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Producers Ask FERC to Lift Restriction on Tax Credits

Producers Ask FERC to Lift Restriction on Tax Credits

Major and independent gas producers last week commended FERC for taking steps to reinstate its authority to make well determinations so that qualified producers can obtain Section 29 tax credits for high-cost gas wells. But they urged the Commission to extend the determination process to all qualifying wells, irrespective of whether the wells were spudded and/or recompleted pre-Jan. 1, 1993 or whether they were recompleted after Dec. 31, 1992.

In a notice of proposed rulemaking (NOPR) last January, the Commission proposed limiting formal well determinations to only those wells that were recompleted after Dec. 31, 1992. Nearly all producers took exception with FERC's proposal because it would deny Section 29 tax credits to qualifying wells spudded or recompleted before 1993.

"Congress certainly did not intend to punish producers when it repealed the [Natural Gas Policy Act], and indeed it is not fair to do so now by precluding producers from obtaining a well determination for certain wells that otherwise would qualify for the tax credit," said the Independent Petroleum Association of America (IPAA), which filed joint comments at FERC with the Natural Gas Supply Association (NGSA) last week [RM00-6].

Under the NOPR, the Commission is trying to remedy an oversight that occurred when Congress phased out price controls for natural gas under the Wellhead Decontrol Act of 1989, which removed FERC's authority to set ceiling prices for natural gas at the wellhead.

The oversight is this: in order for producers to take advantage of the Section 29 tax credit of the Internal Revenue Code, they first must get from FERC a ruling on the geological formation of their wells --- which determines whether the gas can qualify for the tax credit. But the producers can't get such determinations because the Commission phased out its procedures after the total decontrol of gas prices.

A band of producers, who are mostly active in the Rocky Mountain region, petitioned the Commission last year to reinstate its well determination procedures so they could qualify for the tax credit, which expires in 2002. The producers' petition, which was backed by the Department of Energy, along with the NOPR are in response to a decision by the Tenth Circuit Court of Appeals, which addressed the quandary involving the tax credit.

Based on the IRS code and a subsequent IRS ruling, eligible for the tax credit are gas wells that were spudded and/or recompleted prior to Jan. 1, 1993 and wells that were recompleted post Dec. 31, 1992. Recompletion essentially is continuous drilling in wells that were spudded prior to Jan. 1, 1993. Also, only high-cost, hard-to-produce gas (as defined under Section 107 of the Natural Gas Act) is eligible for the tax credit.

Susan Parker

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