[Congressional Record Volume 144, Number 41 (Thursday, April 2, 1998)]
[Senate]
[Pages S3145-S3148]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. HUTCHISON (for herself, Mr. Murkowski, Mr. Nickles, and 
        Mr. Domenici):
  S. 1929. 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; to the Committee on Finance.


                  the u.s. ENERGY EcOnOmIc GRowTH aCT

  Mrs. HUTCHISON. Mr. President, a healthy domestic energy industry is 
critical to our nation's security and our economic well-being. That is 
why I am pleased today to introduce the U.S. Energy Economic Growth 
Act. My legislation provides much needed tax relief for the domestic 
oil and gas industry. It is a part of the omnibus Domestic Oil and Gas 
Security Enhancement Plan that I've developed with Senator Murkowski 
and Senator Nickles. Together, our comprehensive legislation represents 
the most sweeping tax and regulatory relief since before the Gulf War.
  Our package could not come at a more critical time. The price of 
crude

[[Page S3146]]

oil recently dipped to its lowest level since April 1994. This downturn 
in world oil prices has exposed America's independent producers to 
great risk. If current market conditions persist, as is expected, 
thousands of wells could become uneconomic and be shut-in or plugged. 
It is time we acted to ensure this does not happen, and my bill is the 
first step in that direction.
  The U.S. Energy Economic Growth Act will do three things.


                        marGINAL weLL taX RELief

  First, this bill provides tax relief for producers who operate 
marginal oil and gas wells. A marginal oil well is one that produces 
less than 15 barrels per day or produces heavy oil. A marginal gas well 
is one that produces less than 90 thousand cubic feet a day. Those who 
operate marginal wells are most at risk in times of lower oil prices. 
The National Petroleum Council (NPC) reported that America has over 
500,000 marginal wells that collectively produce nearly 700 million 
barrels of oil equivalent each year. Texas alone has over 100,000 
marginal wells. These wells contribute nearly 80,000 jobs and generate 
close to $14 billion each year in economic activity.
  In 1996, abandonment or plugging of these marginal wells led to a 
loss of more than 3,600 high-quality jobs and a loss of $84.1 million 
in earnings in 1996. States and federal governments lost $18.5 million 
in severance taxes and an equal amount of ad valorem taxes from wells 
plugged during 1996.
  Many domestic oil and gas businesses rely on these marginal wells as 
the backbone of their operations. However, as global market factors 
cause commodity prices to fluctuate, the economic viability of these 
wells is precarious. Marginal wells provide countless jobs, energy 
security and federal tax and royalty revenues. The tax credits in my 
bill will help keep these marginal wells in production and Americans 
employed. My bill provides for a maximum $3 per barrel tax credit for 
the first 3 barrels of daily production from an existing oil well. In 
addition, marginal gas well will receive $0.50 per mcf for the first 18 
mcf of daily natural gas production.
  In addition, this tax credit would only occur when prices are low. 
This credit is phased out when prices for oil and natural gas increase.


                        inactive well tax relief

  The second plank of my bill creates an incentive for independent oil 
and gas producers to recover abandoned wells and put them back into 
production. This provision allows producers to exclude income 
attributable to oil and natural gas from a recovered inactive well. In 
order to qualify, the oil or gas well must have been abandoned for at 
least two years prior to the date of enactment. In addition, this 
incentive would only apply to wells that are brought back on line 
within 5 years of the date of enactment.
  This economic incentive has a proven track record. In Texas, a 
similar law resulted in returning over 6,000 wells to production. The 
estimated annual production from these wells is worth $565 million at 
the wellhead, and approximately $1.65 billion to the economy of Texas 
each year. The wealth from this incentive provides over 10,000 direct 
and indirect jobs each year. The Texas legislature receives an 
estimated $22 million in additional annual tax revenues, over ten 
thousand jobs have been created, and $1.65 billion a year in wealth is 
generated. Over 90,000 idle wells remain in Texas. This incentive 
package would help return them to production and allow them to 
contribute to a strong economy in America.
  Thirteen states have inactive well recovery programs, including 
Alaska, Arkansas, California, Florida, Kansas, Louisiana, Mississippi, 
Montana, New Mexico, North Dakota, Oklahoma, Texas, Wyoming. This 
federal program would allow the benefits experienced by Texas and other 
states to continue to grow and to be shared by the rest of the country.
  Importantly, this provision increases the stream of revenue going 
into the federal government in two ways. First, royalty owners will pay 
federal taxes on income generated from the recovered well. Currently, 
no taxes are paid on these wells because they are inactive. Returning 
them to production will increase the royalties paid to the federal 
government. Secondly, the new jobs created will add significantly to 
the taxes paid on wages and earnings.
  This one-time shot-in-the-arm for the industry will provide countless 
jobs and considerable economic benefit to our communities.


