Many oil and gas (“O&G”) companies develop products, processes and software that qualify for the R&D tax credit. Given the rapid pace of technological advances in the area, 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. In addition to proprietary products, O&G companies are often forced to integrate third party products or equipment into their products or processes. The integration of these different technologies may also qualify for the credit. Manufacturing process improvements and automation to reduce manufacturing or production costs is also critical. O&G companies may also hire contractors to perform development activities that can also qualify for the R&D tax credit.
Qualified Research Activities for Oil and Gas (“O&G”) Companies
- Development of unique drilling techniques (upstream, downstream, fracking)
- 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
- 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:
- 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
R&D Tax Credit Case Study: Oilfield Services Tools
Founded more than 30 years ago, this company designs, develops, and manufactures custom seals and gaskets for a variety of applications and industries. Rather than concentrating their efforts on high-volume mass production, the company designs and manufactures highly specialized, custom produced seals and gaskets.
In recent years, the company continued to grow and became involved in designing products for well head applications in the oil and gas industry. Specifically, the company began designing specialty shields, flange gaskets, and well head gaskets. Today, they offer the most extensive and effective line of oilfield sealing solutions in the industry.
R&D Tax Credit Qualification for Oilfield Services Tools
Several years ago, the decision was made by the company to primarily develop custom products rather than standard products due to ever changing customer requirements. As such, some level of R&D was necessary to design and develop nearly every new product. In addition, the company needed to focus on increased automation within the production process to reduce manufacturing time, costs and waste. Production software used in manufacturing equipment was also custom designed to meet the company’s needs.
The product and process development at this firm is collaborative between management, technical sales, engineers, and field personnel. Research and improvement in the performance, functionality and reliability of these products is continuous and iterative. In-house performance and functional testing of prototypes and first articles is ongoing throughout the life of an R&D project.
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
Total combined federal and state tax credits for this company were just over $50,000 for the first year. Given the firm’s growth and continued focus on new products and automation of manufacturing processes, they now realize an annual R&D tax credit of $100,000.