(2) REDUCTION AS OIL AND GAS PRICES IN6 CREASE.—

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

8 amounts under paragraph (1) shall each be re9 duced (but not below zero) by an amount which

10 bears the same ratio to such amount (deter11 mined without regard to this paragraph) as—

12 ‘‘(i) the excess (if any) of the applica13 ble reference price over $14 ($1.56 for

14 qualified natural gas production), bears to

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

16 gas production).

17 The applicable reference price for a taxable

18 year is the reference price for the calendar year

19 preceding the calendar year in which the tax20 able year begins.

21 ‘‘(B) INFLATION ADJUSTMENT.—In the

22 case of any taxable year beginning in a calendar

23 year after 2000, each of the dollar amounts

24 contained in subparagraph (A) shall be in25 creased to an amount equal to such dollar
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1 amount multiplied by the inflation adjustment

2 factor for such calendar year (determined under

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

4 ‘1990’).

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

6 this paragraph, the term ‘reference price’

7 means, with respect to any calendar year—

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

9 production, the reference price determined

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

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

12 gas production, the Secretary’s estimate of

13 the annual average wellhead price per

14 1,000 cubic feet for all domestic natural

15 gas.

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

17 PRODUCTION.—For purposes of this section—

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

19 oil production’ and ‘qualified natural gas production’

20 mean domestic crude oil or natural gas which is pro21 duced from a marginal well.

22 ‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION

23 WHICH MAY QUALIFY.—

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

25 gas produced during any taxable year from any
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1 well shall not be treated as qualified crude oil

2 production or qualified natural gas production

3 to the extent production from the well during

4 the taxable year exceeds 1,095 barrels or barrel

5 equivalents.

6 ‘‘(B) 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 such taxable year bears

12 to 365.

13 ‘‘(ii) WELLS NOT IN PRODUCTION EN14 TIRE YEAR.—In the case of a well which is

15 not capable of production during each day

16 of a taxable year, the limitations under

17 this paragraph applicable to the well shall

18 be proportionately reduced to reflect the

19 ratio which the number of days of produc20 tion bears to the total number of days in

21 the taxable year.

22 ‘‘(3) DEFINITIONS.—

23 ‘‘(A) MARGINAL WELL.—The term ‘mar24 ginal well’ means a domestic 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) CRUDE OIL, ETC.—The terms ‘crude

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

13 the meanings given such terms by section

14 613A(e).

15 ‘‘(C) BARREL EQUIVALENT.—The term

16 ‘barrel equivalent’ means, with respect to nat17 ural gas, a conversion ratio of 6,000 cubic feet

18 of natural gas to 1 barrel of crude oil.

19 ‘‘(d) OTHER RULES.—

20 ‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX21 PAYER.—In the case of a marginal well in which

22 there is more than one owner of operating interests

23 in the well and the crude oil or natural gas produc24 tion exceeds the limitation under subsection (c)(2),

25 qualifying crude oil production or qualifying natural
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1 gas production attributable to the taxpayer shall be

2 determined on the basis of the ratio which tax3 payer’s revenue interest in the production bears to

4 the aggregate of the revenue interests of all oper5 ating interest owners in the production.

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

7 credit under this section may be claimed only on

8 production which is attributable to the holder of an

9 operating interest.

10 ‘‘(3) PRODUCTION FROM NONCONVENTIONAL

11 SOURCES EXCLUDED.—In the case of production

12 from a marginal well which is eligible for the credit

13 allowed under section 29 for the taxable year, no

14 credit shall be allowable under this section unless

15 the taxpayer elects not to claim the credit under sec16 tion 29 with respect to the well.’’

17 ‘‘(e) CREDIT TREATED AS BUSINESS CREDIT.—Sec18 tion 38(b) is amended by striking ‘‘plus’’ at the end of

19 paragraph (11), by striking the period at the end of para20 graph (12) and inserting ‘‘, plus’’, and by adding at the

21 end the following new paragraph:

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

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

24 (d) CREDIT ALLOWED AGAINST REGULAR AND MIN25 IMUM TAX.—
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1 (1) IN GENERAL.—Subsection (c) of section 38

2 (relating to limitation based on amount of tax) is

3 amended by redesignating paragraph (3) as para4 graph (4) and by inserting after paragraph (2) the

5 following new paragraph:

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

7 GAS WELL PRODUCTION CREDIT.—

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

9 marginal oil and gas well production credit—

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

11 be applied separately with respect to the

12 credit, and

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

14 credit—

15 ‘‘(I) subparagraphs (A) and (B)

16 thereof shall not apply, and

17 ‘‘(II) the limitation under para18 graph (1) (as modified by subclause

19 (I)) shall be reduced by the credit al20 lowed under subsection (a) for the

21 taxable year (other than the marginal

22 oil and gas well production credit).

23 ‘‘(B) MARGINAL OIL AND GAS WELL PRO24 DUCTION CREDIT.—For purposes of this sub25 section, the term ‘marginal oil and gas well pro-
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1 duction credit’ means the credit allowable under

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

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

4 of section 38(c)(2)(A)(ii) is amended by inserting

5 ‘‘or the marginal oil and gas well production credit’’

6 after ‘‘employment credit’’.

