S 1050 IS

To amend the Internal Revenue Code of 1986 to provide incentives for gas and oil producers, and for other purposes.

May 13, 1999

Mr. MURKOWSKI introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to provide incentives for gas and oil producers, and for other purposes.

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 `Energy Security Tax Policy Act of 1999'.

SEC. 2. ELIMINATION OF CERTAIN AMT PREFERENCES FOR OIL AND GAS ASSETS.

(a) DEPLETION- Section 57(a)(1) of the Internal Revenue Code of 1986 (relating to depletion) is amended by striking the second sentence and inserting the following: `This paragraph shall not apply to any deduction for depletion computed in accordance with section 613A.'

(b) INTANGIBLE DRILLING COSTS- Section 57(a)(2)(E) of the Internal Revenue Code of 1986 (relating to exception for independent producers) is amended to read as follows:

`(E) TERMINATION OF APPLICATION TO OIL AND GAS PROPERTIES- In the case of any taxable year beginning after December 31, 1998, this paragraph shall not apply in the case of any oil or gas property.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1998.

SEC. 3. DEPRECIATION ADJUSTMENT NOT TO APPLY TO OIL AND GAS ASSETS.

(a) IN GENERAL- Subparagraph (B) of section 56(a)(1) of the Internal Revenue Code of 1986 (relating to depreciation adjustments) is amended to read as follows:

`(B) EXCEPTIONS- This paragraph shall not apply to--

`(i) property described in paragraph (1), (2), (3), or (4) of section 168(f), or

`(ii) property used in the active conduct of the trade or business of exploring for, extracting, developing, or gathering crude oil or natural gas.'

(b) DEPRECIATION ADJUSTMENT FOR PURPOSES OF ADJUSTED CURRENT EARNINGS- Paragraph (4)(A) of section 56(g) of such Code (relating to adjustments based on adjusted current earnings) is amended by adding at the end the following new clause:

`(vi) OIL AND GAS PROPERTY- In the case of property used in the active conduct of the trade or business of exploring for, extracting, developing, or gathering crude oil or natural gas, the amount allowable as depreciation or amortization with respect to such property shall be determined in the same manner as for purposes of computing the regular tax.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1998.

SEC. 4. REPEAL CERTAIN ADJUSTMENTS BASED ON ADJUSTED CURRENT EARNINGS RELATING TO OIL AND GAS ASSETS.

(a) INTANGIBLE DRILLING COSTS- Clause (i) of section 56(g)(4)(D) of the Internal Revenue Code of 1986 (relating to certain other earnings and profits adjustments) is amended by striking the second sentence and inserting the following: `In the case of any oil or gas well, this clause shall not apply to amounts paid or incurred in taxable years beginning after December 31, 1998.'

(b) DEPLETION- Clause (ii) of section 56(g)(4)(F) of the Internal Revenue Code of 1986 (relating to depletion) is amended to read as follows:

`(ii) EXCEPTION FOR OIL AND GAS WELLS- In the case of any taxable year beginning after December 31, 1998, clause (i) (and subparagraph (C)(i)) shall not apply to any deduction for depletion computed in accordance with section 613A.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1998.

SEC. 5. ENHANCED OIL RECOVERY CREDIT AND CREDIT FOR PRODUCING FUEL FROM A NONCONVENTIONAL SOURCE ALLOWED AGAINST MINIMUM TAX.

(a) ENHANCED OIL RECOVERY CREDIT ALLOWED AGAINST REGULAR AND MINIMUM TAX-

(1) ALLOWING CREDIT AGAINST MINIMUM TAX- Subsection (c) of section 38 of the Internal Revenue Code of 1986 (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 ENHANCED OIL RECOVERY CREDIT-

`(A) IN GENERAL- In the case of the enhanced 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) 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 enhanced oil recovery credit).

`(B) ENHANCED OIL RECOVERY CREDIT- For purposes of this subsection, the term `enhanced oil recovery credit' means the credit allowable under subsection (a) by reason of section 43(a).'.

(2) CONFORMING AMENDMENT- Subclause (II) of section 38(c)(2)(A)(ii) of such Code is amended by inserting `or the enhanced oil recovery credit' after `employment credit'.