                            other incentives

  The third provision of my bill makes changes to the tax code that 
makes it easier for producers to take full advantage of already 
existing tax credits. Under these provisions, both geological and 
geophysical expenditures on domestic production and delay rental 
payments would be allowed to be expensed at the time incurred rather 
than capitalized over the length of the well. This election would allow 
producers more control over their income stream without changing the 
amount of tax.
  In addition, two relatively new types of drilling methods are 
included as a qualified enhanced oil recovery method for purposes of 
the Enhanced Oil Recovery Tax Credit. These two drilling methods, 
hydro-injection and horizontal drilling, would be included on the list 
of qualified methods. They provide us with some of the most innovative 
means of drilling and we should encourage producers to utilize these 
and other productive methods.
  Mr. President, my legislation provides incentives for the most 
threatened parts of the oil and gas industry. Relief for marginal and 
inactive wells encourages full utilization of existing wells, clearly 
provides jobs and helps the local economy grow. I encourage my 
colleagues to support this legislation and their local communities by 
making marginal and inactive wells productive contributors to the local 
economy. Our energy security depends upon it.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1929

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``United States Energy 
     Economic Growth Act''.
          TITLE I--PRODUCTION FROM MARGINAL AND INACTIVE WELLS

     SEC. 101. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND NATURAL 
                   GAS WELL PRODUCTION.

       (a) Credit for Producing Oil and Gas From Marginal Wells.--
     Subpart D of part IV of subchapter A of chapter 1 of the 
     Internal Revenue Code of 1986 (relating to business credits) 
     is amended by adding at the end the following new section:

     ``SEC. 45D. CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL 
                   WELLS.

       ``(a) General Rule.--For purposes of section 38, the 
     marginal well production credit for any taxable 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 attributable to the taxpayer.
       ``(b) Credit Amount.--For purposes of this section--
       ``(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 increase.--
       ``(A) In general.--The $3 and 50 cents amounts under 
     paragraph (1) shall each be reduced (but not below zero) by 
     an amount which bears the same ratio to such amount 
     (determined without regard to this paragraph) as--
       ``(i) the excess (if any) of the applicable reference price 
     over $14 ($1.40 for qualified natural gas production), bears 
     to
       ``(ii) $4 ($0.40 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 taxable year begins.
       ``(B) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 1999, each of the 
     dollar amounts contained in subparagraph (A) shall be 
     increased 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 `1998' 
     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--

[[Page S3147]]

       ``(1) In general.--The terms `qualified crude oil 
     production' and `qualified natural gas production' mean 
     domestic crude oil or natural gas which is produced from a 
     marginal 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 1,095 barrels or barrel equivalents.
       ``(B) Proportionate reductions.--
       ``(i) Short taxable years.--In the case of a short taxable 
     year, the limitations under this paragraph shall be 
     proportionately reduced to reflect the ratio which the number 
     of days in such taxable year bears to 365.
       ``(ii) Wells not in production entire 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 production 
     bears to the total number of days in the taxable year.
       ``(3) Definitions.--
       ``(A) Marginal well.--The term `marginal well' means a 
     domestic well which during the taxable year has marginal 
     production (as defined in section 613A(c)(6)).
       ``(B) Crude oil, etc.--The terms `crude oil', `natural 
     gas', `domestic', and `barrel' have the meanings given such 
     terms by section 613A(e).
       ``(C) Barrel equivalent.--The term `barrel equivalent' 
     means, with respect to natural 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 taxpayer.--In the case 
     of a marginal well in which there is more than one owner of 
     operating interests in the well and the crude oil or natural 
     gas production exceeds the limitation under subsection 
     (c)(2), qualifying crude oil production or qualifying natural 
     gas production attributable to the taxpayer shall be 
     determined on the basis of the ratio which taxpayer's revenue 
     interest in the production bears to the aggregate of the 
     revenue interests of all operating interest owners in the 
     production.
       ``(2) Operating interest required.--Any credit under this 
     section may be claimed only on production which is 
     attributable to the holder of an operating interest.
       ``(3) Production from nonconventional sources excluded.--In 
     the case of production from a marginal well which is eligible 
     for the credit allowed under section 29 for the taxable year, 
     no credit shall be allowable under this section unless the 
     taxpayer elects not to claim the credit under section 29 with 
     respect to the well.''.
       (b) Credit Treated as Business Credit.--Section 38(b) of 
     such Code is amended by striking ``plus'' at the end of 
     paragraph (11), by striking the period at the end of 
     paragraph (12) and inserting ``, plus'', and by adding at the 
     end the following new paragraph:
       ``(13) the marginal oil and gas well production credit 
     determined under section 45D(a).''.
       (c) Credit Allowed Against Regular and Minimum Tax.--
       (1) In general.--Subsection (c) of section 38 of such Code 
     (relating to limitation based on amount of tax) is amended by 
     redesignating paragraph (3) as paragraph (4) and by inserting 
     after paragraph (2) the following new paragraph:
       ``(3) Special rules for marginal oil and gas well 
     production credit.--
       ``(A) In general.--In the case of the marginal oil and gas 
     well 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) subparagraphs (A) and (B) thereof shall not apply, 
     and
       ``(II) the limitation under paragraph (1) (as modified by 
     subclause (I)) shall be reduced by the credit allowed under 
     subsection (a) for the taxable year (other than the marginal 
     oil and gas well production credit).

