Oil & Gas R&D Tax Credits

Drive innovation in upstream, midstream and downstream energy. Oil & gas companies and associated petrochemical operations across the U.S. are developing new drilling technologies, refining processes, digital controls, and material systems. Many of these initiatives qualify for the federal R&D Tax Credit under IRC §41, along with state‑level incentives.

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Examples of qualifying activities in oil & gas

Advanced Extraction & Drilling Technologies Development of automated drilling rigs, advanced bit or sensor systems, new down‑hole tools or directional drilling methods.
Refining & Petrochemical Process Innovation Testing new catalyst systems, improved refinery units, novel separation processes for crude, or new polymer feedstock formulations tied to petrochemical operations.
Pipeline, Containment & Transportation Systems Designing new containment systems, improved pipeline monitoring or leak‑detection technologies, advanced pumping or compressor systems.
Automation, Sensors & Digital Control Systems Implementing AI‑driven process control, real‑time monitoring of wells or upstream operations, digital twin modelling of facilities.
Sustainability & Environmental Mitigation Projects Developing vent‑recovery systems, CO₂ capture or reuse projects in upstream operations, novel materials for corrosion control and enhanced recovery.

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What qualifies as R&D in Oil & Gas?

To qualify, activities must:

Pursue a permitted purpose such as designing a new extraction tool, refining process, pipeline system or digital control method
Address technical uncertainty about method, capability or design in petroleum engineering, materials science, chemical process, or automation
Follow a process of experimentation through pilot programs, test wells, process modelling, or control‑system trials
Be technological in nature, grounded in petroleum engineering, chemistry, materials engineering, or industrial automation

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Qualified Research Expenses (QREs)

Expense Type

Examples in Oil & Gas

Eligibility Notes

Wages

Petroleum engineers, process engineers, automation engineers, materials scientists

Must be tied to qualified experimentation

Supplies

Test well equipment, special materials, sensor systems, pilot‑plant consumables

Must be consumed or used in experimentation

Software / Cloud

Simulation tools, modelling software for reservoirs, digital twin platforms

Eligible when used for R&D purposes

Contract Research

Independent labs, universities doing materials testing, drilling‑technology pilot testing

Often ~65% of subcontracted costs may be eligible

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Roles commonly involved in qualifying activities

Petroleum and reservoir engineers
Process and chemical engineers (refinery and petrochemicals)
Automation and digital‑control specialists
Materials engineers testing novel steels, coatings, or composites for drilling/transport
External research partners, labs, and pilot‑plant facilities

What does not qualify

Routine production of oil or gas without experimentation
Standard maintenance or operations of drilling/refining assets without technical advancement
General administrative, sales or marketing tasks
Land acquisition or conventional production equipment not tied to research

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Compliance and Documentation

§174 Update

Following the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, §174 now allows immediate expensing of domestic research expenses for tax years beginning on or after January 1, 2025. Taxpayers may also elect optional amortization under new §174A. Foreign research expenses must still be amortized over 15 years. This is separate from the §41 credit but impacts overall tax planning.

Project goals, hypotheses, test well or process‑trial frameworks
Pilot logs, sensor data, modelling outputs, failure analysis
Comparative metrics (baseline vs improvement)
Employee time tracking and role descriptions tied to experimentation
Audit‑ready demonstration of the four‑part test

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Frequently Asked Questions

Do oil & gas companies qualify for the R&D Tax Credit?

Yes — if they conduct drilling, refining, transportation or material/process innovations rather than routine operations.

What expenses can be claimed?

Wages of engineers and technicians, pilot‑plant supplies, simulation software, contract research in labs or field trials.

Which operations are eligible?

Upstream (drilling/extraction), mid‑stream (transportation/pipelines), downstream (refining/petrochemicals) when actively testing new methods.

What activities do not qualify?

Routine production, non‑technical tasks, standard asset wear‑and‑tear, and equipment purchases not tied to research.

How much might be saved?

Savings depend on project scope and size; companies can claim a portion (commonly ~22 %) of qualified research expenses.

How should oil & gas firms document research?

Maintain logs of test wells, drilling parameter iterations, modelling data, sensor or automation trials, engineering drawings, and employee time sheets.