What is it?
The marginal well tax credit is a production-based tax credit that provides a per-barrel or per-barrel-of-oil equivalents (BOEs) credit for the production of crude oil or qualified natural gas from a qualified marginal well. What is a qualified marginal well, you ask? A qualified marginal well is a domestic well that has average daily production of not more than 25 BOEs and produces water at a rate not less than 95% of total well effluent (basically the well meets environmental standards regarding wastewater). The credit only applies to the operating interest in a well.
What’s the history?
The marginal well credit was enacted in 2004 and was intended to serve as a safety net for marginal wells during low periods of pricing. The credit is particularly beneficial to small well producers who typically produce limited barrels a day. The credit is only available if the commodity prices are below a certain threshold. Since its enactment there have been very few years allowing for this credit as the commodity prices are generally above the threshold.
Why talk about it now?
During 2020 the commodity price of natural gas dropped below the current threshold of $1.94 per 1,000 cubic feet of natural gas (Mcf) and on June 4, 2021 the IRS announced the reference price adjusted for inflation of $0.66 per Mcf. There is also a significant increase in the per mcf reference price (up from $0.50 per Mcf).
How is it calculated?
Step 1: Convert current year produced Mcf to BOE. 6 mcf of gas equals 1 BOE.
Step 2: Determine which well(s) are qualified marginal wells and only include those wells in the steps that follow. A qualified marginal well is a domestic well that, IN TOTAL, produces 25 BOEs or less on average, per day.
- If you are not a 100% working interest owner in the well(s) you must calculate the production of the well as a whole.
- If the well was not online or able to produce during each day of the tax year you must calculate the production on a proportional basis. This includes shut-in wells brought back online.
Step 3: Calculate the number BOEs that qualify. The credit is limited to 1,095 BOEs per well during the taxable year. This is on a well-as-a-whole total; if you don’t own 100% of the well, the number of BOEs allowable is allocated in proportion to your ownership.
Step 4: Convert the qualifying BOEs to mcf.
Step 5: Multiply the qualifying mcf by the applicable credit amount, which is $0.66 for 2020.
HoganTaylor's Energy Practice
If you would like more information about the Marginal Well Tax Credit and how it could potentially benefit your business, please contact the author of this article, Paige Buxton Graham, at pgraham@hogantaylor.com, Energy Practice Lead, Jeff Koweno, at jkoweno@hogantaylor.com, or any other member of the HoganTaylor Energy practice.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
