David N. Nakamura
Refining/Petrochemical Editor
SALT LAKE CITY, Mar. 21 -- Sen. Orrin Hatch (R-UT) outlined his legislation encouraging investment in refining capacity to attendees at the National Petrochemicals and Refiners Association annual meeting in Salt Lake City.
"Even though refining profitability has been strong in recent years and efficiency at refineries has improved, I remain concerned that capacity growth is not keeping pace with demand growth," he said. "Given the boom and bust history of the oil industry, I would imagine many [refiners] have concerns about overinvesting in expansion projects."
Hatch outlined a bill he introduced a year ago, S. 1039, designed to help refiners improve returns on investment and encourage investment in new refining capacity. The first part of the bill, which was included in the Energy Policy Act of 2005, was written to allow refiners to immediately write off, instead of depreciate, near-term investments that increase refining capacity.
"I was disappointed that cost constraints forced us to limit the incentive to 50% of expensing instead of the full 100%," Hatch said. "Even so, I understand this is the first tax provision passed by Congress in the past half-century that encourages the US refining industry to invest in capacity and the only provision in the entire energy bill that encourages industry to add capacity."
He added that if Hurricane Katrina had hit the US Gulf Coast before the energy bill was passed, the entire expensing provision likely would have been included.
The second part of S. 1039 would have reduced the depreciation schedule for refining assets to 5 years from 10-years to bring it in-line with write-off periods in other manufacturing industries.
"The National Petroleum Council recommended that Congress change this long depreciation schedule, arguing that it would add about 1% to the return on investments in refining," Hatch said. "While this provision did not make it into the energy bill, I have continued to promote shortening depreciation rates to encourage investment in refining and to make depreciation rates consistent with that of other similar industries."
Punitive taxes
He mentioned the previous proposal for a windfall profits tax, which was defeated, and proposed punitive tax provisions aimed at integrated oil companies.
"It seems that some members of Congress believe they are better qualified than the marketplace to determine how much profit businesses should make," he said about the windfall tax proposal. "In their minds, losing money is fine for businesses, but making money is completely forbidden."
The tax provisions would force large major oil to make costly inventory adjustments and would deny them favorable tax treatment of geological and geophysical expenditures. They ended up in the Senate version of a tax reconciliation bill currently before a conference committee. The two provisions would cost the top integrated oil companies about $5 billion in extra taxes in the next 10 years, according to estimates by the Joint Committee on Taxation, Hatch said.
"I oppose these provisions and I fought to keep them out of the Senate Finance Committee bill," he said. "Such punitive taxes are counterproductive to moving the US toward energy independence."
Hatch said he favors lower energy prices for consumers, and he believes that incentive-based legislation, such as S. 1039, is the appropriate way to achieve it.
"I do not believe punitive taxes�are the answers consumers are looking for at the pump," he said. "They are looking for real answers such as lower production costs and increased supply, which has proven to lead to lower prices."
Hatch expressed frustration when other members of Congress from consumer states try to block domestic energy production in the name of environmentalism, especially when those same members complain about high gasoline prices.
"As a nation, we oscillate between feelings of indifference toward energy when prices are low and outrage when prices are high," he said. "But we in Congress do have a responsibility to protect consumers from market manipulation, and I am dedicated to that cause. I believe it is possible to go after bad actors without putting up major new burdens on the backs of industry."
Contact David N. Nakamura at [email protected].
