Abstract
Beginning with the Omnibus Budget Reconciliation Act of 1990*, the federal government has recently attempted to encourage domestic oil production through federal income tax incentives. Section 43 of the Internal Revenue Code provides a tax credit for projects employing enhanced oil recovery (EOR) methods. The EOR credit was enacted to stimulate the production of potentially recoverable domestic oil reserves. The federal tax system previously attempted to provide an incentive for EOR projects when the Windfall Profit Tax rules, before repeal, contained an incentive tax rate on oil recovered using tertiary (EOR) methods.
The credit is an amount equal to 15 percent of the qualified enhanced oil recovery costs paid or incurred by a taxpayer in connection with a qualified enhanced oil recovery project. A credit to reduce an income tax liability can provide a significant economic benefit as an indirect discount on the cost of a project. However, the true economic impact to an EOR project must be evaluated considering the rules for qualification and the limitations applicable to the credit as determined under the framework of the federal income tax system.
