U.S. BTU TAX PLAN REVISED; INDUSTRY WARY OF RESULTS

Patrick Crow Washington Editor The Clinton administration has changed its U.S. energy tax proposal to remove some objections voiced by industry and consumers. The new plan is designed to raise $71.4 billion during 5 years to help fund the administration's deficit reduction/economic stimulus package (OGJ, Mar. 1, p. 19). The petroleum industry found little or nothing to cheer about in the revised plan. Michael Baly, American Gas Association president, said the new plan will be a major blow

April 12, 1993

12 min read

Patrick Crow
Washington Editor

The Clinton administration has changed its U.S. energy tax proposal to remove some objections voiced by industry and consumers.

The new plan is designed to raise $71.4 billion during 5 years to help fund the administration's deficit reduction/economic stimulus package (OGJ, Mar. 1, p. 19).

The petroleum industry found little or nothing to cheer about in the revised plan.

Michael Baly, American Gas Association president, said the new plan will be a major blow to the natural gas industry and AGA will work against it in Congress.

Baly said, "There are misperceptions that the energy tax proposal will be 'good for gas.' Nothing could be further from the truth."

The American Petroleum Institute said, "The modifications incorporate some of the changes the petroleum industry suggested to the Clinton administration and to Congress, and those are welcome.

"Nevertheless, we remain opposed to the BTU tax because it is inequitable and will harm the economy, cost jobs, and reduce domestic energy production.

"If a new tax is vital to manage our nation's budget and deficit problems, we believe a broad based consumption tax, such as a value added tax will be the least damaging to economic growth and the international competitiveness of American industries."

The Treasury Department's revised plan will still tax oil products at double the rate of other types of energy except for home heating oil, which now is to be taxed at the lower rate for natural gas.

Of major importance to California producers, the revision will not tax natural gas used in enhanced recovery for heavy oil.

The latest version also changes the collection points for the tax. The collection point for the tax on refined petroleum products and LPG was shifted to the refinery tailgate.

The tax on natural gas is to be imposed at the city gate, and the local distribution company will be liable for paying it, although it will be collected and remitted to the government by the interstate gas pipeline. That way the BTU tax will not be broken out on consumers' utility bills.

But to ensure that state regulatory commissions allow the tax to be passed through, the administration said it will deny utilities certain tax benefits for periods during which the energy tax is not completely passed through to end users.

Importers of refined petroleum products will pay the BTU tax at the point of importation. Those products are to bear the same tax as equivalent domestic products.

EXEMPTIONS

The BTU tax on coal, natural gas, LPG (whether produced from natural gas or crude oil), natural gasoline, and electricity will be 25.7 cts/MMBTU.

Refined petroleum products, except LPG and natural gasoline, will bear a supplemental tax of 34.2 cts/MMBTU. All the taxes will be indexed for inflation.

The administration expanded to 13 from three the list of fuels exempt from the tax in order to lessen opposition to the plan when Congress considers it.

Exempt are nonfuel or feedstock uses of fossil fuels, coal used in the production of synthetic natural gas, and nonfuel products such as asphalt, lubricants, and waxes.

Also exempt are ethanol, methanol, ethyl tertiary butyl ether, methyl tertiary butyl ether, and feedstocks used in their production.

The tax will not apply to exported fuels and electricity and bunker and jet fuel used in international transportation.

Independent producers of electric power will receive a credit for any energy tax on fossil fuel they use to generate electricity.

The administration added an energy "use tax" that will be levied on fuel uses of taxable products on which the energy tax has not been imposed and on fuel uses of crude oil.

Treasury explained, "This tax would apply to fuel use of products that have not reached the point at which tax is normally imposed, to nonexempt use of products purchased under a chain of exemption, and to nonresidential fuel use of home heating oil.

"The use tax would not apply to crude oil or natural gas used on the premises where it is extracted to extract crude oil or natural gas. In addition, the use tax would not apply to crude oil used in a refinery or to natural gas used in a natural gas processing or fractionation plant. However, oil or natural gas consumed in a pipeline would be subject to the use to."

The plan retained the floor stocks tax on energy. It will apply to coal, natural gas, and refined petroleum products if the product is held, beyond the point at which the energy tax is normally imposed, for sale or for use as fuel. All exemptions from the energy tax will apply, as well as an exemption for very small stock volumes.

The BTU tax will be imposed at one third of the full rates beginning July 1, 1994, at two thirds 1 year later, and at full rates July 1, 1996.

Treasury Sec. Lloyd Bentsen said, "It is our intention that the energy tax be borne fairly and equitably across the country and that the tax promote conservation as well as increased reliance on domestic energy, not foreign OH.

"If the tax is to effectively promote energy conservation, it must be borne by the ultimate consumer. The administration is continuing to explore methods of assuring that the tax is in fact passed through to chose who use the energy."

BAD FOR GAS

AGA's Baly said, "This tax is bad for gas consumers, from homeowners to hardware makers, and bad for the gas industry from the wellhead to the burner tip.

"Its structure is particularly detrimental to the new high technology markets, such as gas cooling, gas heat pumps, and natural gas vehicles, which are important for the natural gas industry, energy consumers, and the environment."

Baly said the proposal will cause natural gas to lose market share to electricity, particularly in commercial and industrial markets, because there is a larger percentage of tax burden in the cost of using natural gas. That is counter to the goal of improving conservation of natural resources because using gas directly is usually more energy efficient than using it to generate electrical power.

He said the only market in which the BTU tax plan might help gas is the power generation market, in spite of having the collection point on coal moved to the utility.

