Tax Credits Expire for Unconventional Gas Drilling

Article excerpt

Soon after the new year dawns, many believe we will see what the true U.S. rig count is, for the first time in two years. Tax credits associated with Section 29 unconventional gas drilling expire Thursday, you see.

Actually, the tax credits extend through 2002, but the wells have to be drilled before year end 1992.

The national rig count averaged about 685 for three-fourths of 1992, but natural gas drilling kicked in during fourth quarter, boosting the annual average to about 720. Two-thirds, or about 330 rigs, of the natural gas rig count of 525 last week were drilling for Section 29 gas.

The tax credits apply to wells drilled in tight sand formations and coalseam beds, chiefly. There are several tight sand formations in Oklahoma certified for the tax credits. Other hot tax credit drilling areas include New Mexico, Colorado, Kansas and Wyoming.

Section 29 credits were adopted as a drilling incentive in 1988 and have been extended twice.

But it hasn't really done much for the rig count. And many producers now say that rather than help, Section 29 gas has contributed to and exaggerated the depressed gas prices since 1986. The tax credits range from 52 cents per thousand cubic feet to 92 cents.

Gas producers with Section 29 gas can take far lower prices for the gas and still come out ahead, which drives the market downward.

In 1988, the U.S. rig count was unchanged from 1987 at an average 936. The 1989 rig count dropped 7 percent to an average 869, then shot up 16 percent in 1990 to an average 1,010. But last year it fell 15 percent, cratering to an average 860 _ a 50-year low.

The number of gas wells drilling nationwide, however, rose consistently from 1988 to 1990, before falling back in 1991. According to American Petroleum Institute statistics, there were 9,168 gas wells drilled in 1989, a 9 percent increase from 8,403 in 1988. The number of gas wells drilled grew 13 percent in 1990 to 10,386. But last year the figure dropped 11 percent to 9,281.

Meanwhile, spot gas prices foundered in a downward spiral from the 1988 average of $1.62 per thousand cubic feet to $1.58 in 1989, to $1.48 in 1990 and to $1.34 in 1991. The 1992 spot price average wound up at $1.62 _ comparable with the 1988 level _ but only after a sharp rebound from record low prices of below $1 in February, a month which historically holds strong gas prices from the winter heating season. …