Tuesday, January 13, 2009

The Taxman Cometh and The Taxman Taketh: Refineries in Alaska

Sometimes I get annoyed at Legislators and sometimes I have to take a second and ask what was Governor Palin thinking when she came up with the tax plan that cut out tax credits for new investments.

I am going to go back and point to the cause and effect of the new tax structure that was put into effect by the Alaska Legislature and the Governor.

Here it is: Conoco cancels refinery upgrade on North Slope

Conoco Phillips says it's canceling a major North Slope project because the new oil tax denies deductions for the work, but the state revenue commissioner says the company never deserved the tax breaks in the first place.

The project involved upgrading a refinery in the Kuparuk oil field to make ultra low-sulfur diesel, the use of which federal law and a state agreement will require across the oil patch by the end of the decade.

Conoco, Alaska's top oil producer, and its partners wanted the state to allow tax breaks for the $300 million project under the state tax overhaul lawmakers adopted last year.

If there is one thing I have been critical of the Governor on, it is the ACES legislation and the criticism has been valid and warranted.

Because of the tax structure, we have seen Conoco say nay on the refinery and we are seeing problems with the Flint Hills refinery upgrade.

The company is balking at doing the upgrade. Frankly I don't blame them. The competition in the State between the Nikiski plant owned by Tesoro and the refinery in Valdez, well it is a highly competitive place to be.

Moreover, when the federal government passes legislation that puts a burden on businesses to do an overhaul on their businesses, tax breaks are in order because as we all know, that cost will find it way to the bottom line. Your wallet.

On an end note I got a laugh out of Halcro's business savvy. Here is what he had to say:

I'm sure if Flint Hills is willing to toss the keys to the refinery to the state or take the radical third option of simply shutting the refinery down, others would be willing to step in.

Others? Andrew, don't bet on it. The competition is too great and the pot to small to bet on this one. Without the tax breaks like Conoco wanted, over 100 million dollars is too risky.

And if it is done, then it will be done by a company that got tax breaks in 2004 legislation and incentives from the federal level like a Native Corporation, but that in effect that would subsidising it anway. And it would be like the State of Alaska taking over it by subsidizing it from public money.

Like Fannie Mae and Freddie Mac to be exact.

Tax Breaks for Oil Refiners
Title III, Subtitle C, Sections 328-329
Cost to Taxpayers: $119 million

This tax break begins with a reasonable premise: provide tax breaks to oil refineries to improve clean air standards. The problem is that the statue defines “small refiners” as those with refining capacity below 205,000 barrels/ per day—a high threshold that will include some large oil companies that have enjoyed huge profits. A better threshold would be restricting the tax break to those refiners with capacity below 100,000 barrels/ per day.

Following is the list of companies that appear to qualify for this tax break as it is now written: Chalmette Refining, TotalFinaElf, Crown Central-La Gloria Oil & Gas, Sinclair Oil-Little America Refining, Frontier Oil, Cenex Harvest States Corp, Murphy Oil, Farmland Industries, Ergon-Lion Oil, Giant Indus, Holly Corp-Navajo Refining-Montana Refining, Calumet, United Refining, Suncor Energy, Petro Star, Alon USA Energy, Gary Williams, Paramount Acquisition Corp, Placid Refining, Time Oil-U.S. Oil & Refining Co, Hunt, Transworld Oil USA, Apex Oil, Kern Oil, San Joaquin Refining, Countrymark Cooperative, Southland Oil, El Paso Corp-Coastal, Silver Eagle Refining, Wyoming Refining, Age Refining, American Refining Group, Greka Energy, World Oil, Cross Oil, Somerset Refinery, Young Refining, Foreland Refining, Oil Holding Inc, and Dow Chemical.

Section 328 would allow qualifying refiners to deduct 75% of the costs associated with complying with the EPA’s Highway Diesel Fuel Sulfur Control Requirements. Section 329 provides a 5¢/gallon of low sulfur diesel fuel produced by the refiner.

Andrew needs to do his homework, the refinery at Flint Hills North Pole is above the threshold for the tax credit. The question would have to be asked how low do you go...

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