       ``(B) Marginal oil and gas well production credit.--For 
     purposes of this subsection, the term `marginal oil and gas 
     well production credit' means the credit allowable under 
     subsection (a) by reason of section 45D(a).''.
       (2) Conforming amendment.--Subclause (II) of section 
     38(c)(2)(A)(ii) of such Code is amended by inserting ``or the 
     marginal oil and gas well production credit'' after 
     ``employment credit''.
       (d) Carryback.--Subsection (a) of section 39 of such Code 
     (relating to carryback and carryforward of unused credits 
     generally) is amended by adding at the end the following new 
     paragraph:
       ``(3) 10-year carryback for marginal oil and gas well 
     production credit.--In the case of the marginal oil and gas 
     well production credit--
       ``(A) this section shall be applied separately from the 
     business credit (other than the marginal oil and gas well 
     production credit),
       ``(B) paragraph (1) shall be applied by substituting `10 
     taxable years' for `1 taxable years' in subparagraph (A) 
     thereof, and
       ``(C) paragraph (2) shall be applied--
       ``(i) by substituting `31 taxable years' for `22 taxable 
     years' in subparagraph (A) thereof, and
       ``(ii) by substituting `30 taxable years' for `21 taxable 
     years'.''.
       (e) Coordination With Section 29.--Section 29(a) of such 
     Code is amended by striking ``There'' and inserting ``At the 
     election of the taxpayer, there''.
       (f) Clerical Amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 of such Code is 
     amended by adding at the end the following item:

``45D. Credit for producing oil and gas from marginal wells.''

       (g) Effective Date.--The amendments made by this section 
     shall apply to production after the date of the enactment of 
     this Act.

     SEC. 102. EXCLUSION OF CERTAIN AMOUNTS RECEIVED FROM 
                   RECOVERED INACTIVE WELLS.

       (a) In General.--Part III of subchapter B of chapter 1 of 
     the Internal Revenue Code of 1986 (relating to items 
     specifically excluded from gross income) is amended by 
     redesignating section 139 as section 140 and by inserting 
     after section 138 the following new section:

     ``SEC. 139. OIL OR GAS PRODUCED FROM A RECOVERED INACTIVE 
                   WELL.

