The Application of Enhanced Oil Recovery Tax Credits Against the Alternative Minimum Tax for 2004 and 2005

Section 1347 of the CEB would permit oil producers to apply their EOR tax credits against the Alternative Minimum Tax (AMT). Under current law, if an oil producer pays the AMT, then they would be constrained from applying some or all of their EOR tax credits to their tax bill. The CEB proposal would permit oil producers to reduce their AMT payment equal to the size of their outstanding EOR tax credits. This provision would remain in effect only for 2004 and 2005. This provision would primarily increase near-term cash flow for those petroleum companies which are subject to the AMT and which have unused EOR tax credits.

EIA cannot determine the budget impacts of this provision because company-specific tax information is required regarding whether a company is paying the AMT level and the amount of that company’s unused EOR tax credits, which is not available to EIA. Any analysis of this provision would be further complicated by the fact that a company’s future tax situation largely depends upon prevailing oil and gas prices. During periods when oil and gas prices are high, producers are less likely to be subject to the AMT. Because unused tax credits can be carried forward, an analysis calculating future budget impacts would have to anticipate when the EOR tax credits would otherwise be employed in the future. So this provision primarily changes the timing of when a company’s EOR tax credits are applied to that company’s tax bill.

Generally, the small petroleum producers, which have smaller gross margins than the large diversified companies, are more likely to be subject to paying the AMT. Because EIA currently projects oil prices to remain above $25 per barrel for 2004 and 2005,¹⁵ the number of oil producers subject to the AMT which also have undeclared EOR tax credits is expected to be small.

JCT estimates that the proposed tax provision would result in an average annual decline in tax revenues of $80 million during 2004 through 2006. If the JCT analysis is correct and if this decline in tax revenues translated directly into an increase in company cash flow, then it would have a negligible impact on total industry cash flow, and in turn, on oil and gas production. The annual cash flow from U.S. oil and gas production operations for FRS companies has been in the $17-to-$49-billion range over the last 5 years.¹⁶ The proposed tax change would increase industry cash flow by less than one-half of one percent, assuming that the JCT analysis is correct. The proposed tax change may improve some individual company balance sheets, but on an industry level, the impact on oil production and imports would be negligible.

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