TITLE I—TAX INCENTIVES FOR
OIL AND GAS PRODUCTION
SEC. 100. AMENDMENT OF 1986 CODE.
Except as otherwise expressly provided, whenever in
this title an amendment or repeal is expressed in terms
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code
of 1986.
Subtitle A—Production Credit
SEC. 101. TAX CREDIT FOR MARGINAL AND NEW DOMESTIC
OIL AND NATURAL GAS PRODUCTION.
(a) CREDIT FOR PRODUCING OIL AND GAS FROM
NEW WELLS AND MARGINAL WELLS.—Subpart D of part
IV of subchapter A of chapter 1 (relating to business cred-
its) is amended by adding at the end the following new
section:
‘‘SEC. 45C. CREDIT FOR PRODUCING OIL AND GAS FROM
NEW WELLS AND MARGINAL WELLS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
the new and marginal well production credit for any tax-
able year is an amount equal to the product of—
‘‘(1) the credit amount, and
‘‘(2) the qualified crude oil production and the
qualified natural gas production which is attrib-
utable to the taxpayer.
‘‘(b) CREDIT AMOUNT.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The credit amount is—
‘‘(A) $3 per barrel of qualified crude oil
production, and
‘‘(B) 50 cents per 1,000 cubic feet of
qualified natural gas production.
‘‘(2) REDUCTION AS OIL AND GAS PRICES IN-
CREASE.—
‘‘(A) IN GENERAL.—The $3 and 50 cents
amounts under paragraph (1) shall each be re-
duced (but not below zero) by an amount which
bears the same ratio to such amount (deter-
mined without regard to this paragraph) as—
‘‘(i) the excess of the applicable ref-
erence price over $14 ($2.49 for qualified
natural gas production), bears to
‘‘(ii) $6 ($1.06 for qualified natural
gas production).
The applicable reference price for a taxable
year is the reference price for the calendar year
preceding the calendar year in which the tax-
able year begins.
‘‘(B) INFLATION
ADJUSTMENT.—In the
case of any taxable year beginning in a calendar
year after 1995, each of the dollar amounts
contained in subparagraph (A) shall be in-
creased to an amount equal to such dollar
amount multiplied by the inflation adjustment
factor for such calendar year (determined under
section 43(b)(3)(B) by substituting ‘1994’ for
‘1990’).
‘‘(C) REFERENCE PRICE.—For purposes of
this paragraph, the term ‘reference price’
means, with respect to any calendar year—
‘‘(i) in the case of qualified crude oil
production, the reference price determined
under section 29(d)(2)(C), and
‘‘(ii) in the case of qualified natural
gas production, the Secretary’s estimate of
the annual average wellhead price per
1,000 cubic feet for all domestic natural
gas.
‘‘(c) QUALIFIED CRUDE OIL
AND NATURAL GAS
PRODUCTION.—For purposes of this section—
‘‘(1) IN GENERAL.—The terms ‘qualified crude
oil production’ and ‘qualified natural gas production’
mean domestic crude oil or natural gas which is pro-
duced from—
‘‘(A) a marginal well, or
‘‘(B) a new well.
‘‘(2) LIMITATION ON AMOUNT OF PRODUCTION
WHICH MAY QUALIFY.—
‘‘(A) IN GENERAL.—Crude oil or natural
gas produced during any taxable year from any
well shall not be treated as qualified crude oil
production or qualified natural gas production
to the extent production from the well during
the taxable year exceeds—
‘‘(i) in the case of a marginal well,
1,095 barrels or barrel equivalents, or
‘‘(ii) in the case of a new well—
‘‘(I) 5,475 barrels in the case of
crude oil, or
‘‘(II) 109,500,000 cubic feet in
the case of natural gas.
‘‘(B) SPECIAL RULE WHERE WELL PRO-
DUCES BOTH.—In the case of a new well which
produces crude oil and natural gas, the limita-
tion for any taxable year applicable to natural
gas produced from the well shall be reduced by
the barrel equivalents (expressed in cubic feet)
of the crude oil produced from the well during
the taxable year.
‘‘(C) PROPORTIONATE REDUCTIONS.—
‘‘(i) SHORT TAXABLE YEARS.—In the
case of a short taxable year, the limitations
under this paragraph shall be proportion-
ately reduced to reflect the ratio which the
number of days in the year bears to 365.
