Section 29

Section 29

April 01, 2005
SECTION 29 tax credits were $1.13 an mmBtu last year.

The IRS announces the credit amount each April for the past year. Section 29 credits are tax credits that can be claimed by companies that are producing synthetic fuel from coal or landfill gas or other “gas from biomass.” The facilities used to produce these fuels must have been put into service by June 1998. The credits may be claimed on output from such facilities through 2007.

High oil prices are spurring a lot of talk. Section 29 credits will phase out if oil prices return to levels reached during the Arab oil embargo in the mid-1970’s.  The phaseout is tied to the average wellhead price for domestic crude oil. The IRS said the average wellhead price was $36.75 a barrel last year, well below the phaseout range, which it said was $51.35 to $64.46 a barrel. Tax credits phase out as the domestic wellhead price moves across the phaseout range. Thus, for example, if the average domestic wellhead price had been the mid-point of the range last year, then section 29 credits on synfuel and landfill gas produced during 2004 would have been reduced by half. Both the bottom end of the range and the range itself are adjusted each year for inflation.

Meridian Investments, which has been helping synfuel plant owners “monetize” tax credits, studied the link between oil futures prices on NYMEX and the average domestic wellhead price that the IRS uses to determine whether the tax credits phase out. NYMEX prices had been more than $3 a barrel higher than the oil price used by the IRS, but John Boc, chairman of the company, reports that the gap is increasing. The IRS reference price was $40.24 a barrel in January this year, or 85.89% of the average NYMEX futures price for the same month.

Meridian calculates that NYMEX futures prices would have to average $64.02 for the rest of 2005 in order for the reference to reach the bottom of the phaseout range.

Keith Martin