Energy Industry to Win Big on Energy Bill
Date: 13-Oct-03
Country: USA
Author: Joseph A. Giannone
Recently, bitter disagreements on issues such as power grid rules and ethanol have bogged down the bill, possibly delaying a vote by House and Senate negotiators until January. But some analysts say the Aug. 14 blackout and soaring gasoline prices will generate the support needed to pass a bill this year or early in the new year.
"If you look at the fundamentals, who benefits from the bill and all the different reasons why members of Congress are likely to vote for it in the end, we're looking at excellent chances of getting the bill done this year," said Prudential Securities Washington analyst James Lucier.
The bill is good news for a broad range of energy companies - from oil producer ConocoPhillips COP.N and power company Exelon Corp. EXC.N to drillers like Nabors Industries NBR.A .
It has tax credits to promote drilling unconventional sources of gas, changes the tax code to encourage pipeline and power grid investments and takes steps to open more federal lands to drilling.
According to Joint Committee on Taxation estimates, the bill's provisions would reduce net tax payments by $16 billion to $19 billion over the next 10 years.
"Longer term, there's a lot of stuff in the bill that could move these stocks," said Friedman Billings Ramsey analyst Jacques Rousseau.
For utilities, the bill is even more beneficial. There are financial incentives earmarked for nuclear power, cleaner coal-based power and coal-based synthetic fuels. Lawmakers also hope to restructure power transmission and repeal Depression-era rules to encourage consolidation and investment from outside the energy industry.
Critics complain the bill enriches companies that shaped the Bush-Cheney energy policy behind closed doors in 2001. The legislation, they say, does not do enough to reduce energy consumption, curb pollution or develop renewable resources.
"The industry is reaping huge profits from tax credits, yet there are no benefits to the public," said Navin Nayak, an analyst at consumer advocates U.S. Public Interest Research Group. "It's a waste of money."
Final figures are likely to change, but legislation passed earlier this year indicates the bill will carry a hefty price tag.
The Congressional Budget Office estimates the bill's total cost to taxpayers, including lost revenue, would reach $40.3 billion through 2008 and $52.6 billion over the next decade.
Energy Secretary Spencer Abraham, in a Sept 10 memo, told lawmakers the tax impact should not exceed $8 billion.
Still, sponsors say the bill is needed to boost U.S. security and reduce dependence on foreign oil.
For example, there are more than $2.5 billion of "Section 29" credits to encourage production of gas from coal-bed methane, deepwater wells and landfills. Analysts say these credits help coal-bed wells, which take years to reach peak production, compete with conventional gas.
"I don't think there's any doubt, depending on the exact terms of the tax credit, that you would see shifting in capital toward unconventional projects," Devon Energy DVN.A Vice President Don DeCarlo said at a conference earlier this year.
Beyond tax breaks, the bill expands access to domestic resources, most notably opening the Arctic National Wildlife Refuge to drillers. Producers also seek permission to drill in federal lands in the Rocky Mountains.
The bill may also finally launch construction of a 3,600-mile pipeline to Alaska's North Slope by Exxon Mobil XOM.N , BP BP.L and ConocoPhillips. BP and Conoco seek credits that would kick in if gas prices fall below $3.50 before committing to the $20 billion project.
Ultimately, some analysts say, the most powerful benefit to the industry comes from new tax rules such as a 30 percent depreciation bonus, on top of normal first-year depreciation. This could yield huge savings for an industry that makes big pipeline, power line and other infrastructure investments.
"The tax cuts pack a wallop for all asset classes, but t