REVENUE RULE 93-11

1993-1 C.B. 44, 1993-7 I.R.B. 11.

Internal Revenue Service
Revenue Ruling

QUALIFIED TERTIARY RECOVERY METHODS

Published: February 16, 1993

§ 193.  Tertiary Injectants, 26 CFR 1.193-1: Deduction for tertiary injectant expenses.

(See Also § 43; 1.43-2.)

Qualified tertiary recovery methods. The Service has ruled on the circumstances under which immiscible nonhydrocarbon gas displacement qualifies as a tertiary recovery method for purposes of § 193 of the Code. Rev. Rul. 85-141 modified.

ISSUE

If immiscible nonhydrocarbon gas displacement effects a chemical or physical reaction (other than an increase in pressure) between the oil and the injected gas or between the oil and other reservoir fluids, is it a tertiary recovery method for purposes of § 193 of the Internal Revenue Code?

LAW AND ANALYSIS

§ 193(a) of the Code allows a deduction for the taxable year equal to the taxpayer's qualified tertiary injectant expenses for tertiary injectants injected during the taxable year.

§ 193(b)(3) of the Code provides that the term "tertiary recovery method" means any method that is described in § 212.78(c)(1) through (9) of the June 1979 energy regulations, 10 CFR 212.78 (1979), or any other method to provide tertiary enhanced recovery that is approved by the Secretary for purposes of § 193.

§ 1.193-2(b)(2)(ii) of the Income Tax Regulations provides that a tertiary recovery method includes any method for which the taxpayer has obtained the approval of the Associate Chief Counsel (Technical) under former § 4993(d)(1)(B) of the Code relating to the windfall profit tax.

§ 43(c)(4) of the Code provides that for purposes of the enhanced oil recovery credit provided in § 43, immiscible nonhydrocarbon gas displacement is treated as a tertiary recovery method under § 193(b)(3). The Conference Committee report underlying § 43 states that by including immiscible nonhydrocarbon gas displacement as a qualified tertiary recovery method for purposes of § 43, Congress intended no "inference regarding whether the costs of these injectants are deductible under § 193." H.R.Rep. No. 964 101st Cong., 2d Sess. 1124-1125 (1990), 1990-3 (Vol. 3) C.B. 1124-1125.

Rev. Rul. 85-141, 1985-2 C.B. 277, concludes that the injection of nonhydrocarbon gas into the gas cap of a reservoir is not an approved tertiary enhanced recovery method under § 4993(d)(1)(B) of the Code. Rev. Rul. 85-141 states that in the case of immiscible nonhydrocarbon gas displacement, the Secretary will approve a method as a tertiary recovery method under § 4993(d)(1)(B) only if the method involves the injection of nonhydrocarbon gas into the oil zone of a reservoir to obtain a chemical or physical reaction (other than an increase in pressure) between the oil and the injectant. Accordingly, under § 1.193-1(b)(2)(ii) of the regulations, immiscible nonhydrocarbon gas displacement also qualifies as a tertiary recovery method under § 193(b)(3) of the Code if the nonhydrocarbon gas is injected into the oil zone of a reservoir to obtain a chemical or physical reaction (other than an increase in pressure) between the oil and the injectant.

Immiscible nonhydrocarbon gas displacement may effect a chemical or physical reaction (other than an increase in pressure) with the oil, however, in situations other than that approved in Rev.Rul. 85-141. For example, injection of immiscible nonhydrocarbon gas at the gas-oil contact to flood the gas-oil interface may result in the swelling of the oil caused by a reaction between the oil and the injectant. In addition, injecting immiscible nonhydrocarbon gas into the reservoir may reduce the interfacial tension between the oil and the water in the reservoir. Therefore, in situations in which injecting immiscible nonhydrocarbon gas effects a chemical or physical reaction (other than an increase in pressure) between the oil and the injectant or between the oil and other reservoir fluids, immiscible nonhydrocarbon gas displacement is a tertiary recovery method for purposes of § 193 of the Code.

HOLDING

If immiscible nonhydrocarbon gas displacement effects a chemical or physical reaction (other than an increase in pressure) between the oil and the injected gas or between the oil and other reservoir fluids, it is a tertiary recovery method for purposes of § 193 of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 85-141 is modified to conform the description of the qualified tertiary recovery method under former § 4993(d)(1)(B) of the Code to the holding of this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue ruling is Brenda M. Stewart of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Brenda M. Stewart on (202) 622-3120 (not a toll-free number).

Rev. Rul. 93-11, 1993-1 C.B. 44, 1993-7 I.R.B. 11.