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Description
The Crude Oil Windfall Profits Tax Act of 1980 provided tax incentives for businesses to encourage energy conservation and production of alternative energy sources. Under Title II, tax credits were available for the production and sale of natural gas produced from geopressurized brine, Devonian shale, coal seams, or tight formations. (Tax credits were also provided for other fuels, which will not be addressed here).
The tax credit (as modified by the Revenue Reconciliation Act of 1990) applies to the domestic production and sale of qualified fuels to unrelated persons according to Section 29 of the Internal Revenue Code. The qualified natural gas had to be produced from a well drilled after December 31, 1979, and before January 1, 1993, and the gas had to be sold before January 1, 2003. The initial credit was set equal to $3 for each 5.8 million Btu of energy. Except for gas from tight formations, the credit was indexed for inflation. The credit would phase out proportionately as the annual average wellhead price for a barrel of uncontrolled domestic oil (the "reference price") increased from $23.50 to $29.50, adjusted for inflation. The credit applied to tax years ending after December 31, 1979.
Impact
Natural gas production from unconventional gas recovery (UGR) sources grew substantially from the time the Section 29 credits started. Annual production from UGR sources prior to 1980 was less than 100 billion cubic feet (Bcf). By the end of the first 10 years of the Section 29 credits, UGR production reached almost 3 trillion cubic feet (Tcf). It is estimated that up to one-third of gas wells drilled in 1990 (the final year to qualify under the original legislation) were for unconventional gas recovery. By the end of the allowable period for the credit, UGR production was almost 5 Tcf, or more than 25 percent of domestic production.
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