Tax Provision May Benefit Oil Interests : $100-Million Windfall Seen; Users of Natural Gas Would Pay More

With hundreds of billions of dollars at stake in this year’s massive tax overhaul bill, almost no one paid attention to an obscure, complicated provision that was quietly inserted into the bill during the 11th hour of House and Senate committee deliberations.

But that tiny provision could play a big role in determining the outcome of a struggle among corporate titans for control of an enormous California natural gas market. And it is finally generating controversy as congressional tax negotiators try to shape the widely differing House-passed and Senate-passed versions of tax legislation into a final bill.

The much-overlooked provision could provide a windfall of up to $100 million to a handful of major oil companies that need natural gas to operate more efficiently in the Bakersfield area.

Price Could Be Steep

For the rest of California’s natural gas consumers, however, there could be a steep price to pay--as much as $138 million a year in higher gas prices, according to the California Public Utilities Commission and the state’s two giant gas utilities, Southern California Gas Co. and Pacific Gas & Electric Co.

But the true picture, according to Charles Imbrecht, chairman of the California Energy Commission, is not as simple as either side makes it appear. “This is not an issue where anyone can claim the sanctity of the angels,” he said.

Regardless of who wins, the tax bill has become central to one of the most important energy decisions affecting California over the next decade. And, at least so far, special interests have been calling the shots as congressional tax writers have sealed their intricate political deals.

Plan to Generate Steam

The story of this particular tax measure started in late 1984, when several companies began planning three competing pipelines to supply huge quantities of natural gas to oil producers operating near Bakersfield in Kern County. Two of the pipelines would draw gas by connecting with the existing nationwide pipeline network in western Arizona, and the source of the third would be southwestern Wyoming.

The oil companies want to use the out-of-state gas to generate steam that they could inject into the ground to force additional quantities of heavy oil to the surface. Burning the gas would be far more efficient than the current choice--burning some of the oil as it is drawn from the ground.

If the oil producers used oil as their fuel, they would have to burn one barrel of every three barrels they extracted. If they burned gas instead, they could expand output even more and boost production by 50%--making the recoverable resources from the Kern County oil fields bigger than the entire proven oil reserves off the California coast.

Last year, as House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) was trying to wrap up work on the tax overhaul bill, a firm sponsoring one of the proposed pipelines from Arizona to Kern County approached Rep. Hal Daub (R-Neb.), a member of the committee, for help. The firm, a partner in the El Dorado pipeline project, wanted special relief from some of the provisions of the tax bill.

Of particular concern to El Dorado, the tax bill would eliminate the investment tax credit, which allows companies to subtract from their tax bills up to 10% of the cost of their investments in plant and equipment. And another provision would reduce the annual tax write-offs that companies can take to compensate for the depreciation of their investments. El Dorado wanted to keep those tax breaks if it received permission from the Federal Energy Regulatory Commission to build its pipeline.

A Receptive Chairman

Daub, pleading El Dorado’s case, turned to Rostenkowski for support. He found a receptive chairman. Rostenkowski was presenting nearly every committee member with a chance to include some special tax breaks, called “transition rules,” in the tax bill. Such tax breaks were generally written so that particular, unidentified projects could avoid being financially squeezed by the abrupt shift to the new tax system.

Daub, with the help of Rep. William M. Thomas (R-Bakersfield), another committee member, gained the committee’s approval of an amendment that would preserve the investment tax credit and liberal depreciation write-offs not only for the El Dorado pipeline but also for the Mojave pipeline, the other pipeline from Arizona.

But the third proposed pipeline, the much longer Kern River pipeline from southwestern Wyoming, was inadvertently left out in the cold.

“There was no intention to freeze anybody out,” Thomas said. “It was simply a mistake by the staff in drafting the rule. It was our understanding that millions, even hundreds of millions, of dollars had been spent in preparation for these projects.”

Thomas Was Misled

Actually, Thomas was misled, because far less than that has been poured into the pipeline proposals. Kern River, the most extensive, has spent about $6 million so far, according to Ewell H. Muse, a Tenneco Co. executive who is president of the project.

When the tax bill moved to the Senate, Tenneco and the Williams Cos.--Kern River’s sponsors--went to extra efforts to make sure they were not overlooked again. After persuading the Idaho Legislature to pass a resolution endorsing Kern River’s request for equal tax treatment, Tenneco approached Sens. Steven D. Symms (R-Ida.) and Malcolm Wallop (R-Wyo.), members of the tax-writing Finance Committee, for help in rewriting the provision.

The matter was never debated by the full committee. But when the bill was finally written in May, it included a provision granting all three pipelines the same tax breaks.

“All we were seeking was equal treatment,” said Kern River’s Muse.

Ultimate Beneficiaries

The major oil companies operating in Kern County hope the provision survives in the final tax bill. They would be the ultimate beneficiaries of the tax subsidy because the pipelines, as federally regulated utilities, would have to pass on all costs and cost savings to their customers.

“We are looking carefully for a consistent supply of gas at the best available price,” said Jerry Barlow, a spokesman for Chevron USA in Bakersfield. “We want to be able to choose from all the alternatives.”

But the California Public Utilities Commission launched an effort to eliminate the tax break on the ground that the interstate pipeline projects would receive an unneeded subsidy of $50 million to $100 million in their competition with Southern California Gas and PG&E; to supply gas to the oil fields.

“The interstate pipeline projects are like a straw pointed straight into the California market,” said Mark Fogelman, a lawyer on the Public Utilities Commission staff. “By depriving the utilities of the ability to serve that market, residential and small-business customers would suffer by being forced to pay much more to cover the fixed costs of the existing system.”

The commission estimates savings to existing gas customers of as much as $138 million a year if California’s utilities could supply gas to the Kern County oil fields.

The pipeline companies, on the other hand, argue that the utilities cannot provide what the oil companies must have to invest in new steam-generating facilities. That is a guaranteed, uninterruptible supply of natural gas for the foreseeable future.

California’s utilities insist that they have enough extra gas to meet the Kern County oil companies’ demand for steam, which is expected to boost California’s gas usage by as much as 25%. “Our current gas customers would suffer if that market was taken away from us,” said Robert J. Hohne, a senior vice president of Southern California Gas in Los Angeles.

‘Hedging Our Bets’

But SoCal Gas’s parent company, Pacific Lighting, is also a partner in the Mojave pipeline project. “Hedging our bets,” Hohne conceded, “is a good way to characterize it.”

Lawmakers are lining up on both sides.

California Rep. Pete Stark (D-Oakland) said: “I’m outraged to learn that state gas customers are going to be ripped off.” As one of the 11 House tax writers on the conference committee, he is in a powerful position to oppose the provision.

But Thomas, arguing that whatever pipeline is chosen would only receive the same tax benefits that were used by the California utilities when they built their systems, has vowed to work with Wallop, a Senate tax conferee, to retain the special provision in the final tax bill.

California energy officials are just beginning to grapple with the implications of developing the massive Kern County oil fields.

“This may be the most important energy policy decision facing the state during this decade,” said the Energy Commission’s Imbrecht. “I hope that we don’t let political pressures overwhelm the need for a dispassionate reassessment of all the issues.”