Synfuel

Synfuel

June 01, 2004

Synfuel hearings have been postponed — and possibly shelved — by Congress.

The staff of the Senate permanent subcommittee on investigations has been looking into the use of section 29 tax credits by owners of roughly 53 “coal agglomeration plants” that add chemical reagents to crushed coal to turn the coal into synthetic fuel. Critics charge that the plants do little to transform the coal. The US government offers tax credits of $1.1036 an mmBtu as an inducement to turn coal into synthetic fuel. The subsidies on the 53 plants run to more than $2 billion a year.

The subcommittee was expected to hold public hearings in June. Those hearings have now been postponed until the fall at the earliest. It is possible there will not be any hearings. The staff is also no longer sure that it will write a report.

Meanwhile, the tax credits will disappear by law if oil prices return to levels reached during the Arab oil embargo in the 1970’s. Futures contracts for US light crude were trading at close to $41 a barrel as the NewsWire went to press in late May. However, oil prices would have to reach at least $50.14 a barrel before the credits would start to phase out. The phaseout would be complete if prices reach $62.94 a barrel. These are 2003 prices. The phaseout range for 2004 will be slightly higher. The key is the average domestic wellhead price for the entire year.

In another development, the Senate voted in May to allow tax credits to be claimed on new synfuel plants that are built in the future. The existing tax credit runs through 2007, but it can only be claimed on output from synfuel plants that went into service by June 1998. Under the Senate provision, new synfuel plants built during 2005 and 2006 would qualify for tax credits of 51.7¢ an mmBtu. Credits could be claimed on five years of output. The Senate tightened the definition of what will qualify as synfuel for plants built in the future. Output would only qualify as synfuel if it has a fair market value at least 50% higher than the raw coal used as feedstock and there is less pollution from burning it. Nitrogen oxide and either sulfur dioxide or mercury emissions would have to be reduced by at least 20%. The amount of credits that could be claimed on each “project” would be limited to $37,751 a year.

The Senate provision is part of an export tax bill that must also pass the House before it can become law. House Republicans have been unable to reach agreement on what to put in the bill. The measure is not expected to reach the House floor before July at the earliest.

A bill introduced by Congressman Lloyd Doggett (D-Texas) is creating a lot of buzz outside Washington. Doggett introduced a bill in May to deny section 29 credits for existing synfuel plants on their future output. The bill is not expected to pass.

Keith Martin