S 2265 IS

To amend the Internal Revenue Code of 1986 to preserve marginal domestic oil and natural gas well production, and for other purposes.

March 21, 2000

Mrs. HUTCHISON (for herself, Mr. BREAUX, Mr. LOTT, Mr. BROWNBACK, Mr. BINGAMAN, Mr. GRAMM, Mr. THOMAS, and Mr. INHOFE) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to preserve marginal domestic oil and natural gas well production, 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; 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-

`(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.'

`(e) 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.

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