[Congressional Record Volume 146, Number 32 (Tuesday, March 21, 2000)]
[Senate]
[Pages S1522-S1524]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. HUTCHISON (for herself, Mr. Breaux, Mr. Lott, Mr. 
        Brownback, Mr. Bingaman, Mr. Gramm, Mr. Thomas, and Mr. 
        Inhofe):
  S. 2265. A bill to amend the Internal Revenue Code of 1986 to 
preserve marginal domestic oil and natural gas well production, and for 
other purposes; to the Committee on Finance.


                 MARGINAL WELL PRESERVATION ACT OF 2000

  Mrs. HUTCHISON. Mr. President, I am pleased today to introduce with 
my colleague from Louisiana, Senator Breaux, and the other cosponsors 
of the bill, the Marginal Well Preservation Act of 2000. This bill 
represents a necessary and workable proposal to ensure that the United 
States does not lose even more of its domestic energy production and to 
help prevent the further escalation of gasoline, diesel, and home 
heating oil prices for consumers.
  Mr. President, just a few days ago, on March 18, President Clinton 
announced his support of a number of provisions to respond to the 
recent spike in oil and gasoline prices in America. Among the issues to 
which he referred, I was most pleased and surprised to hear the 
president express his support for, quote, `tax incentives . . . for 
domestic oil production,' enquote.
  Well I for one welcome the President's long overdue endorsement of an 
issue that I and many other Senators have been promoting, discussing, 
and introducing legislation on for years. It is unfortunate that the 
President's newfound support for domestic oil production comes now, 
rather than a year ago when our domestic producers were being wiped-out 
by record low oil prices and when communities across Texas and other 
states were having their economic and tax base decimated. Nevertheless, 
I do welcome the president's comments, and I urge him to now turn those 
comments into action.
  I publicly urge him and the Treasury Department to pledge to sign 
into law, and to urge Congress to pass, the bill we are introducing 
today. Called the Marginal Well Preservation Act of 2000, this bill 
borrows from legislation I introduced earlier this year to create 
incentives to keep marginal wells (those producing fewer than 15 
barrels per day--and a corresponding level for natural gas) in 
production during times when oil and gas prices fall below break-even. 
The bill also contains provisions that the Administration explicitly 
endorsed over the weekend: the same-year deduction of geological and 
geophysical (exploratory) and delay rental costs associated with lease 
development. Taken together, these two provisions will help ensure a 
minimal level of protection for our nation's independent oil and gas 
producers and will help prevent America from becoming even more 
dangerously dependent on foreign oil.
  Mr. President, in addition to the President's recent round of 
proposals, tt seems as if everyone these days has their own ``quick 
fix'' to address the recent spike in oil and gas prices. But regardless 
of what short term solutions may be proposed, as America slips further 
and further into dependence on foreign oil the volatility of oil and 
gasoline prices is almost certain to get worse. The only logical 
response to this crisis is to increase our domestic supply of oil and 
gas.
  Much of the estimated 350 billion barrels of our domestic oil reserve 
lies not on public lands, but on private property where oil and gas 
production already occurs. Why isn't that oil and

[[Page S1523]]

gas being produced? The answer is that much of it is in small pockets 
and is relatively difficult to retrieve. Such ``marginal well'' 
production accounts for roughly 20 percent of our domestic oil 
production, or about as much as we import from Saudi Arabia.
  But while these wells are critical to our energy security, they are 
the most susceptible to oil price crashes, like we saw during 1998 when 
oil fell below $10 per barrel. During this time we lost over 65,000 
American jobs and over 150,000 marginal oil and gas wells. And despite 
the high price of oil today, the small, independent producers that own 
the majority of marginal wells cannot assume the economic risk of re-
opening them because there is no assurance that the price of oil will 
not again fall in the near future (see enclosed article).
  The Marginal Well Preservation Act will provide a tax credit of $3 
per barrel for the first three barrels of production when oil falls to 
between $17 and $14 per barrel for oil, and a corresponding price for 
natural gas. This represents the average break-even price for these 
wells. In states like Texas, where marginal well tax incentives have 
been enacted, the result has been to keep thousands of wells open that 
would have been closed, and thousands of American jobs here that would 
have moved overseas. Such a tax credit at the federal level would 
reduce our dependence on foreign oil and help us meet our growing 
demand for natural gas.
  If we were to enact the marginal well tax credit today, we would not 
only ensure a long-term safety net for producers, but we would also 
create an incentive today to re-open those shut-in wells. In fact, a 
reasonable estimate is that, within a reasonably short period of time, 
we could bring half, or 75,000 of those shut-in wells back into 
production. This would mean an addition of about 250,000 barrels of 
daily production. Given that America uses 19 million barrels of oil per 
day this may not seem like much, but when one considers just how tight 
the supply of oil is today, this relatively small increase in 
production could have a significant impact in the price of crude oil 
and oil products like gasoline and diesel fuel.
  In addition, Mr. President, this bill brings the U.S. Tax Code in 
line with the present-day realities of the oil and gas industry by 
allowing oil and gas exploration (geological and geophysical) costs to 
be expensed rather than capitalized, and by allowing delay rental lease 
payments to be deducted in the year in which they are paid, rather than 
when the oil is actually pumped. The Administration's own endorsement 
of this measure, which I and others have been promoting for years, 
should mean it's quick enactment into law, and I hope that it does.
  In fact, the Administration estimates that allowing the expensing of 
exploration costs alone could spur an additional daily production of 
126,000 barrels, on top of the roughly quarter million barrels that the 
marginal well provision would bring back in the near-term. For those 
keeping score, that totals almost 400,000 barrels of added daily 
production that can conservatively be expected to result from the 
passage of this bill. But it must be done soon. We are quickly 
approaching a $2 per gallon nationwide price for gasoline, and we have 
not even entered the peak vacation driving season. Americans need 
relief now, and this bill will give it to them.
  Mr. President, this legislation is long overdue, and I appreciate the 
support of Senator Breaux and my other colleagues who are cosponsoring 
the bill. Most importantly, I urge the President and my other 
colleagues in the Senate, particularly those from non-energy producing 
states, to join with us in supporting this effort. High prices and low 
prices are two sides of the same coin, and it is high time we realize 
that. Price dives are as detrimental to producers as price spikes are 
to consumers.
  We can break this cycle, and we can do it now by passing the Marginal 
Well Preservation Act.
  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. 2265

