Border-Adjustment Tax Divides Energy Sector
By
The linchpin of a corporate tax overhaul proposed by House
Republicans would mark a massive change for the U.S. oil and gas
industry and has companies frantically studying whether to get
behind it, fight it or stay on the sidelines.
The proposal, a border adjustment tax, would remove companies'
ability to deduct import costs, including on raw materials, as
regular business expenses. In turn, exports and other foreign
sales wouldn't count as income, meaning the U.S. would stop
taxing companies' foreign revenue and profits.
Such a system could benefit companies that export fuel products
or sell domestic crude, because it would make imported crude
more expensive. It could hurt those companies that must import
crude from other countries.
The proposal faces an uphill challenge on Capitol Hill, where it
has encountered strong opposition from some major companies
including retailers and conglomerate Koch Industries. Many
senators are also opposed. The White House appeared to embrace a
border adjustment as a way to draw money from Mexico to pay for
a border wall, only to back away and say it is one option.
For now, energy companies are taking it seriously, and Rep.
Kevin Brady (R., Texas), who chairs the House Ways and Means
Committee and is an architect of the proposal, met last week
with company tax executives at the headquarters of the American
Petroleum Institute.
"Coming from an energy state, I thought our meeting was very
productive, " Mr. Brady said.
The API and the American Fuel and Petrochemical Manufacturers
have both concluded in internal reports that a border adjustment
would raise gasoline prices by 20 cents per gallon or more in
the short term, according to people familiar with the matter.
Supporters of the border adjustment have said it would have
corresponding currency impacts that would ultimately leave fuel
prices relatively unchanged.
The groups haven't made their findings public and haven't taken
a stance on the proposal because of splits among their
membership, the people said. The API represents many domestic
drillers that could be helped by the program, while the AFPM
tends to represent refiners, some of whom could end up paying
more for imports.
"AFPM supports comprehensive tax reform, but refiners are
concerned that a border adjusted tax could have considerable
impacts on the industry, consumers and the economy," AFPM
President and CEO Chet Thompson said in a statement.
Even within the industry there are splits. Refiners on the east
or west coast that rely heavily on imported crude, such as
Tesoro Corp. (
TSO
Loading...
) and PBF Energy Inc. (
PBF
Loading...
), are opposed to the plan, people familiar with the matter
said. Refiners with better access to U.S. crude and the ability
to export fuel products from the Gulf Coast, such as Texas-based
Valero Energy Corp. (
VLO
Loading...
), are more neutral to the idea.
Valero, Tesoro and PBF declined to comment.
Some independent drillers such as Devon Energy Corp. have
indicated the proposal could be beneficial, believing the
proposal would likely lead to increased prices for U.S. crude
oil.
"We do see where it could be a positive overall for our
portfolio," Devon Chief Executive David Hager said last week.
Continental Resources Inc., a producer headed by oilman Harold
Hamm, who served as an adviser to President Donald Trump during
his campaign, has yet to take a position on the proposal or the
broader tax package, said Blu Hulsey, the company's vice
president of government and regulatory affairs.
"It's an incomplete puzzle," he said. "We're going to reserve
judgment."
Retail gasoline sellers, including the Society of Independent
Gasoline Marketers of America trade group, have come out against
the proposal. But most energy companies and trade groups have
kept their position quiet, commissioning internal studies on its
effects and lobbying behind the scenes.
A Koch Industries study concluded that if U.S. drillers sold to
domestic refiners at current prices, about $53 a barrel, they
would pass on a roughly $10 premium to compensate for the 20%
levy they would be paying for not exporting the oil. Refiners
would be forced to buy that marked up domestic crude to avoid
their own 20% levy on imported crude.
Conversely, Goldman Sachs concluded the border adjustment would
be a boon for drillers, leading to a 25% appreciation of U.S.
crude and product prices and an extra $20 billion in cash flow
from higher domestic crude price and increased production.
Several studies have concluded that U.S. gasoline purchasers
would take a hit: Barclays PLC said in an analyst note in
January the tax could cost a family an additional $400 a year in
gasoline costs as refiners pushed increased costs onto
consumers.
"[It's] really is going to increase domestic crude prices at the
benefit of domestic producers, to the detriment of the
consumer," Marathon Petroleum Corp. (
MPC
Loading...
) Chief Executive Gary Heminger said in the company's earnings
call earlier this month.
--Erin Ailworth contributed to this article.
Write to Christopher M. Matthews at christopher.matthews@wsj.com
and Amy Harder at amy.harder@wsj.com
Corrections & Amplifications
This article was corrected Feb. 24, 2017 at 2:26 p.m. ET because
the original version incorrectly stated Devon Energy Corp.
favored the tax in the 12th paragraph. The company believes a
border-adjustment tax could benefit its business but has not
formally endorsed a proposal.
(END) Dow Jones Newswires
02-23-17 0544ET
Copyright (c) 2017 Dow Jones & Company, Inc.
https://eresearch.fidelity.com/eresearch/evaluate/news/basicNewsStory.jhtml?symbols=TSO&storyid=201702230544DOWJONESDJONLINE000305&provider=DOWJONES&product=DJONLINE&sb=1