Sec. 29 nonconventional fuels credit: 1993 highlights.

• Author: Lewis, Tara W.

Since 1980, a credit under Sec. 29 has been available to oil and gas producers as an incentive to find and produce fuel from designated nonconventional sources (primarily oil from shale and tar sands, and gas from geopressurized brine, Devonian shale, coal seams and tight formations). The credit is available for qualifying nonconventional fuel produced and sold before Jan. 1, 2003, if wells were drilled after Dec. 31, 1979, but before Jan. 1, 1993. Adjusted for inflation, the credit is worth over $5.50/barrel or almost $1.00/mcf. A flurry of drilling activity related to the expiration of the "drilling window" took place at the end of 1992, primarily in Texas, Alabama, Colorado, New Mexico and the Appalachian region, where large deposits of nonconventional fuels have been found. Even though wells were required to have been drilled by Dec. 31, 1992 to qualify for the credit, a number of Sec. 29 issues continued to be debated, and to some extent were resolved, during 1993.

One of the more important issues was how the end of the "drilling window" would be determined. Several years ago, the IRS held in Rev. Rul. 90-70 that a well is considered to have been "drilled" as of the date it is spudded (the commencement of actual drilling operations), provided drilling is continued until the productive horizon is reached. Specifically what satisfies this test was explored during 1993 in two rulings.

In Letter Ruling 9316033, the Service ruled that gas produced from a coal seam perforated, stimulated and brought into production after Dec. 31, 1992 would be gas produced from a well drilled before Jan. 1, 1993, so long as (1) the wellbore was spudded after Dec. 31, 1979 and before Jan. 1, 1993, (2) at the time the wellbore was spudded, such coal seam gas was within the "productive horizon" targeted by the taxpayer, and (3) the perforation and stimulation activity with respect to such coal seam has been continuously pursued in a diligent manner and consistent with sound engineering and development practices. In this ruling, all wells had been spudded and drilled to their total depth before the close of the window period, and were scheduled to be completed before the end of 1993.

In a second ruling, post-1992 recompletions (completing a well again in the same or different producing zone) of wells originally spudded before Jan. 1, 1993 were considered. Rev. Rul. 93-54 discussed two situations. In the first, during the drilling of a well to produce crude oil...