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

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Marginal 
     Well Preservation Act of 2000.''
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. TAX CREDIT FOR MARGINAL DOMESTIC OIL AND NATURAL GAS 
                   WELL PRODUCTION.

       (a) Purpose.--The purpose of this section is to prevent the 
     abandonment of marginal oil and gas wells responsible for 
     half of the domestic production of oil and gas in the United 
     States.
       (b) Credit for Producing Oil and Gas From Marginal Wells.--
     Subpart D of part IV of subchapter A of chapter 1 (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 ($1.56 for qualified natural gas production), bears 
     to
       ``(ii) $3 ($0.33 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 2000, 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 `1999' 
     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 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--
       ``(i) the production from which during the taxable year is 
     treated as marginal production under section 613A(c)(6), or
       ``(ii) which, during the taxable year--

       ``(I) has average daily production of not more than 25 
     barrel equivalents, and
       ``(II) produces water at a rate not less than 95 percent of 
     total well effluent.

       ``(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.--

[[Page S1524]]

       ``(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.''
       ``(c) Credit Treated as Business Credit.--Section 38(b) 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).''
       (d) Credit Allowed Against Regular and Minimum Tax.--
       (1) In general.--Subsection (c) of section 38 (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) is amended by inserting ``or the marginal oil 
     and gas well production credit'' after ``employment credit''.
       (e) Carryback.--Subsection (a) of section 39 (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 `21 taxable 
     years' in subparagraph (A) thereof, and
       ``(ii) by substituting `30 taxable years' for `20 taxable 
     years' in subparagraph (B) thereof.''
       (f) Coordination With Section 29.--Section 29(a) is amended 
     by striking ``There'' and inserting ``At the election of the 
     taxpayer, there''.
       (g) 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:

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

       (h) Effective Date.--The amendments made by this section 
     shall apply to production in taxable years beginning after 
     December 31, 1999.

     SEC. 3. ELECTION TO EXPENSE GEOLOGICAL AND GEOPHYSICAL 
                   EXPENDITURES AND DELAY RENTAL PAYMENTS.

       (a) Purpose.--The purpose of this section is to recognize 
     that geological and geophysical expenditures and delay 
     rentals are ordinary and necessary business expenses that 
     should be deducted in the year the expense is incurred.
       (b) Election To Expense Geological and Geophysical 
     Expenditures.--
       (1) In general.--Section 263 (relating to capital 
     expenditures) is amended by adding at the end the following 
     new subsection:
       ``(j) Geological and Geophysical Expenditures for 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 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.''
       (2) Conforming amendment.--Section 263A(c)(3) is amended by 
     inserting ``263(j),'' after ``263(i),''.
       (3) Effective date.--
       (A) In general.--The amendments made by this subsection 
     shall apply to expenses paid or incurred after the date of 
     the enactment of this Act.
       (B) Transition rule.--In the case of any expenses described 
     in section 263(j) of the Internal Revenue Code of 1986, as 
     added by this subsection, 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 prescribe, to amortize the suspended 
     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 subparagraph, the suspended 
     portion of any expense is that portion of such expense which, 
     as of the first day of the 36-month period, has not been 
     included in the cost of a property or otherwise deducted.
       (c) Election To Expense Delay Rental Payments.--
       (1) In general.--Section 263 (relating to capital 
     expenditures), as amended by subsection (b)(1), 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 the drilling of an oil or gas well 
     under an oil or gas lease.''
       (2) Conforming amendment.--Section 263A(c)(3), as amended 
     by subsection (b)(2), is amended by inserting ``263(k),'' 
     after ``263(j),''.
       (3) Effective date.--
       (A) In general.--The amendments made by this subsection 
     shall apply to payments made or incurred after the date of 
     the enactment of this Act.
       (B) Transition rule.--In the case of any payments described 
     in section 263(k) of the Internal Revenue Code of 1986, as 
     added by this subsection, which were made 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 prescribe, to amortize the suspended 
     portion of such payments over the 36-month period beginning 
     with the month in which the date of the enactment of this Act 
     occurs. For purposes of this subparagraph, the suspended 
     portion of any payment is that portion of such payment which, 
     as of the first day of the 36-month period, has not been 
     included in the cost of a property or otherwise deducted.

                          ____________________