The Wall Street Journal: Energy Firms Keep Taxes at Bay

EXTRACT: Companies that stand to benefit from the tax breaks include Chevron Corp.; ConocoPhillips; Marathon Oil Co.; and Motiva Enterprises LLC, a joint venture of Royal Dutch Shell PLC of Britain and the Netherlands and Saudi Arabia’s government-controlled Saudi Arabian Oil Co., known as Saudi Aramco.

THE ARTICLE

Need for Gasoline — and Jobs —
Limits Resistance to Incentives
By JOHN M. BIERS and JESSICA RESNICK-AULT
July 18, 2006; Page A5

Despite public frustration over high pump prices and flush industry profits, major refining companies are seeking and winning large local tax breaks for their refinery-expansion plans with little political opposition.

The reasons: The Bush administration is encouraging refiners to produce more gasoline to help keep prices down, while local communities fear the companies will take jobs elsewhere if they aren’t offered inducements to stay.

The various incentives, combined with a federal tax-break package last year, can offer refiners savings that reach hundreds of millions of dollars, though estimating a total is difficult given the range of federal and local levying agencies involved.

The federal and local benefits come at a time when lawmakers are scrutinizing royalty relief, which could save oil companies billions of dollars associated with pumping oil and natural gas in the Gulf of Mexico. By contrast, refinery tax breaks haven’t emerged as a political lightning rod, in part because the industry argues that its new projects could help ease refinery constraints and ultimately put downward pressure on gasoline prices.

Companies that stand to benefit from the tax breaks include Chevron Corp.; ConocoPhillips; Marathon Oil Co.; and Motiva Enterprises LLC, a joint venture of Royal Dutch Shell PLC of Britain and the Netherlands and Saudi Arabia’s government-controlled Saudi Arabian Oil Co., known as Saudi Aramco.

Former Louisiana senator J. Bennett Johnston, who now heads a Washington lobbying firm, said refining companies still remember the years they were plagued by overcapacity that depressed returns and discouraged investment. “The fact that companies are making record profits does not mean they will make investments where the reward will not compensate for the risk,” he said.

U.S. refineries were running nearly flat-out to meet rising gasoline demand until hurricanes Katrina and Rita slammed the Gulf of Mexico last year, taking some capacity offline. Along with rising global crude-oil demand and political turmoil in petroleum-producing regions, refinery constraints have contributed to a rise in the average U.S. regular gasoline price to $3 a gallon in many places.

Though refiners have seen rising cost to acquire crude oil to refine into fuels like gasoline, higher prices for those fuels have led to a surge in profits. Oil giants like Exxon Mobil Corp. and Shell have reported billions more in profits from so-called downstream operations like refining and marketing. For instance, Exxon Mobil posted nearly $8 billion in downstream profits in 2005, compared with $3.4 billion in 2000.

“Given the federal government’s fiscal situation and given the oil and gas industry’s strong financial situation, you would think a prudent assessment would include revoking these tax breaks,” said Tyson Slocum, who directs the energy program at consumer group Public Citizen in Washington.

The assortment of incentives means that a project like Motiva’s $3.8 billion expansion in Port Arthur, Texas, could result in nearly $700 million in reduced federal tax payments, plus more than $600 million in local abatements. The federal incentives allow refiners to expense 50% of the costs of refinery investments that increase plant capacity by at least 5% or boost production of key products like gasoline by at least 25%.

Tax breaks are among the factors Motiva has taken into account in going ahead with its Port Arthur expansion, said Motiva spokesman Stan Mays. “Like any business, we’ll look at all opportunities to help the economics of a project, and those are avenues certainly to explore,” Mr. Mays said of the incentives.

The refiner has applied for a lower assessment from the Port Arthur Independent School District, one of two major tax-collecting bodies in the industrial East Texas city, said Dan Casey, a partner at Moak, Casey & Associates, an Austin-based consultant retained by the school system. If the tax break is granted, Motiva will pay annual taxes on just $30 million of project costs — instead of the $3.8 billion total — during the project’s first eight years of operations, a shift that could save the company more than $50 million a year during that stretch under the current tax rate.

“The school district’s concern is that if there’s not consistent expansions, they’ll see those jobs go elsewhere,” said Mr. Casey.

Jefferson County, another key taxing entity, is also working with Motiva to ensure the refiner’s taxes don’t increase as much as the plant capacity. Through a variety of taxing measures, Motiva will pay approximately $66 million in taxes on the expansion project by 2026, far below its estimated actual tax value of $255 million, based on figures provided by John Johnson, an attorney in the Jefferson County judge’s office.

Port Arthur officials defend the discounting as necessary given the aggressive courting of refiners elsewhere. Tax incentives are “available around the world, so we would be cutting our own throats as a community not to offer tax incentives,” said Jefferson County Judge Carl Griffith, the top elected county official.

Competitors include neighboring Louisiana, where officials were unsuccessful in their attempt to win the Motiva expansion that instead went to Port Arthur. But Louisiana officials are retooling and working with officials at another large refiner, Marathon Oil, on a proposed $2.2 billion project in Garyville, La.

“Not only are we helping the citizens of Louisiana, but we’re helping the rest of the nation by increasing the gasoline capacity of the rest of the nation, so we think it’s a win for everyone,” said Dane Revette, who directs the energy investment program for the Louisiana Department of Economic Development.

Some incentives have on occasion aroused political criticism, even in states where the petroleum industry is strong. Chevron sought $22 million from the Mississippi legislature this year to support a road expansion that would further the company’s proposed refinery expansion in Pascagoula. But the effort died, in part because it started too late in the legislative session and also because of criticism from some circles citing Chevron’s high profits.

Chevron has met with Mississippi Department of Transportation officials since the effort failed and is encouraged by their receptivity, said Chevron spokesman Steve Renfroe. Mr. Renfroe said the proposal to expand its Pascagoula refinery by 200,000 barrels a day is still under review. “There are many variables that go into the decision analysis, and that’s certainly one of them,” he said of the tax structure.

Write to John M. Biers at [email protected] and Jessica Resnick-Ault at [email protected]