The GOP tax plan is a windfall for oil and gas industry

Source: By Dino Grandoni, Washington Post • Posted: Friday, December 22, 2017

When it comes to the energy business, critics of the Trump tax measure say it gives new meaning to the phrase windfall. Defenders say it will boost investment.

Here are the energy headlines from the tax bill that the president on Wednesday said would be “an incredible Christmas gift for hard-working Americans” after his allies in the GOP Congress approved the package in record time:

1. The oil and gas industry will reap billions of dollars in tax savings from the cut in corporate income tax rates and the generous tax treatment of capital expenditures.

2. In a bitter setback for environmentalists, the bill opens portions of the Arctic National Wildlife Refuge to oil exploration. Over 20 years, advocates of development had failed to win approval from Congress for a standalone measure aimed at drilling in the refuge. Though included  as part of the sweeping tax measure, opening the ANWR will generate, at most, only a small amount of federal revenue. Created by President Eisenhower, the Alaska wildlife refuge is the largest in the United States.

3. The renewable energy industry fended off potentially damaging proposals that were originally in the House bill but were omitted from the final version. In the end, production and investment tax credits and the $7,500 per car electric-vehicle credit went unscathed.

One of the tax bill’s biggest benefits for the energy industry is hiding in plain sight: The cut in the corporate tax rate. 

Barclays equities analysts have calculated that the 14-percentage-point cut in the corporate tax rate will add $1 billion to the profits of the U.S. oil and gas exploration and production firms, equivalent to a $1 a barrel increase in oil prices. A Barclays report to investors Wednesday said that the tax cut could add 5 percent to the earnings per share of international oil giants such as Exxon Mobil and Chevron. The tax savings would have been even greater, but the big oil companies already use effective tax strategies.

“The big picture is the dramatic lowering of effective [corporate] rates, which has a big impact on any company paying those rates. And the expensing provisions are very important for any capital-intensive industry,” said Liam Donovan, a tax lobbyist and principal at the Washington-based firm Bracewell. The bill allows companies to expense 100 percent of their investments over five years.

Pavel Molchanov, energy analyst at the investment firm Raymond James, said the windfall from the corporate rate cut will be even bigger for oil refiners. He estimates the earnings per share for refiners will jump by an average of 23 percent, ranging from 14 percent for Valero Energy to 28 percent for PBF Energy (PBF).

Integrated oil giants like Exxon, Shell and Chevron, which own refineries, will also profit from the new approach to international earnings.

Jack Gerard, president of the American Petroleum Institute, says in a statement that money flowing to the oil industry and the rest of American business will spur faster economic growth: “Today Congress has fulfilled its pledge to modernize the tax code for the 21st century, setting us on a course towards greater economic growth, job creation, and increased U.S. competitiveness around the globe.”

A look into the weeds of the tax bill shows additional benefits to investors in master limited partnerships (MLPs), a corporate vehicle that has grown popular for oil pipeline companies as well as some renewable ventures.

MLPs are used by the likes of Energy Transfer Partners, which owns controversial pipelines such as the Dakota Access and Rover lines. These partnerships are “pass- through” entities, meaning they don’t pay taxes at the partnership level but that the investors pay the taxes themselves. In the past, the pass-through rates investors paid were the same as their personal income tax rates. But the tax bill slashes the pass-through rates to 20 percent.

The influence of the oil and gas industry was also evident in what was left out of the tax bill.

Congress didn’t eliminate tax breaks that have been in effect for a century or so, sparing the oil depletion allowance and tax breaks for intangible drilling costs. The biggest oil companies are no longer allowed to use those, but most of the country’s independent firms still employ them. GOP lawmakers also deleted an early proposal to drop a 15 percent tax credit for enhanced oil recovery.

Many other energy items also failed to win spots in the bill. The Renewable Fuel Standard, which pits ethanol makers and oil refiners against one another, went untouched.

Sens. Charles E. Grassley (R-Iowa) and Dean Heller (R-Nev.) had opposed turning the tax bill into an energy bill.

The utility industry is also poised to do well under the tax bill. The cut in the corporate rate and the full expensing of capital investments will save billions. And the industry persuaded Congress to make an exception to preserve its ability to deduct state and local taxes.

The Edison Electric Institute said that regulated utilities would have to turn over savings to rate payers, potentially saving them billions of dollars.

“Due to the regulated nature of the electric power industry, this is a huge win for customers as the drop in the corporate rate is mostly flowed back to them over time in rates,”  the EEI said in a statement.

For the renewable energy business, the tax bill is a dodged bullet. The House would have accelerated a phaseout of the production tax credit used by the wind industry. The original version of the tax bill also included a provision tightening aspects of the investment tax credit used in the solar industry.

The wind and solar industries pushed back, and they succeeded except for a small portion of an item known as the base erosion anti-abuse tax or BEAT. But they failed to make other technologies such as fuel cells, geothermal and distributed wind eligible for the same tax credits as wind and solar.

Dylan Reed, head of congressional affairs at an association Advanced Energy Economy, said that the tax bill was “a missed opportunity.” But he added “We dodged the bullet from items with the most negative impacts.”

Sen. Lisa Murkowski (R-Alaska), chair of the Senate Committee on Energy and Natural Resources. (Jacquelyn Martin/Associated Press)

Not so with the wildlife refuge in Alaska, one of the most politically charged issues over the past four decades.

The tax package instructs the Interior Department to hold two lease sales in the next seven years. Proponents say exploration would provide needed oil and boost federal and state revenues. Opponents say drilling would threaten the pristine environment and wildlife and that the economic case for developing the remote area is weak.

The Congressional Budget Office estimated that opening the refuge would generate roughly $1 billion over 10 years, which made it eligible for the tax bill even though that sum amounts to less than 0.1 percent of the overall tax cuts contained in the overhaul. Opponents of drilling in the refuge said CBO’s estimate was too high.

The opening of the refuge has received active support from Alaska’s two GOP senators, Lisa Murkowski, chair of the Senate Energy and Natural Resources Committee, and Dan Sullivan, who argue that it affects only the 1.6 million acre coastal plain of the 19 million-acre refuge.

But other lawmakers were upset with the measure and the tactic of including it in a tax bill governed by budget rules that subject to a simple majority vote.

“The decision to permit Arctic Refuge drilling as part of the Republicans’ tax package is based on an unbelievable and cynical approach that believes drilling for oil can co-exist with a wildlife refuge,” Sen. Maria Cantwell (D- Wash.), the top Democrat on the Senate Committee on Energy and Natural Resources, said in a statement. “It is another example of this Administration earning an ‘F’ for land stewardship. No one in America will think that makes sense.”

Environmental groups said they would attempt to block development through litigation and public pressure.

“We are going to take our case to the American public now to educate them about how the Republicans buried this deeply unpopular decision deep in the bowels of the tax bill,” Cantwell promised.