(b) CREDIT FOR PRODUCING FUEL FROM A NONCONVENTIONAL SOURCE-

(1) ALLOWING CREDIT AGAINST MINIMUM TAX- Section 29(b)(6) of the Internal Revenue Code of 1986 is amended to read as follows:

`(6) APPLICATION WITH OTHER CREDITS- The credit allowed by subsection (a) for any taxable year shall not exceed--

`(A) the regular tax for the taxable year and the tax imposed by section 55, reduced by

`(B) the sum of the credits allowable under subpart A and section 27.'

(2) CONFORMING AMENDMENTS-

(A) Section 53(d)(1)(B)(iii) of such Code is amended by inserting `as in effect on the date of the enactment of the Energy Security Tax Policy Act of 1999,' after `29(b)(6)(B),'.

(B) Section 55(c)(2) of such Code is amended by striking `29(b)(6),'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1998.

SEC. 6. 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 ($1.56 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-

`(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 the Internal Revenue Code of 1986 (relating to current year business credit) 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 the Internal Revenue Code of 1986 (relating to limitation based on amount of tax), as amended by section 5(a)(1), is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

`(4) 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 AMENDMENTS-

(A) Subclause (II) of section 38(c)(2)(A)(ii) of such Code, as amended by section 5(a)(2), is amended by striking `or the enhanced oil recovery credit' and inserting `the enhanced oil recovery credit, or the marginal oil and gas well production credit'.

(B) Subclause (II) of section 38(c)(3)(A)(ii) of such Code, as added by section 5(a)(1), is amended by inserting `or the marginal oil and gas well production credit' after `recovery credit'.

(d) COORDINATION WITH SECTION 29- Section 29(d) of the Internal Revenue Code of 1986 (relating to other definitions and special rules) is amended by adding at the end the following new paragraph:

`(9) ELECTION NOT TO TAKE CREDIT- No credit shall be allowed under subsection (a) with respect to production from any marginal well (as defined in section 45D(c)(3)(A)) if the taxpayer elects to not have this section apply to such well.'

(e) CLERICAL AMENDMENT- The table of sections for subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

(f) EFFECTIVE DATE- The amendments made by this section shall apply to production in taxable years ending after the date of the enactment of this Act.

SEC. 7. ALLOWANCE OF ADDITIONAL ENHANCED OIL RECOVERY METHOD.

(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) a qualified horizontal drilling method 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 lead to the discovery or delineation of previously undeveloped accumulations of crude oil,'

(b) QUALIFIED HORIZONTAL DRILLING METHOD- Section 43(c)(2) of the Internal Revenue Code of 1986 (relating to qualified enhanced oil recovery project) is amended by adding at the end the following new subparagraph:

`(C) QUALIFIED HORIZONTAL DRILLING METHOD- For purposes of this paragraph--

`(i) IN GENERAL- The term `qualified horizontal drilling method' means the drilling of a horizontal well in order to penetrate hydrocarbon bearing formations located north of latitude 54 degrees North.

`(ii) HORIZONTAL WELL- The term `horizontal well' means a well which is drilled--

`(I) at an inclination of at least 70 degrees off the vertical, and

`(II) for a distance in excess of 1,000 feet.'

(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 horizontal drilling method, the implementation of the method begins after December 31, 1998.'

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after December 31, 1998.

SEC. 8. NATURAL GAS GATHERING LINES TREATED AS 7-YEAR PROPERTY.

(a) IN GENERAL- Subparagraph (C) of section 168(e)(3) of the Internal Revenue Code of 1986 (relating to classification of certain property) is amended by redesignating clause (ii) as clause (iii) and by inserting after clause (i) the following new clause:

`(ii) any natural gas gathering line, and'.

(b) NATURAL GAS GATHERING LINE- Subsection (i) of section 168 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

`(15) NATURAL GAS GATHERING LINE- The term `natural gas gathering line' means the pipe, equipment, and appurtenances used to deliver natural gas from the wellhead to the point at which such gas first reaches--

`(A) a gas processing plant,

`(B) an interconnection with an interstate natural-gas company (as defined in section 2(6) of the Natural Gas Act (15 U.S.C. 717a(6))), or

`(C) an interconnection with an intrastate transmission pipeline.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to property placed in service before, on, or after the date of the enactment of this Act.

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