WRIGHT KILLEN: BTU TAX WILL SHAKE U.S. REFINERS

Wright Killen & Co., Houston, last week sounded a warning for the U.S. refining industry to brace for another severe jolt if President Clinton's proposed BTU tax goes into effect.

Such a tax will add more than a score of refineries and I million b/d of crude oil refining capacity to a list Wright Killen earlier classed as "at risk of failure" or "likely to fail."

The firm late last year placed 37 refineries with 1.556 million b/d of capacity in those categories because of increased capital outlays and operating costs required to comply with the Clean Air Act amendments of 1990 and other environmental and safety rules. Thus, the 1992 study said, about 10% of that year's total U.S. refining capacity will be at risk of shutdown in the ensuing 3-5 years (OGJ, Dec. 28, 1992, p. 36).

Wright Killen pegged those increased costs at $3-3.40/bbl of capacity in 1995, growing to $4.75-6/bbl by 2010, all in 1990 dollars.

"We expect the BTU tax to have a significant additional negative effect on the U-S. refining industry and the U.S. economy," the company said.

TAX CASUALTY LIST

Based on a revamped tax plan unveiled by the U.S. Treasury Department (OGJ, Apr. 12, p. 21), Wright Killen predicts:

U.S. refiners will not be able to recover completely the BTU taxes on refined products that will be placed at a competitive disadvantage to natural gas, coal, and imported refined products.
Those unrecovered taxes will cause an average 20-30% dip in refining profit margins and cost the industry $1.4 billion/year.
Margin declines will result in the shutdown of 26 refineries and 1.1 million barrels per day of refining capacity in the next 3-7 years in addition to shutdowns predicted last year. Tax casualties represent another 7% of the nation's 1992 capacity. That will boost total closures to 63 refineries with 2.6 million b/d capacity, or 17% of the U.S. total.
As a result of tax related shutdowns, crude oil imports will decline 800,000 b/d for lack of refining capacity, but refined products imports will jump 1.1 million b/d. This will result in a $4.1 billion/year net increase in the country's trade deficit.
9,000 high paying refinery jobs with an average wage rate of $19.21/hr will be lost due to the tax related refinery closures. Another 32,000 indirect job losses will follow.
The industry's lower margins will make it more difficult to raise the large amounts of capital needed for environmental investments. Companies forced to close may be unable to fund remediation or cleanup efforts. The world environment will suffer as imports are produced from higher emission non-U.S. refineries to make up lost U.S. production.
The supplemental BTU tax on residual fuel oil and petroleum coke will create a significant competitive advantage for natural gas and coal, respectively. This supplemental tax will be responsible for most of the margin decline refiners will see. It will be the biggest factor in refinery closures, job losses, and the increased trade deficit.
The tax on purchased energy used in refineries--so-called embedded costs--will create a competitive advantage for all imported refined products. This advantage will prevent U.S. refiners from raising prices to cover their embedded costs, add to the decline in U.S. margins, and increase the pressure for U.S. plant closures. it also will encourage even higher refined product imports and, as a result, add to the trade deficit.