Enhanced oil recovery credit in United States | KPMG | QA

Enhanced oil recovery credit likely available in 2016

U.S. published oil reference price

The Treasury Department and IRS today released for publication in the Federal Register a notice providing the oil reference price for the enhanced oil recovery credit. Because the oil reference price is dramatically lower than last year, the enhanced oil recovery credit might be available in 2016 for the first time since 2005.


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Read today’s notice [PDF 169 KB] 

Enhanced oil recovery (EOR) credit

The EOR credit is phased out in a given year depending on the oil reference price for the prior year. The oil reference price is the government’s estimate of the annual average wellhead price per barrel for all domestic crude oil the price of which is not subject to regulation by the United States. Thus, when domestic oil prices are low, the EOR credit is available, but when domestic oil prices are high or even in a middle range, the EOR credit phases out. Specifically, if the inflation adjustment factor (IAF) for the EOR credit for 2015 is not lower than the IAF for 2014, the EOR credit will be available in 2016, and it will not be phased out.

The enhanced oil recovery credit is equal to 15% of the taxpayer’s qualified enhanced oil recovery costs for the tax year. “Qualified enhanced oil recovery costs” means any of the following:

  • An amount paid or incurred during the tax year for tangible property: (1) that is an integral part of a qualified enhanced oil recovery project; and (2) with respect to which depreciation (or amortization in lieu of depreciation) is allowable.
  • Any intangible drilling and development costs: (1) that are paid or incurred in connection with a qualified enhanced oil recovery project; and (2) with respect to which the taxpayer makes an election under section 263(c) for the tax year.
  • Any qualified tertiary injectant expenses that are paid or incurred in connection with a qualified enhanced oil recovery project and for which a deduction is allowable for the tax year.
  • Any amount that is paid or incurred during the tax year to construct a gas treatment plant that (1) is located in the area of the United States lying north of 64 degrees north latitude; (2) preparing Alaska natural gas for transportation through a pipeline with a capacity of at least 2 trillion btu of natural gas per day; and (3) produces carbon dioxide which is injected into hydrocarbon-bearing geological formations.


Read a 2016 report [PDF 387 KB] prepared by KPMG LLP: The return of the enhanced oil recovery tax credit

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