‘‘(ii) WELLS NOT IN PRODUCTION EN-
TIRE YEAR.—In the case of a well which is
not capable of production during each day
of a taxable year, the limitations under
this paragraph applicable to the well shall
be proportionately reduced to reflect the
ratio which the number of days of produc-
tion bears to the total number of days in
the taxable year.
‘‘(3) DEFINITIONS.—
‘‘(A) MARGINAL WELL.—The term ‘mar-
ginal well’ means a domestic well (other than a
new well)—
‘‘(i) which during the taxable year has
marginal production (as defined in section
613A(c)(6)), or
‘‘(ii) which, during the taxable year—
‘‘(I) has average daily production
of not more than 25 barrel equiva-
lents, and
‘‘(II) produces water at a rate
not less than 95 percent of total well
effluent.
‘‘(B) NEW
WELL.—The term ‘new well’
means a domestic well drilled after December
31, 1994.
‘‘(C) CRUDE OIL, ETC.—The terms ‘crude
oil’, ‘natural gas’, ‘domestic’, and ‘barrel’ have
the meanings given such terms by section
613A(e).
‘‘(D) BARREL
EQUIVALENT.—The term
‘barrel equivalent’ means, with respect to natu-
ral gas, a conversion ratio of 6,000 cubic feet
of natural gas to 1 barrel of crude oil.
‘‘(d) OTHER RULES.—
‘‘(1) PRODUCTION ATTRIBUTABLE TO THE TAX-
PAYER.—In the case of a marginal well or new well
in which there is more than one owner of operating
‘‘(12) the new and marginal oil and gas well
production credit determined under section 45C(a).’’
(c) CREDIT ALLOWED AGAINST REGULAR AND MINI-
MUM TAX.—
(1) IN GENERAL.—Subsection (c) of section 38
(relating to limitation based on amount of tax) is
amended by redesignating paragraph (3) as para-
graph (4) and by inserting after paragraph (2) the
following new paragraph:
‘‘(3) SPECIAL RULES FOR OIL AND GAS PRO-
DUCTION CREDIT.—
‘‘(A) IN GENERAL.—In the case of the oil
and gas production credit—
‘‘(i) this section and section 39 shall
be applied separately with respect to the
credit, and
‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) subparagraph (A) shall not
apply, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the
taxable year (other than the oil and
gas production credit).
‘‘(B) OIL
AND
GAS
PRODUCTION
CRED-
IT.—For purposes of this subsection, the term
‘oil and gas production credit’ means the credit
allowable under subsection (a) by reason of sec-
tion 45C(a).’’
(2) CONFORMING AMENDMENT.—Subclause (II)
of section 38(c)(2)(A)(ii) of such Code is amended
by inserting ‘‘or the oil and gas production credit’’
after ‘‘employment credit’’.
(d) COORDINATION WITH SECTION 29.—Section
29(a) is amended by striking ‘‘There’’ and inserting ‘‘At
the election of the taxpayer, there’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart D of part IV of subchapter A of chapter 1
is amended by adding at the end the following item:
‘‘45C. Credit for producing oil and gas from new wells and marginal wells.’’
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to production after the date of the
enactment of this Act.
Subtitle B—Modifications to
Percentage Depletion
SEC. 111. ELIMINATION OF NET INCOME LIMITATION ON
PERCENTAGE DEPLETION FOR OIL AND GAS.
(a) ELIMINATION.—
(1) IN GENERAL.—Paragraph (1) of subsection
(d) of section 613A (relating to the limitation based
on taxable income for percentage depletion in the
case of oil and gas wells) is repealed.
(2) OTHER PRODUCTION.—The second sentence
of subsection (a) of section 613 of the Internal Reve-
nue Code of 1986 (relating to percentage depletion)
is amended to read as follows: ‘‘Except in the case
of oil and gas wells, such allowance shall not exceed
50 percent of the taxpayer’s taxable income from the
property (computed without allowance for deple-
tion).’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1994.
SEC. 112. ALL MARGINAL PRODUCTION ELIGIBLE FOR PER-
CENTAGE DEPLETION.
