Federal Tax Incentives:
Marginal Oil & Gas Well Production Credit
Summary – IRC §45I Marginal Well Production Credit
Congress enacted IRC §45I in 2004 to provide a tax credit for production from qualified marginal wells, intended as a safety net during periods of low commodity pricing. This credit primarily benefits small producers operating low-volume wells. The credit is price-sensitive and phases out when reference prices exceed statutory thresholds (IRC §45I(b)(2)). Historically, the credit has rarely applied due to high crude oil and natural gas prices.
Credit Amounts
In general, the marginal well tax credit provides a $3-per-barrel credit for the production of crude oil and $0.50-per-1,000-cubic-feet (Mcf) credit for the production of qualified natural gas, adjusted annually for inflation (IRC §45I(b)(1)).
Phase-Out Thresholds
Phase-out begins when reference prices exceed $15/barrel (oil) or $1.67/Mcf (gas) and ends at $18/barrel or $2.00/Mcf, adjusted for inflation (IRC §45I(b)(2)).
Qualified Marginal Well
A qualified marginal well must meet IRC §45I(c)(3)(A) and IRC §613A(c)(6) and generally refers to a domestic oil well that produces
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the production from which during the taxable year is treated as marginal production under IRC § 613A(c)(6) [means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which is (1) a stripper well property for the calendar year in which the taxable year begins, or (2) is a property substantially all of the production of which during such calendar year is heavy oil], or;
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IRC § 613A(c)(6)(E) states the term “stripper well property” means, with respect to any calendar year, any property with respect to which the amount determined by dividing— the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by the number of such wells, is 15 barrel equivalents or less.
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IRC § 613A(c)(6)(F) states the term “heavy oil” means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit).
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which, during the taxable year
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has average daily production of not more than 25 barrel-of-oil equivalents (as so defined), and produces water at a rate not less than 95 percent of total well effluent.
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Production Limits
Thus, qualified marginal gas wells generally include those producing not more than 90 Mcf a day (one barrel of oil is equivalent to 6 Mcf). IRC § 613A(c)(6)(E). The maximum amount of production on which a credit may be claimed is 1,095 barrels or barrel-of-oil equivalent per year, per well. IRC § 45I(c)(2)(A). There is also a limitation for wells not capable of production during each day of a taxable year. IRC § 45I(c)(2)(B).
Ownership & Allocation
Taxpayer must own an operating interest; credit allocated among owners based on revenue interests (IRC §45I(d)(1)-(2)).
Carryback and Carryforward of Unused Credit
Unused credits may be carried back 5 years and forward 20 years (IRC §39(a)(3)).
Note: The Marginal Well Production Credit is subject to unavailability (as in recent years) due to high commodity prices. Consult your tax advisor to evaluate carbon capture incentives and confirm compliance with IRS reporting requirements.
IRS Links, Notices, & Filing Requirements
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Claim credit on Form 8904; report on Form 3800 as part of the general business credit.
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See also Notice 2024-52: Reference price for section 45I credit for production of natural gas from marginal wells (dated July 1, 2024).