       ``(a) In General.--Gross income does not include income 
     attributable to independent producer oil from a recovered 
     inactive well.
       ``(b) Definitions.--For purposes of this section--
       ``(1) Independent producer oil.--The term `independent 
     producer oil' means crude oil or natural gas in which the 
     economic interest of the independent producer is attributable 
     to an operating mineral interest (within the meaning of 
     section 614(d)), overriding royalty interest, production 
     payment, net profits interest, or similar interest.
       ``(2) Crude oil and natural gas.--The terms `crude oil' and 
     `natural gas' have the meanings given such terms by section 
     613A(e).
       ``(3) Recovered inactive well.--The term `recovered 
     inactive well' means a well if--
       ``(A) throughout the 2-year period ending on the date of 
     the enactment of this section, such well is inactive or has 
     been plugged and abandoned, as determined by the agency of 
     the State in which such well is located that is responsible 
     for regulating such wells, and
       ``(B) during the 5-year period beginning on the date of the 
     enactment of this section, such well resumes producing crude 
     oil or natural gas.
       ``(4) Independent producer.--The term `independent 
     producer' means a producer of crude oil or natural gas whose 
     allowance for depletion is determined under section 613A(c).
       ``(c) Deductions.--No deductions directly connected with 
     amounts excluded from gross income by subsection (a) shall be 
     allowed.
       ``(d) Election.--
       ``(1) In general.--This section shall apply for any taxable 
     year only at the election of the taxpayer.
       ``(2) Manner.--Such election shall be made, in accordance 
     with regulations prescribed by the Secretary, not later than 
     the time prescribed for filing the return (including 
     extensions thereof) and shall be made annually on a property-
     by-property basis.''
       (b) Minimum Tax.--Section 56(g)(4)(B) of the Internal 
     Revenue Code of 1986 is amended by adding at the end the 
     following new clause:
       ``(iii) Inactive wells.--In the case of income attributable 
     to independent producers of oil recovered from an inactive 
     well, clause (i) shall not apply to any amount allowable as 
     an exclusion under section 139.''
       (c) Clerical Amendment.--The table of sections for part III 
     of subchapter B of chapter 1 of such Code is amended by 
     striking the item relating to section 139 and inserting the 
     following:

``Sec. 139. Oil or gas produced from a recovered inactive well.
``Sec. 140. Cross references to other Acts.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.
                       TITLE II--OTHER INCENTIVES

     SEC. 201. ELECTION TO EXPENSE GEOLOGICAL AND GEOPHYSICAL 
                   EXPENDITURES.

       (a) In General.--Section 263 of the Internal Revenue Code 
     of 1986 (relating to capital expenditures) is amended by 
     adding at the end the following new subsection:
       ``(j) Geological and Geophysical Expenditures for Domestic 
     Oil and Gas Wells.--Notwithstanding subsection (a), a 
     taxpayer may elect to treat geological and geophysical 
     expenses incurred in connection with the exploration for, or 
     development of, oil or gas within the United States (as 
     defined in section 638) as expenses 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) of the 
     Internal Revenue Code of 1986 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 
     enactment of this Act.
       (2) Transition rule.--In the case of any expenses described 
     in section 263(j) of the Internal Revenue Code of 1986, as 
     added by this section, which were paid or incurred on or 
     before the date of enactment of this Act, the

[[Page S3148]]

     taxpayer may elect, at such time and in such manner as the 
     Secretary of the Treasury may prescribe, to amortize the 
     unamortized portion of such expenses over the 36-month period 
     beginning with the month in which the date of 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. 202. ELECTION TO EXPENSE DELAY RENTAL PAYMENTS.

       (a) In General.--Section 263 of the Internal Revenue Code 
     of 1986 (relating to capital expenditures), as amended by 
     section 201(a), is amended by adding at the end the following 
     new subsection:
       ``(k) Delay Rental Payments for Domestic Oil and Gas 
     Wells.--
       ``(1) In general.--Notwithstanding subsection (a), a 
     taxpayer may elect to treat delay rental payments incurred in 
     connection with the development of oil or gas within the 
     United States (as defined in section 638) as payments which 
     are not chargeable to capital account. Any payments so 
     treated shall be allowed as a deduction in the taxable year 
     in which paid or incurred.
       ``(2) Delay rental payments.--For purposes of paragraph 
     (1), the term `delay rental payment' means an amount paid for 
     the privilege of deferring development of an oil or gas 
     well.''
       (b) Conforming Amendment.--Section 263A(c)(3) of the 
     Internal Revenue Code of 1986, as amended by section 201(b), 
     is amended by inserting ``263(k),'' after ``263(j),''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to payments made or incurred after the date of 
     enactment of this Act.
       (2) Transition rule.--In the case of any payments described 
     in section 263(k) of the Internal Revenue Code of 1986, as 
     added by this section, which were made or incurred on or 
     before the date of enactment of this Act, the taxpayer may 
     elect, at such time and in such manner as the Secretary of 
     the Treasury may prescribe, to amortize the unamortized 
     portion of such payments over the 36-month period beginning 
     with the month in which the date of enactment of this Act 
     occurs. For purposes of this paragraph, the unamortized 
     portion of any payment is the amount remaining unamortized as 
     of the first day of the 36-month period.

