The House ways and means committee has rejected a proposal to tax the U.S. oil industry to fill the Strategic Petroleum Reserve.
The plan, proposed by the House energy committee in its omnibus energy bill, would have required importers and refiners to place 1% of their volumes in the SPR. The goal was to fill the SPR, currently at 579 million bbl, at a 150,000 b/d clip toward a target 1 billion bbl.
The oil industry lobbied hard against such a setaside, which it said would cost $2 billion/year. Ways and means voted it down 23-8.
Now the House rules committee will consider whether to drop the SPR fill provision from the energy committee's bill or let the full House of Representatives decide the matter when the bill goes to the floor.
In a separate action, ways and means voted 20-16 against giving the oil industry relief from the alternative minimum tax (AMT).
Rep. Bill Archer (R-Tex.) proposed granting a 50% deduction for preference intangible drilling costs for all wells. It would have applied to majors and independents.
The Treasury Department, which supported the provision, said it would mean a $1.2 billion revenue boost for producers during 5 years.
Producers also failed to get AMT tax relief last March, when President Bush vetoed the economic relief bill that would have improved AMT treatment for independents.
SPR SETASIDE PLAN
Rep. Phil Sharp (D-Ind.) proposed the 1% SPR setaside in the energy committee's omnibus legislation. The provision was referred to the ways and means, which has jurisdiction over all fiscal measures.
The setaside would have taken effect only if the administration failed to find an alternative method to begin filling the SPR by April 1993. Oil companies would have retained title to the oil and would have received the revenue A,hen there is a drawdown.
Because the Department of Energy would have required a very specific crude type for the SPR, most refiners and importers probably would have paid cash rather than crude.
Opponents argued that managing the setaside would be an administrative nightmare, and refiners could be ruined if they were unable to pass through the costs.
Sharp replied "it is utter nonsense" that administering the program would be a nightmare. "It can be made very simple," he said.
He said allegations about hurting refiners "is the biggest bunch of bull I've ever heard." He said they would pass through the costs, which he estimated at 0.5/gal, "so where is the hit?"
He observed, "A half cent a gallon is less than the daily fluctuation in oil and oil product prices on most days. This policy is to protect the users of oil in this country. We assume the costs will be passed through."
Sharp said U.S. producers should be pleased "we are creating a market for 150,000 b/d" of crude.
VOCAL OPPOSITION
Bush administration officials said they would recommend a veto if the final bill contained the SPR setaside.
Rep. Bill Thomas (R-Calif.), who represents the Kern County area, said the setaside would be disastrous for the oil industry.
"By forcing refiners and importers to 'lend' oil to the government, it forces them to lend the government the equivalent of $14 billion during the next few years at a time when refineries need $25-45 billion of new capital to upgrade their facilities to meet Clean Air Act and other requirements."
Thomas also said, "California refiners have no practical access to the SPR, so the setaside is not a source of energy security for California. A number of small independent refiners would go out of business."
Linda Stuntz, acting deputy energy secretary, claimed the setaside would put the federal government in the "unnecessary position" of regulating oil markets.
"The oil would be virtually valueless as collateral because it cannot be liquidated to repay a lender if the owner defaults on a loan."
She said the bill would require contributors of the first 200 million bbl of oil to pay for future construction of storage capacity and the recurring costs of 10 years of storage, or about $4-5/bbl in front end charges on crude and $25/bbl on products.
"The total amount of the SPR tax and storage charges could exceed $13 billion in 1990 dollars. It is a tax on the U.S. petroleum industry, which is attempting to deal with many other regulatory changes while remaining competitive in world markets."
The administration also opposed a provision for a 50 million bbl products reserve in the U.S. Northeast.
OIL GROUPS OBJECT
Charles DiBona, American Petroleum Institute president, said to continue general revenue funding of the SPR is consistent with the federal government's practice with regard to the stockpiling of other strategic minerals.
Gene Ames, chairman of the Independent Petroleum Association of America, said, "A shifting of this new tax will result in even lower posted oil prices for independent producers who are already reeling from low prices and tax penalties."
Urvan Sternfels, National Petroleum Refiners Association president, said, "We object to requiring one particular sector of American industry to fund this national security measure.
"We would not expect the federal government, for instance, to confiscate 1% of all motor vehicles produced by Detroit to provide for transportation needs of the armed forces. We would not expect the government to require shipbuilders to 'contribute' 1% of the vessels they build to augment naval security.
"And we don't think government should require a refiner to turn over 1% of its crude oil and then to make it pay for the privilege of having the government store it for him."
Sternfels acknowledged that the refiner would retain title to the oil.
"But who is going to buy or what bank is going to accept as collateral an encumbered asset that can't be touched?"
"This is a tax, pure and simple. Except it is not so simple. It is very complicated and has not been thought through very well."
He added there are a number of questions about the accounting treatment of the oil and annual storage fee.
Farmers Union Central Exchange Inc., a small refiner, said the setaside would cost it more than $4.9 million/year, or about 12% of its average annual petroleum division pretax net income.
The New England Fuel Institute and Independent Fuel Terminal Operators Association said, "Although relatively small, we are all aware that once enacted the fee can grow to more dangerous proportions."
Several groups questioned the need for a 1 billion bbl SPR, noting that it currently is large enough to withstand a 100% interruption in Persian Gulf imports for more than 10 months.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
