August 8, 2017
By Kevin Corley and Wayne Miranda, alliantgroup
Oil & Gas Engineering
The benefits of innovation
With oil prices reaching $70 a barrel for the first time since 2014, the oil & gas industry is growing again. While recent legislative changes such as lower tax rates have had a positive effect on the industry, many companies view innovation and efficiency as the clear long-term solution for continued growth. However, what many businesses don’t know is that the activities they perform to drive competitive innovation can lead to qualification for lucrative government incentives.
Research & development
In the late 1980s, the U.S. took steps to battle economic slowdown by implementing a new incentive called the Research & Development (R&D) Tax Credit. In the decades since, the credit has evolved and expanded multiple times for the benefit of U.S. businesses. Today, the credit is a primary government incentive to reward businesses that encourage innovation and help keep technical jobs in the country.
Within the upstream, midstream, and downstream oil & gas industry, there are a number of activities that can qualify for the credit, such as:
- Developing new or improved construction methods and designs with respect to a variety of functional and performance criteria
- Engineering, designing, manufacturing, and developing oil pressure vessels, tanks, and gas processing equipment
- Designing and building test equipment and facilities to meet fuel economy and emission standards
- Front end engineering and design of piping racks and spools
- Multi-well pad design, construction, and commissioning
- Mechanical and chemical lifting system design and construction
- Design, development, and construction of secondary containment and spill prevention systems.
Although oil & gas is forecasted to remain in high demand through 2040, the industry will evolve and adapt to ongoing shifts in the energy market. Use of the R&D Tax Credit can improve the ability of a business to grow in such a capital-hungry industry.
Qualifying for the credit
Oil & gas companies tend to receive generous credits because of the highly technical and customized projects they undertake. The credit is wage-based. The industry’s technical nature requires highly skilled workers, generating a larger credit, allowing for companies to re-invest capital into new projects or improve existing ones.
For example, an oil & gas equipment manufacturer received over $375,000 in federal credits for undertaking numerous projects to develop custom equipment. This included the development of tooling and programming to manufacture rotary and metal mill bodies according to precise client standards. They also evaluated different means and methods for holding and securing the parts during precision cutting and sawing operations.
Another example would be of an engineering and manufacturing company that designed a new unitized pump package, a process that involved incorporating four mud pumps with an engine for development. The company also created various design drawings and sought client input for adjustments through an iterative design process. For this project and other qualifying activities, the company received over $830,000 in federal and state credits and helped lower the shareholders’ effective tax rate from 39.6% to below 30%.
In an industry that easily can be disrupted by shifting political policy, environmental changes, and global economic fluctuations, finding additional capital to foster innovation and stay relevant is extremely important. Organizations would greatly benefit from speaking with their financial advisors to determine their qualifications for the credit and to help ensure they receive the maximum benefits available to grow their businesses in 2018 and beyond.
Kevin Corley, CPA is a senior managing director with alliantgroup; Wayne Miranda is a petroleum engineer and senior associate with alliantgroup.