7 (e) CARRYBACK.—Subsection (a) of section 39 (relat8 ing to carryback and carryforward of unused credits gen9 erally) is amended by adding at the end the following new

10 paragraph:

11 ‘‘(3) 10-YEAR CARRYBACK FOR MARGINAL OIL

12 AND GAS WELL PRODUCTION CREDIT.—In the case

13 of the marginal oil and gas well production credit—

14 ‘‘(A) this section shall be applied sepa15 rately from the business credit (other than the

16 marginal oil and gas well production credit),

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

18 substituting ‘10 taxable years’ for ‘1 taxable

19 years’ in subparagraph (A) thereof, and

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

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

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

23 thereof, and
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1 ‘‘(ii) by substituting ‘30 taxable years’

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

3 thereof.’’

4 (f) COORDINATION WITH SECTION 29.—Section

5 29(a) is amended by striking ‘‘There’’ and inserting ‘‘At

6 the election of the taxpayer, there’’.

7 (g) CLERICAL AMENDMENT.—The table of sections

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

9 is amended by adding at the end the following item:

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

10 (h) EFFECTIVE DATE.—The amendments made by

11 this section shall apply to production in taxable years be12 ginning after December 31, 1999.

13 SEC. 3. ELECTION TO EXPENSE GEOLOGICAL AND GEO14 PHYSICAL EXPENDITURES AND DELAY RENT15 AL PAYMENTS.

16 (a) PURPOSE.—The purpose of this section is to rec17 ognize that geological and geophysical expenditures and

18 delay rentals are ordinary and necessary business expenses

19 that should be deducted in the year the expense is in20 curred.

21 (b) ELECTION TO EXPENSE GEOLOGICAL AND GEO22 PHYSICAL EXPENDITURES.—

23 (1) IN GENERAL.—Section 263 (relating to cap24 ital expenditures) is amended by adding at the end

25 the following new subsection:
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1 ‘‘(j) GEOLOGICAL AND GEOPHYSICAL EXPENDI2 TURES FOR OIL AND GAS WELLS.—Notwithstanding sub3 section (a), a taxpayer may elect to treat geological and

4 geophysical expenses incurred in connection with the ex5 ploration for, or development of, oil or gas as expenses

6 which are not chargeable to capital account. Any expenses

7 so treated shall be allowed as a deduction in the taxable

8 year in which paid or incurred.’’

9 (2) CONFORMING AMENDMENT.—Section

10 263A(c)(3) is amended by inserting ‘‘263(j),’’ after

11 ‘‘263(i),’’.

12 (3) EFFECTIVE DATE.—

13 (A) IN GENERAL.—The amendments made

14 by this subsection shall apply to expenses paid

15 or incurred after the date of the enactment of

16 this Act.

17 (B) TRANSITION RULE.—In the case of

18 any expenses described in section 263(j) of the

19 Internal Revenue Code of 1986, as added by

20 this subsection, which were paid or incurred on

21 or before the date of the enactment of this Act,

22 the taxpayer may elect, at such time and in

23 such manner as the Secretary of the Treasury

24 may prescribe, to amortize the suspended por25 tion of such expenses over the 36-month period
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1 beginning with the month in which the date of

2 the enactment of this Act occurs. For purposes

3 of this subparagraph, the suspended portion of

4 any expense is that portion of such expense

5 which, as of the first day of the 36-month pe6 riod, has not been included in the cost of a

7 property or otherwise deducted.

8 (c) ELECTION TO EXPENSE DELAY RENTAL PAY9 MENTS.—

10 (1) IN GENERAL.—Section 263 (relating to cap11 ital expenditures), as amended by subsection (b)(1),

12 is amended by adding at the end the following new

13 subsection:

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

15 AND GAS WELLS.—

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

17 (a), a taxpayer may elect to treat delay rental pay18 ments incurred in connection with the development

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

20 section 638) as payments which are not chargeable

21 to capital account. Any payments so treated shall be

22 allowed as a deduction in the taxable year in which

23 paid or incurred.

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

25 of paragraph (1), the term ‘delay rental payment’
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1 means an amount paid for the privilege of deferring

2 the drilling of an oil or gas well under an oil or gas

3 lease.’’

4 (2) CONFORMING AMENDMENT.—Section

5 263A(c)(3), as amended by subsection (b)(2), is

6 amended by inserting ‘‘263(k),’’ after ‘‘263(j),’’.

7 (3) EFFECTIVE DATE.—

8 (A) IN GENERAL.—The amendments made

9 by this subsection shall apply to payments made

10 or incurred after the date of the enactment of

11 this Act.

12 (B) TRANSITION RULE.—In the case of

13 any payments described in section 263(k) of the

14 Internal Revenue Code of 1986, as added by

15 this subsection, which were made or incurred on

16 or before the date of the enactment of this Act,

17 the taxpayer may elect, at such time and in

18 such manner as the Secretary of the Treasury

19 may prescribe, to amortize the suspended por20 tion of such payments over the 36-month period

21 beginning with the month in which the date of

22 the enactment of this Act occurs. For purposes

23 of this subparagraph, the suspended portion of

24 any payment is that portion of such payment

25 which, as of the first day of the 36-month pe-
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1 riod, has not been included in the cost of a

2 property or otherwise deducted.

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