Oil Refiners Shrug Off Agreement to Remove U.S. Export Limits

WTI-Brent Spread May Hinder U.S. Oil Export Plan
  • Congress agrees to lift 40-year old ban on most crude exports
  • Refiners to receive small increase in manufacturing tax break

Restrictions on U.S. crude exports may disappear. That doesn’t mean the sky is falling for refiners.

A Bloomberg index of 11 U.S. independent refiners rose 2.3 percent in New York Wednesday, after congressional leaders agreed on a deal to lift a 40-year ban on most oil exports. Some refiners, which process crude into gasoline and diesel, would get a tax break on the cost of transporting oil as part of the deal. The break is expected to be $119 million in 2016, or about 0.5 percent of next year’s combined pre-tax profits of the refiners in the index, according to government and analyst estimates.

Refiners have been the biggest beneficiaries of the shale boom, using cheap oil and gas to run their plants at record rates and make the U.S. the world’s largest exporter of gasoline and diesel. U.S. plants will still have access to cheaper oil and natural gas than most of the rest of the world and are situated in the largest market for refined fuels, said Carl Larry, head of oil and gas for Frost & Sullivan LP.

“They’re positioned to succeed regardless,” Larry said. “They can still make products cheaper than anywhere in the world. It’s the largest refining system in the world. Regardless of whether the U.S. exports crude, they’ll be ahead of the game.”

Deal Reached

The House and Senate on Tuesday evening reached a deal on tax and spending plans that included an end to the oil-trade limits that were implemented in 1975 after the Arab oil embargo. Drillers such as ConocoPhillips have argued that the restrictions make no sense in a post-shale world in which the U.S. produces more oil than it imports.

While refiners rose Wednesday, a Bloomberg index of 61 independent oil and gas producers fell 4.1 percent.

The spending bill includes a tax provision meant to blunt the potential damage to domestic refiners of allowing unfettered crude exports.

The refiner provision is designed to allow independent refiners to exclude 75 percent of oil-transportation costs, such as pipeline tariffs, rail costs and tanker fees, from their pre-tax net income when calculating an existing domestic manufacturing deduction.

The provision, which would expire Dec. 31, 2021, is valued at $1.9 billion over the next 10 years, according to an analysis by the Joint Committee on Taxation.

Because of the way the provision is drafted, it is likely to benefit just a handful of independent refiners that can currently deduct about 6 percent of qualified production activity income, said Curtis Beaulieu, a senior counsel and tax expert at Bracewell and Giuliani.

"Most refiners would not be able to benefit from excluding 75 percent of their oil-transportation costs when computing their Sec. 199 deduction," Beaulieu said. 

For those refiners that can take advantage of the change, rough calculations show it would amount to a 1 percent boost in after-tax net income.

Oil Discount

Producers complained about the ban as U.S. oil prices reached record discounts to foreign barrels. West Texas Intermediate crude in Oklahoma was as much as $27.88 a barrel cheaper than European Brent in 2011. Light Louisiana Sweet on the Gulf Coast was as much as $16.58 cheaper than the international benchmark in late 2013.

Those discounts had already shrunk considerably even before the export agreement was reached as companies built pipelines in the U.S. to distribute oil more evenly and a supply glut expanded throughout the world, depressing prices everywhere. WTI narrowed to 49 cents a barrel below Brent on Wednesday, and LLS traded at $1 a barrel more.

“This is like the Keystone debate. You’re fighting last year’s battle here,” said Robert Campbell, an analyst for Energy Aspects Ltd. in New York.