"Environmentally, the tax also creates problems. In the cogeneration market, for example, waste products that are classified as renewables, such as wood chips and process 'liquors,' will capture markets that will otherwise go to natural gas. Yet, these so called environmental fuels have greater environmental impacts than natural gas."

Baly said each change the administration made in the BTU tax is to the disadvantage of the gas industry.

"The collection point chosen will directly affect the bottom line of gas distribution and pipeline companies, possibly eliminating the net income of certain companies during any regulatory lag period.

"Then an exemption was given to ethanol and methanol for use in vehicles, but to date no corresponding exemption has been made for natural gas, the most promising alternative vehicle fuel.

"Next, an exemption from the petroleum surcharge was granted to home heating oil, despite the energy and environmental policy rationale for the existence of the oil surcharge."

Baly said the BTU tax will be heavier on gas, on a percentage basis, than on other fuels and the increased cost could drive some heavy manufacturers overseas, costing the industry some of its largest customers and costing the nation jobs.

The Natural Gas Supply Association agreed that the tax should be imposed at the point of final consumption.

Nicholas Bush, NGSA president, said Treasury's plan to withhold tax credits from utilities that are not permitted to pass the tax through to consumers is well intentioned, "but we are concerned in our discussions with our local distribution company customers and with our pipeline transporters that the administration may not achieve through this proposal its objectives of passing this tax through to the burner tip."

The Independent Petroleum Association of America said it will continue to work with the administration to ensure that the BTU tax is passed through to consumers and the tax does not impair U.S. energy production.

CREDIBILITY GAP

Julian G. Martin, executive vice-president of the Texas Independent Producers and Royalty Owners Association (Tipro), Austin, said reduction of the BTU tax base resulting from extensive exemptions raises questions about the credibility of the entire plan.

Even if collected far from the wellhead, Martin said, the tax still could undermine gas producers' chances of benefiting from recent increases in U.S. gas wellhead prices. Moreover, many details remain unresolved about who the levy would hurt most.

"If the Clinton administration every few days agrees to make all kinds of consumer oriented changes initiated by concern in Congress, perhaps we should start considering what changes should be made to assure the U.S. oil and gas industry remains functional," Martin said.

"Perhaps we should be proposing exemptions for stripper well operations or for all fuels used on the lease."

Many independent producers still are concerned that gas feeding gas processing plants will be taxed once at the wellhead before it reaches the plant and again as residue gas leaves the plant.

Martin said, "We think the exemption approved by the administration for coal and other gasification plant feedstocks should be extended to traditional NGL plant operations."

Also, the question of whether NGL is taxed as oil or as gas is very important to U. S. producers, he said.

DAMPER ON RECOVERY

Martin said enacting the BTU tax in a form that allows it to bounce back onto the gas producer at the wellhead would be a serious blow to further development of U.S. gas reserves the administration wants so badly. Even assessing the tax as close as possible to end users doesn't guarantee marketers won't have to discount it as a cost item in order to make a sale.

After several years of trying to outlast surplus supplies and wellhead price volatility, U.S. gas producers hope better balanced markets will allow prices to increase, making more reserves economical to produce. But the proposed BTU tax will put a damper on chances of a gas market recovery.

"If consumers are going to be asked to pay this tax it's going to be very difficult for a producer to get the real wellhead price increase he needs to drill for more gas," Martin warned.

"He might get it eventually, but most likely after a shortage occurs and everyone's furious over that."

TAX ON NGL

Craig Goodman, vice-president of Mitchell Energy & Development Corp., The Woodlands, Tex., said moving the BTU tax collection point closer to end users shows the Clinton administration is aware that the U.S. gas industry is trying to emerge from a 7 year recession.

But Mitchell still is concerned about the manner in which the tax is to be implemented on NGL, relied on by gas producers as a significant source of revenue.

Mitchell recommends:

Further changes be issued to clarify that only purchasers of nonexempt NGL are subject to the tax in the first instance.
The BTU tax be collected at the point where NGL products are odorized for commercial use as fuels.

In addition, the company said the Clinton administration should exempt from the BTU and use taxes all fossil fuels used to produce other fossil fuels, regardless of where the fuel originally is produced.

"That should specifically include fossil fuels used on the lease, at central field facilities, and at fossil fuel processing plants," Goodman said.

Goodman said the new version of the BTU tax will impose all liability, collection responsibility, and administrative costs on owners and operators of gas processing plants. While the BTU tax will be assessed on 100% of NGL feeding processing facilities, about 75% of the products derived ultimately are used for exempt purposes, mostly as feedstock and for blending.

"Virtually all ethane, isobutane, natural gasoline, condensate, and all other nonodorized NGLs are used for exempt feedstock or blending purposes," he said.

The changes do not provide for refunds of tax collected on NGL deritives bound for exempt uses. But even if refunds were allowed, Goodman said, "it is outrageously inefficient to impose a tax on 100% of NGLS, 75% of which are exempt."

TROUBLED FUTURE

At a meeting last week of the National Ocean Industries Association in Washington, D.C., oil industry lobbyists predicted the BTU tax faces trouble in Congress.

Jeffery Fritzlen, director of Washington affairs for Union Pacific Resources Co., reminded that the administration's program is only a proposal, and Congress is likely to make a number of changes in the tax.

Don Duncan, manager of federal relations for Phillips Petroleum Co., agreed "we're at an early point in the process," and Congress is likely to be less supportive of the BTU tax's particulars than it has been of the economic package in general.

"There was a little blood let with the 13 exemptions," Duncan said. "There will be many more exemptions sought on Capitol Hill. And you're going to see efforts made on the hill to move the tax all the way back to the wellhead."

He noted gas industry associations already are divided on the question of where the tax should be collected.