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Senate Clarifies Carbon Capture Tax Credit for Producers

The energy portion of the nearly $888 billion Senate economic stimulus package, like its House counterpart, focuses almost exclusively on tax credits and direct investments for renewable fuels and electric transmission facilities, but one tax credit has been carved out for traditional oil and natural gas producers. Producers would be eligible for a $10/ton tax credit if they can prove that the carbon dioxide (CO2) injected to enhance oil and gas recovery has been permanently sequestered in a field.

This is a "clarification or correction of the tax credit language that Congress enacted as part of the financial rescue bill last [fall]," said a Washington, DC tax expert specializing in carbon capture and storage. The clarification, which was included in the Senate Finance Committee's portion of the stimulus bill, "makes clear what Congress had always intended and that is that you can, in fact, engage in permanent sequestration operations while you're engaged in oil and gas production," he noted.

The Internal Revenue Service (IRS) now will have to "determine what an oil and gas operator has to do to meet the the permanent storage test and that might be interesting," the tax expert said. "There will likely be additional regulatory requirements imposed upon an oil and gas operator if they want to be engaging in carbon capture and storage activity, but it's unclear what those requirements are going to be."

The Senate provision basically tells producers to prove that the CO2 used in enhancing oil and gas production will be permanently captured, he said. "You're going to have to have some demonstration of proof to get the tax credit."

Some producers are employing measuring, monitoring and verification (MMV) technology to"verify that the CO2 that is going down is not coming back up," which he said is inexpensive to use in some production fields, but costly in other fields. Depending on the per-field cost of the MMV technology, the $10/ton tax credit may not be worthwhile for some producers, the tax expert noted.

He acknowledged that the $10 tax credit "isn't much," but he added that "Congress is to be commended for enacting any kind of carbon capture tax credit."

If Congress approves the clarified tax credit language and rules are issued by the IRS, it would be the first time producers would receive federal tax relief for the capture of CO2 used in oil and gas production activities, he said, adding that some states offer severance tax relief to operators. The House passed its stimulus package last Wednesday and the Senate is expected to take up their bill this week (see related story).

He estimated that 4-5% of domestic production involves the injection of CO2 and this "is steadily growing." The use of carbon sequestration in production is mostly evident in the Permian Basin in West Texas and New Mexico, along the Gulf Coast and in Wyoming. Producers leading the way in sequestering CO2 underground are Occidental Petroleum, Anadarko Petroleum, Denbury Resources and Kinder Morgan, he said.

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