December 21, 2017 / 6:52 PM / 9 months ago

U.S. tax overhaul likely to spur spending by refiners, pipeline cos

    By Jarrett Renshaw
    NEW YORK, Dec 21 (Reuters) - U.S. refiners and pipeline
companies are likely to embark on a capital spending spree in
the next year, fueled by a provision in the recently-passed U.S.
tax bill that rewards investment in new projects, said energy
industry lobbyists and analysts.
    On Wednesday, Congress gave final approval to the biggest
overhaul of the U.S. tax code in 30 years, the first major
legislative victory for President Donald Trump since he took
office.             
    The bill contains a bonus depreciation provision that allows
all companies to immediately write off the full costs of capital
improvements, instead of depreciating the new asset over time.
    The immediate expensing of capital costs will make less
financially-attractive projects more viable and free up capital
for stock buybacks and increased dividends. The benefit begins
to phase out in 2023, which means companies could look to
advance projects to take advantage.
    "Every major refining company has a list of projects they
want to get approved that are ranked by profitability and risk,"
said Charles Kemp, vice president of Houston-based energy
consultancy Baker & O'Brien Inc.
    The bill, he said, will motivate companies to look further
down those lists, "and noticeably increase capital budgets."
    The U.S. energy industry has emerged as one of the winners
of the historic tax package passed this week. The S&P Oil and
Gas Refining Marketing Index              is up 27 percent this
year, and hit a record this week on optimism over the bill's
passage. 
    In addition to lower corporate rates, the net effect of the
immediate write-off provision will boost the present value of
capital investments by roughly 4 to 10 percent, Kemp said. That
essentially makes projects more profitable, more quickly.
    Moving up projects could be advantageous for refiners and
pipeline operators such as Valero         and Energy Transfer
Partners        , as they spend billions yearly to expand plants
and build pipelines to move increasing volumes of petroleum. 
    All refining and pipeline companies contacted by Reuters
declined to comment on the implications of the tax package,
though some expressed support for the reform in general.
    Refiners have already started evaluating capital projects to
determine whether marginal ones have become profitable and
whether any can be advanced into the five-year window, said two
refining lobbyists based in Washington D.C., who asked not to be
named because they were not authorized to speak for their
respective companies.
    "The U.S. energy industry has spent billions in the past few
years, but there's still a lot of room for growth," said one
lobbyist.
    "We have a lot of north and south pipelines, but not a lot
east and west. And there's a lot of demand for exports, so we
will see a real uptick in capital investment to meet that
demand." 
    U.S. exports of crude oil and refined products have
increased by 15 percent so far in 2017 when compared with 2016,
and companies are looking to add to terminals on the Gulf Coast
as U.S. crude oil production nears an all-time record of 10
million barrels a day. 
    Numerous large investments in export of liquefied natural
gas are also in the works, and cheap natural gas prices have
spurred $85 billion in U.S. petrochemical investments since
2010, according to multiple studies. 
    Exxon Mobil Corp        , the world's largest publicly
traded oil company, had already planned to invest $20 billion
through 2022 to expand its chemical and oil refining plants on
the Gulf Coast. 
    Exxon declined to comment on the tax changes. Chevron Corp
       , which operates several large U.S. refineries, said it
"supports comprehensive tax reform and tax policy that enhances
both domestic investment in all forms of energy."
    Engineering and building trades in refining and
petrochemical states like Texas and Louisiana also emerged as
big winners, analysts said. Fresh investment would boost jobs
and wages, but may also place increased pressure on a Gulf Coast
market experiencing a labor shortage.
    The new bill also limits the amount of so-called net
operating losses, a loss in which a company's tax deductions
exceed income, that companies will be able to record. 
    In order to offset that change, oil companies could drill
more in order to have more deductions, lowering their taxable
income and tax burden. 
    Deductions have always been available to oil producers, but
the change in the arcane nature of how net operating losses are
applied could further stimulate operations, said James
Chenoweth, a tax attorney with Gibson Dunn law firm.
    "You don't necessarily have the incentive to slow down, if
you're an oil producer," said Chenoweth.

 (Reporting By Jarrett Renshaw; Additional reporting by Ernest
Scheyder in Houston, Editing by Rosalba O'Brien)
  
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