Refinery subsidies linked to the Keystone XL tar sands pipeline

The Keystone XL tar sands pipeline project, like all oil industry projects, benefits from substantial taxpayer subsidies.  Some, like reduced property taxes, are directed at the pipeline itself.  Others increase the viability of the pipeline by reducing the cost of the oil going into it, or the cost of processing it at the other end. 

Three refineries have embarked on more than $10 billion in capital investment projects with a core objective of building capacity to process Canadian tar sands oil that will be delivered via the Keystone pipeline.  These include Valero Port Arthur’s Hydrocracker Project, Total Port Arthur’s Coker project and Motiva Port Arthur’s expansion project. The largest subsidy to these investments is through special depreciation provisions under section 179C of the tax code (“Election to Expense Certain Refineries”).

The provision enables refineries to write off 55% of the total investment from taxable income in the year the facility opens (50% expensing, plus the first year of depreciation of the remaining expenditure).  By the end of year three, more than 70% will have been deducted.   In comparison, depreciating the asset over even lower-bound estimates for the actual life of the asset (20 years for example) would result in a much lower 12.5% of the investment written off by year three.

The rapid write-off turns out to be quite a valuable subsidy to the refineries:  $1 to $1.8 billion on a net present value basis. The low-end of the range uses a lower bound cost of capital and a shorter assumed asset life. Our calculations indicate that this one tax break alone is equal to between 10 and 17 percent of the total project cost.