REVENUE RULE 93-54

1993-2 C.B. 3, 1993-27 I.R.B. 4.

Internal Revenue Service
Revenue Ruling

§ 29 CREDIT; RECOMPLETIONS

Published: August 16, 1993

§ 29. Credit for Producing Fuel from a Nonconventional Source

§ 29 credit; recompletions. If a well that is drilled after December 31, 1979, and before January 1, 1993, is recompleted after January 1, 1993, to produce fuel that is a qualified fuel under § 29(c) of the Code and if the recompletion does not involve additional drilling to deepen or extend the well, the fuel produced as a result of the recompletion qualifies for the § 29 credit.

ISSUE

If a well that is drilled after December 31, 1979, and before January 1, 1993, is "recompleted" after January 1, 1993, to produce fuel that is a qualified fuel under § 29(c) of the Internal Revenue Code, does the fuel produced from the "recompletion" qualify for the § 29 credit?

FACTS

Situation I. In 1982, X, the owner of an oil and gas property, drilled a well for the purpose of producing crude oil. X completed the well in the oil reservoir and began producing crude oil. Information obtained during the drilling and completion of the well indicated that the well had penetrated a coal seam gas deposit above the oil reservoir. In 1994, when all the crude oil that can be economically extracted from the well has been recovered, X plugs the oil zone. X perforates the casing and installs a flow line, that is, recompletes the well, to produce gas from the coal seam gas deposit.

Situation 2. In 1982, Y, the owner of an oil and gas property, drilled a well to 4,800 feet. Y completed the well in the oil reservoir and began producing crude oil. By 1994, the well is depleted by primary and enhanced recovery. Instead of plugging and abandoning the well, Y deepens the well to 8,000 feet by additional drilling. Y perforates multiple intervals between 6,000 and 7,200 feet from which Y produces gas from a tight formation below the depleted oil reservoir.

LAW AND ANALYSIS

§ 29(a) of the Code provides a credit for qualified fuel produced by the taxpayer and sold to an unrelated person during the taxable year. § 29(c) defines the term "qualified fuels." Gas produced from coal seams and gas produced from a tight formation are qualified fuels listed in § 29(c). § 29(f) of the Code provides that the credit is available with respect to qualified fuels that are produced from a well drilled after December 31, 1979, and before January 1, 1993.

Prior to the Revenue Reconciliation Act of 1990, Revenue Reconciliation Act of 1990, § 11501(a)(1), 1991-2 C.B. 481, 519, which extended the credit through 1992, the credit was not available if the well was drilled after December 31, 1990. Rev.Rul. 90-70, 1990-2 C.B. 3, holds that if a well is "spudded in" before January 1, 1991, and there is continual drilling until the productive horizon is reached, the well is considered to have been drilled before January 1, 1991, for purposes of § 29(f)(1)(A)(i) of the Code. Rev.Rul. 90-70 describes the circumstances under which drilling will be considered continual as follows:

Drilling will be considered to be continual even when delays occur if those delays result from factors that are beyond a taxpayer's control. Delays caused by the need to make mechanical repairs, the presence of unusually severe weather conditions, or the operation of any federal or state law are examples of delays ordinarily caused by factors that are beyond the taxpayer's control. Unavailability of drilling rigs will not be treated as a factor beyond the taxpayer's control.

Situation 1. The well that X drilled in 1982 to produce crude oil penetrated a coal seam gas deposit. In 1994, X recompletes the well to produce the coal seam gas deposit through the original wellbore. Gas produced from coal seams is a qualified fuel under § 29(c) of the Code. Because the well was drilled to the productive horizon before January 1, 1993, the coal seam gas qualifies for the credit provided in § 29.

Situation 2. Y produced crude oil from a well drilled in 1982 until depletion by primary and enhanced recovery. In 1994, Y deepens the well to produce gas from a tight formation below the oil reservoir. Gas produced from a tight formation is a qualified fuel under § 29(c) of the Code. Although the well is "spudded in" before January 1, 1993, there is not continual drilling until the productive horizon (the tight formation) is reached. Moreover, the delay in drilling to the tight formation is not caused by factors beyond Y's control. Accordingly, the tight formation gas does not qualify for the credit provided in § 29.

HOLDING

If a well that is drilled after December 31, 1979, and before January 1, 1993, is recompleted after January 1, 1993, to produce fuel that is a qualified fuel under § 29(c) of the Code and if the recompletion does not involve additional drilling to deepen or extend the well, the fuel produced from the recompletion qualifies for the § 29 credit.

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 call).

Rev. Rul. 93-54, 1993-2 C.B. 3, 1993-27 I.R.B. 4.