The US tax code overhaul being pushed by House Republicans calls for
eliminating a credit for producing oil and natural gas from marginal
wells, but the industry group that originally lobbied for the creation of
the credit about 13 years ago is not pushing to keep it place.

“As sound of a philosophical structure as it has, it’s just not something
that’s been active enough to have the necessity we thought it would
have,” said Lee Fuller, vice president of government relations with the
Independent Petroleum Association of America.

The credit, which was enacted in 2004 after a campaign by IPAA, allows
producers of marginal oil and gas wells to claim a maximum of $3/b or 50
cents/Mcf on a small portion of daily production if prices fall below
$15/b or $1.67/Mcf, based on the average price from the previous year,
according to IPAA. Marginal wells are defined as not producing more than
15 b/d of oil or 90 Mcf/d of gas.

“They’re really designed to be a safety net for these particular types of
production when prices really fall very low,” Fuller said.

According to Fuller, the credit was triggered only once, last year for
gas prices and could still be claimed this year for some marginal
producers, but has never been triggered for oil since it was enacted in
2004.

Fuller said that roughly 80% of US oil wells and nearly 70% of gas wells
are defined as marginal wells. Last year, the US Energy Information
Administration estimated that there were 380,000 such oil wells operating
in the US at the end of 2015, compared to 90,000 wells producing more
than 15 b/d.

Fuller said the tax bill unveiled by Senate Republicans Thursday does not
appear to repeal either the marginal well credit nor the enhanced oil
recovery credit identified for repeal in the House bill. The full text of
the Senate bill, however, has not been released.

He said that provisions the IPAA and other oil and gas industry groups
had been pushing for, particularly the Intangible Drilling Cost and
percentage depletion deductions, remain intact in both the House and
Senate tax bills.

“That’s a huge benefit to the capital recovery opportunities that our
producers pursue,” Fuller said.

Tudor Pickering Holt said cutting corporate tax rates and keeping IDCs –
“the Holy Grail of E&P tax breaks” – outweighs the loss of the EOR and
marginal well incentives.

ENHANCED OIL RECOVERY

Kevin Book, a managing director at ClearView, said the case for the EOR
and marginal well incentives “seems a lot weaker than cash-flow-critical”
parts of the permanent tax code, like the IDCs. “By the same token,
cutting little-used credits doesn’t generate a lot of federal liquidity for
lower corporate rates, either,” he said.

Book said a separate tax credit for EOR – known as 45Q – likely did more
to incentivize drilling projects than the EOR credit being repealed. But
the 45Q program will likely be tapped out early next year, he said.

It offers credits worth $10/mt of CO2 used in EOR and $20/mt of CO2
stored underground, with an overall program cap of 75 million mt.

Lawmakers sponsoring new legislation in both houses of Congress, with
support from Permian Basin heavyweight Occidental Petroleum, argue the
incentive needs to be restructured to remove a cap on total credits and
to increase each credit’s value. But that effort has not gained traction.

The House is expected to vote on its tax bill next week, but the Senate
may not be able to move their legislation before the end of the year or
potentially early next year, according to a note Friday from analysts at
ClearView.

“Even if the Senate were to pass tax legislation before lawmakers leave
for their winter recess, reconciliation of disparate legislative drafts
could take weeks of intercameral debate, with no shortage of unexpected
complications,” the analysts wrote.

–Brian Scheid, brian.scheid@spglobal.com
–Meghan Gordon, meghan.gordon@spglobal.com
–Edited by Derek Sands, newsdesk@spglobal.com

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