     SEC. 203. EXTENSION OF SPUDDING RULE.

       (a) In General.--Section 461(i)(2)(A) of the Internal 
     Revenue Code of 1986 (relating to special rule for spudding 
     of oil or gas wells) is amended by striking ``90th day'' and 
     inserting ``180th day''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     1997.

     SEC. 204. ENHANCED OIL RECOVERY CREDIT EXTENDED TO CERTAIN 
                   NONTERTIARY RECOVERY METHODS.

       (a) In General.--Clause (i) of section 43(c)(2)(A) of the 
     Internal Revenue Code of 1986 (defining qualified enhanced 
     oil recovery project) is amended to read as follows:
       ``(i) which involves the application (in accordance with 
     sound engineering principles) of--

       ``(I) one or more tertiary recovery methods (as defined in 
     section 193(b)(3)) which can reasonably be expected to result 
     in more than an insignificant increase in the amount of crude 
     oil which will ultimately be recovered, or
       ``(II) one or more nontertiary recovery methods which are 
     required to recover oil with traditionally immobile 
     characteristics or from formations which have proven to be 
     uneconomical or noncommercial under conventional recovery 
     methods.''

       (b) Qualified Nontertiary Recovery Methods.--Section 
     43(c)(2) of the Internal Revenue Code of 1986 is amended by 
     adding at the end the following new subparagraphs:
       ``(C) Qualified nontertiary recovery method.--For the 
     purposes of this paragraph--
       ``(i) In general.--The term `qualified nontertiary recovery 
     method' means any recovery method described in clause (ii), 
     (iii), or (iv), or any combination thereof.
       ``(ii) Enhanced gravity drainage (egd) methods.--The 
     methods described in this clause are as follows:

       ``(I) Horizontal drilling.--The drilling of horizontal, 
     rather than vertical, wells to penetrate any hydrocarbon-
     bearing formation which has an average in situ calculated 
     permeability to fluid flow of less than or equal to 12 or 
     less millidarcies and which has been demonstrated by use of a 
     vertical wellbore to be uneconomical unless drilled with 
     lateral horizontal lengths in excess of 1,000 feet.
       ``(II) Gravity drainage.--The production of oil by gravity 
     flow from drainholes that are drilled from a shaft or tunnel 
     dug within or below the oil-bearing zone.

       ``(iii) Marginally economic reservoir repressurization 
     (merr) methods.--The methods described in this clause are as 
     follows, except that this clause shall only apply to the 
     first 1,000,000 barrels produced in any project:

       ``(I) Cyclic gas injection.--The increase or maintenance of 
     pressure by injection of hydrocarbon gas into the reservoir 
     from which it was originally produced.
       ``(II) Flooding.--The injection of water into an oil 
     reservoir to displace oil from the reservoir rock and into 
     the bore of a producing well.

       ``(iv) Other methods.--Any method used to recover oil 
     having an average laboratory measured air permeability less 
     than or equal to 100 millidarcies when averaged over the 
     productive interval being completed, or an in situ calculated 
     permeability to fluid flow less than or equal to 12 
     millidarcies or oil defined by the Department of Energy as 
     being immobile.
       ``(D) Authority to add other nontertiary recovery 
     methods.--The Secretary shall provide procedures under 
     which--
       ``(i) the Secretary may treat methods not described in 
     clause (ii), (iii), or (iv) of subparagraph (C) as qualified 
     nontertiary recovery methods, and
       ``(ii) a taxpayer may request the Secretary to treat any 
     method not so described as a qualified nontertiary recovery 
     method.

     The Secretary may only specify methods as qualified 
     nontertiary recovery methods under this subparagraph if the 
     Secretary determines that such specification is consistent 
     with the purposes of subparagraph (C) and will result in 
     greater production of oil and natural gas.''
       (c) Conforming Amendment.--Clause (iii) of section 
     43(c)(2)(A) of the Internal Revenue Code of 1986 is amended 
     to read as follows:
       ``(iii) with respect to which--

       ``(I) in the case of a tertiary recovery method, the first 
     injection of liquids, gases, or other matter commences after 
     December 31, 1990, and
       ``(II) in the case of a qualified nontertiary recovery 
     method, the implementation of the method begins after 
     December 31, 1997.''

       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after December 31, 1997.
                                 ______