(a) IN GENERAL.—Paragraph (6) of section 613A(c)
(relating to marginal production) is amended to read as
follows:
‘‘(6) SEPARATE
APPLICATION
TO
MARGINAL
PRODUCTION.—
‘‘(A) IN GENERAL.—Except as provided in
subsection (d)—
‘‘(i) the allowance for depletion under
section 611 with respect to all of a tax-
payer’s marginal production of domestic
crude oil and domestic natural gas shall be
computed in accordance with section 613,
except that, for purposes of section 613(a),
the applicable percentage shall be sub-
stituted for the percentage specified in sec-
tion 613(b), and
‘‘(ii) such marginal production shall
not be taken into account under paragraph
(1), including for purposes of determining
the taxpayer’s average daily production of
domestic crude oil or domestic natural gas
eligible for application of paragraph (1).
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of subparagraph (A), the term ‘appli-
cable percentage’ means the percentage (not
greater than 25 percent) equal to the sum of—
‘‘(i) 15 percent, plus
‘‘(ii) 1 percentage point for each
whole dollar by which $20 exceeds the ref-
erence price for crude oil for the calendar
year preceding the calendar year in which
the taxable year begins.
For purposes of this paragraph, the term ‘ref-
erence price’ means, with respect to any cal-
endar year, the reference price determined for
such calendar year under section 29(d)(2)(C).
‘‘(C) MARGINAL PRODUCTION.—The term
‘marginal production’ means domestic crude oil
or domestic natural gas which is produced dur-
ing any taxable year from a property which—
‘‘(i) is a stripper well property for the
calendar year in which the taxable year be-
gins, or
‘‘(ii) is a property substantially all of
the production of which during such cal-
endar year is heavy oil.
‘‘(D) STRIPPER
WELL
PROPERTY.—For
purposes of this paragraph, the term ‘stripper
well property’ means, with respect to any cal-
endar year, any property with respect to which
the amount determined by dividing—
‘‘(i) the average daily production of
domestic crude oil and domestic natural
gas from producing wells on such property
for such calendar year, by
‘‘(ii) the number of such wells,
is 15-barrel equivalents or less.
‘‘(E) HEAVY OIL.—For purposes of this
paragraph, the term ‘heavy oil’ means domestic
crude oil produced from any property if such
crude oil had a weighted average gravity of 20
degrees API or less (corrected to 60 degrees
Fahrenheit).’’
(b) CONFORMING AMENDMENT.—Paragraph (3) of
section 613A(c) (defining depletable oil quantity) is
amended to read as follows:
‘‘(3) DEPLETABLE
OIL
QUANTITY.—For pur-
poses of paragraph (1), the taxpayer’s depletable oil
quantity is 1,000 barrels.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1994.
SEC. 113. ALLOCATION OF DEPLETABLE QUANTITIES.
(a) IN GENERAL.—Subparagraphs (A) and (B) of
section 613A(c)(7) (relating to special rules for production
in excess of depletable quantities) are each amended by
inserting ‘‘of such quantity allocated to the property by
the taxpayer, or, if the taxpayer elects not to make the
allocation, that amount’’ after ‘‘shall be that amount’’.
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1994.
SEC. 114. PERCENTAGE DEPLETION RATE FOR MARGINAL
PRODUCTION.
(a) IN GENERAL.—Subparagraph (B) of section
613A(c)(6), as amended by section 112(a), is amended to
read as follows:
‘‘(B) 
APPLICABLE
PERCENTAGE.—For
purposes of this paragraph, the term ‘applicable
percentage’ means the percentage (not greater
than 25 percent) equal to the sum of—
‘‘(i) 15 percent, plus
‘‘(ii) 1 percentage point for each
whole dollar by which $20 exceeds the ref-
erence price for crude oil for calendar year
1994 
(determined 
under 
section
29(d)(2)(C)).’’
(b) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1994.
Subtitle C—Other Provisions
SEC. 121. ELECTION TO EXPENSE GEOLOGICAL AND GEO-
PHYSICAL EXPENDITURES.
(a) IN GENERAL.—Section 263 (relating to capital
expenditures) is amended by adding at the end the follow-
ing new subsection:
‘‘(j) GEOLOGICAL
AND
GEOPHYSICAL
EXPENDI-
TURES FOR DOMESTIC OIL AND GAS WELLS.—Notwith-
standing subsection (a), a taxpayer may elect to treat geo-
logical and geophysical expenses incurred in connection
with the exploration for, or development of, oil or gas with-
in the United States (as defined in section 638) as ex-
penses which are not chargeable to capital account. Any
expenses so treated shall be allowed as a deduction in the
taxable year in which paid or incurred.’’
