The Silver Lining of Texas’ Low Oil Prices

In Energy

oil-106913_960_720The oil industry, with its history of booms and busts, has been reported to be in its deepest downturn since the 1990s, if not earlier. The cause is the plunging price of a barrel of oil, which has fallen more than 70 percent since June 2014. But why exactly has the price of a barrel of oil plummeted so much?

Fundamentally, it comes down to supply and demand. United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Canadian and Iraqi oil production and exports are rising year after year. Even the Russians, with all their economic problems, manage to keep pumping. On the demand side, the economies of Europe and developing countries are weak and vehicles are becoming more energy-efficient. Thus as a result, demand for fuel is lagging a bit.

Certainly, the plunge in oil prices is a boon for some, and a calamity for others. However, for oil producers is there a silver lining? Ultimately, those that can maintain the cost reductions and productivity improvements when prices eventually rise may be stronger than before the crash. In Texas, the price per a barrel of oil has been hovering around the $30 mark.  As Tom Erikson,  head of the University of North Dakota’s Energy and Environmental Research Center, puts it, “at $30 oil, you need to innovate, or else you’re just losing money.”

Indeed, further innovative developments in the oil and gas industry are required in order to remain competitive in today’s markets. As a result, substantial research and development (R&D) is needed, which can be costly.  Fortunately, the R&D tax credit is available for eligible companies, offering a lucrative investment that allows for forward thinking and the next steps in innovation within the oil and gas industry.

Initially, the R&D tax credit was primarily used for technological and biomedical research when it was introduced by congress over thirty years ago. Since its first introduction the tax credit has evolved, now it encompasses multiple industries including the oil and gas industry.

There are certain activities that determine whether companies and organizations in this industry are eligible for the credit. Here is a short list to give you an idea of what activities are included:

  • Offshore structure design
  • Helidecks
  • Development and testing in a variety of areas including shutdown services, plug and abandonment solutions and turnaround
  • Plant design regarding safety, chemicals, pollution control and pressurization
  • Wastewater solutions
  • Designing and improving drilling
  • Combustion testing
  • Improvements in drilling processes and design
  • Testing and development including:
    • Plug and abandonment solutions
    • Shutdown services
    • Turnaround

Overall, R&D is the lifeblood of technological advancement and could greatly assist companies in the oil industry grow in a seemingly difficult time. In 2006, the IRS broke out numbers to show that $388 million in R&D credit was claimed on individual tax returns, including pass-through income from smaller companies organized as S corps or partnerships. Ultimately, businesses of all sizes can benefit from utilizing the R&D tax credit to grow their organization, maintain a competitive edge in the industry, and add new jobs. If you want to discuss how you can take advantage of the R&D tax credit, Contact Swanson Reed  to talk to one of our specialist R&D Tax Advisors. For more information about qualifying activities, read our oil and gas case study. 

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