R&D Tax Credits in the Oil and Gas Industries

Updates and improvements on the manufacturing process for increased efficiency and decreased costs are also vital contributors to research and development either in-house or through contractors that are hired to perform the qualifying activities for claiming the R&D credit.

Today's oil and gas industry thrives due to the robust development of products, services, and software that meet the criteria under the R&D tax credit. These innovations are not limited to new products but also the sourcing, refinement, and/or manufacturing processes that are employed by companies within the space. They are all achieved through consistent advancements in theory and technology that spark competitive innovation throughout the industry to provide a benefit for the consumer. Oil and gas are necessary components in a wide range of fields and the producers of these resources must keep up with technological advances in the area. The leading oil and gas companies must continually innovate to remain competitive. Almost all E&P companies, refineries, drilling contractors and oilfield services companies have qualifying activity. In addition, many companies that support the industry also qualify including software companies and other technical service companies.

The proprietary products developed and distributed by oil and gas producers are only one part of the bigger picture. Many of these companies will depend on the integration of third party commodities and/or equipment for the purposes of bringing their products to the public. This synthesis can also qualify for the R&D credit. Updates and improvements on the manufacturing process for increased efficiency and decreased costs are also vital contributors to research and development either in-house or through contractors that are hired to perform the qualifying activities for claiming the R&D credit.

Qualified Research Activities for Oil and Gas Companies

Software development for data acquisition or monitoring systems
Improvements in tubing technologies
Production optimization technology and improved geophysical and geological methods
Design and development of new refined products, methods, and processes
New products and processes for remediation, emissions, gas flaring and gas detection
Design and development of unique onshore rigs and structures
Offshore structure design with respect to:
  • Generator and compressor modules
  • Platforms
  • Buoyancy
  • Process modules
  • Equipment skids
Development and testing of plug and abandonment solutions
Development and testing of turnaround and shutdown services
Plant design with respect to:
  • Pressurization
  • Safety
  • Chemical segregation
  • Environmental and pollution control systems
Design, development, and testing of drill pipe, collars, connectors, and other drilling accessories
Design, development, and testing of drill bits of various sizes
Design, development, and testing of well completion tools and equipment
Fabrication and assembly of prototype units
Improvements in the manufacturing process for existing products
Development of new software specific to the oil and gas industry
Wastewater treatment solutions
Design and development of containment systems
Fuel combustion testing
Field testing activities and other technical services
Environmental testing and remediation
Case Study

Oil and Gas: A Case Study in R&D

This case study focuses on a company that has been developing and manufacturing components for use across multiple industries. Those components are custom seals and gaskets and they are not constructed as a high-volume, mass produced product but tailored instead for specific applications on-demand. This company became a leading supplier to the oil and gas industry, taking their production techniques and applying them to the design and manufacture of specialty shields, flange gaskets, and well head gaskets. Today, they offer the most extensive and effective line of oilfield sealing solutions in the industry.

Qualification in R&D

The decision to offer custom-made products over mass-produced output was motivated by the widely disparate requirements that had to be met from one customer to the next. As a result, the company had to increase their research and development activities in order to meet the constantly shifting demands of the customers in order to deliver their products. This meant rethinking and redesigning the manufacturing phases for efficiency of time and cost while maintaining the high standards of quality for each item that was being produced. In some instances, each redesign of the company's product and the corresponding manufacturing processes incorporated new or updated production software critical to meet each customer's unique requirements.

The development and production processes are a collaborative effort among multiple stakeholders in a variety of departments, including management, engineers, technical salespeople, and field personnel. These teams are always reconsidering and introducing new and inventive ways to increase the performance levels, functionality, and dependability of the products that bear their name. This means building prototypes for the purpose of exposing them to a battery of performance and functionality tests, adjusting the manufacture processes and end products where necessary to achieve a product that is ready for the customer to take delivery.

In most cases, the customer only provided high-level requirements for the custom product. Therefore, the company was required to design and engineer products that met those requirements. Detailed design specifications were created and implemented. Potential form, fit, material, and performance issues were addressed by the company. Calculations and computer models are evaluated and modified, as necessary. Issues with design, material composition, and manufacturability were also addressed. Engineers developed different design alternatives to choose and refine the most appropriate product. This phase of development is often documented through engineering drawings, schematic designs, models, and other engineering documentation.

The development of prototypes was often necessary to test the function and performance of new products. The company generally develops four to five different prototypes for testing and analysis based on various field conditions. Changes were made to the design based on information discovered during the prototype construction stage by the cross-functional team. For example, prototypes were developed to evaluate various configurations of components and their resistance to environmental conditions such as pressure or heat. The prototyping process was a collaborative effort between the engineers and the production/shop departments. For example, the prototype assemblers were responsible for creating and assembling prototypes based on the design requirements and providing feedback to engineers on manufacturability issues for further refinement.

Significant testing was performed to ensure that prototype designs were validated against the intended product specifications. Design tests often failed, which required the design to be further refined at either the component level or prototype level. Prototypes were subjected to environmental testing, which normally included pressure and temperature tests. Hardness testing was also included for performance and reliability. It was common for tests to fail as seal and gasket components are modified, and the testing environment was activated to deliver new products to meet customer specifications. Finally, field testing was conducted to determine the performance in different environments and conditions.

Results Speak for Themselves

This company was easily aware of their eligibility for claiming the R&D tax credit and took every opportunity to do just that. In the first year of availability, the combined value of the credit at the federal and state level yielded an offset of more than $50,000. Considering the accelerated rate of growth of this company over the long-term along with their consistent emphasis on the development of new products and manufacturing processes, they have enjoyed an annual benefit of around $100,000 each year when claiming R&D tax credits.

Collect approximately

$100,000

In combining federal and state tax credits

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Hire US-based engineers, developers, or scientists.
Designs and develops product prototypes and/or software.
Performs experimentation and validation on products, manufacturing processes, and/or software.
None of the above.

This calculator has been developed utilizing data from a variety of studies conducted in the industries listed. This is only an approximation based on a variety of assumptions and should be treated as such.

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