(b) CONFORMING AMENDMENT.—Section 263A(c)(3)
is amended by inserting ‘‘263(j),’’ after ‘‘263(i),’’.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to expenses paid or incurred
after the date of the enactment of this Act.
(2) TRANSITION RULE.—In the case of any ex-
penses described in section 263(j) of the Internal
Revenue Code of 1986 which were paid or incurred
on or before the date of the enactment of this Act,
the taxpayer may elect, at such time and in such
manner as the Secretary of the Treasury may pre-
scribe, to amortize the unamortized portion of such
expenses over the 36-month period beginning with
the month in which the date of the enactment of this
Act occurs. For purposes of this paragraph, the
unamortized portion of any expense is the amount
remaining unamortized as of the first day of the 36-
month period.
SEC. 122. ENHANCED OIL RECOVERY CREDIT.
(a) EXPANSION OF PROJECTS ELIGIBLE FOR CRED-
IT.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section
43(c)(2)(A) (defining qualified enhanced oil recovery
project) is amended to read as follows:
‘‘(i) which involves the application (in
accordance with sound engineering prin-
ciples) of 1 or more secondary or tertiary
recovery methods which can reasonably be
expected to result in more than an insig-
nificant increase in the amount of crude oil
or natural gas which ultimately will be re-
covered,’’.
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (C) of section 43(c)(1)
is amended to read as follows:
‘‘(C) Any cost paid or incurred (whether or
not chargeable to capital account) for any
injectant or other costs which are used as part
of a qualified enhanced oil recovery project,
other than a recoverable hydrocarbon injectant
described in section 193(b)(2).’’
(B) Section 43(c)(4) is amended to read as
follows:
‘‘(4) SECONDARY
AND
TERTIARY
RECOVERY
METHODS.—For purposes of paragraph (2), second-
ary and tertiary recovery methods shall include—
‘‘(A) tertiary recovery methods described
in section 193(b)(3),
‘‘(B) immiscible nonhydrocarbon gas dis-
placement, and
‘‘(C) other secondary and tertiary recovery
methods certified in accordance with paragraph
(2)(B).’’
(b) CREDIT ALLOWABLE AGAINST MINIMUM TAX.—
(1) IN GENERAL.—Subsection (c) of section 38
(relating to limitation based on amount of tax), as
amended by section 101(c), is amended by redesig-
nating paragraph (4) as paragraph (5) and by in-
serting after paragraph (3) the following new para-
graph:
‘‘(4) SPECIAL RULES FOR ENHANCED OIL RE-
COVERY CREDIT.—
‘‘(A) IN GENERAL.—In the case of the en-
hanced oil recovery credit—
‘‘(i) this section and section 39 shall
be applied separately with respect to the
credit, and
‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) subparagraph (A) shall not
apply, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the
taxable year (other than the enhanced
oil recovery credit).
‘‘(B) ENHANCED
OIL
RECOVERY
CRED-
IT.—For purposes of this subsection, the term
‘enhanced oil recovery credit’ means the credit
allowable under subsection (a) by reason of sec-
tion 43(a).’’
(2) CONFORMING AMENDMENTS.—
(A) 
Subclause 
(II) 
of 
section
38(c)(2)(A)(ii), as amended by section 101(c),
is amended by striking ‘‘or the oil and gas pro-
duction credit’’ and inserting ‘‘, the oil and gas
production credit, or the enhanced oil recovery
credit’’.
(B) 
Subclause 
(II) 
of 
section
38(c)(3)(A)(ii) is amended by inserting ‘‘or the
enhanced oil recovery credit’’ after ‘‘production
credit’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1994.
SEC. 123. ELECTION FOR OPTIONAL 5-YEAR WRITEOFF OF
INTANGIBLE DRILLING COSTS.
(a) OPTIONAL ELECTION FOR MINIMUM TAX PUR-
POSES.—
(1) IN GENERAL.—Section 56(a) is amended by
adding at the end the following new paragraph:
‘‘(9) INTANGIBLE DRILLING COSTS.—If the tax-
payer elects to have this paragraph apply, the tax-
payer may disregard, for purposes of computing the
taxpayer’s alternative minimum taxable income, an
election under section 59(e) with respect to any por-
tion of any qualified expenditure described in section
59(e)(2)(C).’’
(2) CONFORMING AMENDMENT.—Section 59(e)
is amended by adding at the end the following new
paragraph: