OIL AND GAS:

IRS exempts most oil sands crude from spill cleanup tax

When more than 20,000 barrels of fuel leaked from an oil sands crude pipeline in Michigan in 2010, the government set aside $13 million from a fund formed for spill cleanup -- and stretched to its limits by that spring's Gulf of Mexico gusher.

Five months later, the Internal Revenue Service quietly ruled that a significant portion of the type of Canadian crude flowing through that Michigan pipeline was exempt from the per-barrel tax created for that spill-liability fund. The loophole for oil sands fuel, which also forms the bulk of the crude set to run on the Keystone XL pipeline, remains in effect today despite congressional proposals to close it.

"It's a real concern that these spills appear to be incredibly expensive to clean," Natural Resources Defense Council (NRDC) attorney Anthony Swift, a leading critic of increased oil-sands development, said of leaks from pipelines carrying Canadian crude. "And the transportation of this crude is not producing the taxes that we'll rely on to clean up spills."

The IRS ruled on taxation of the oil sands crude that Keystone XL would carry in a January 2011 memo, issued at the request of a company whose identity was kept secret. While the agency "has not issued final regulations" on the Oil Spill Liability Trust Fund, paid for by an 8-cent-per-barrel tax set to expire in 2017, it noted that a congressional report accompanying that law excluded "synthetic petroleum" from its definition of oil.

"Accordingly, tar sands imported into the United States ... are not subject to the excise tax on petroleum" that keeps the spill-cleanup fund flush, the IRS wrote. "However, crude oil and/or petroleum products that are coming led with tar sands are subject to the excise tax."

It remains unclear how the per-barrel tax could be applied to only a portion of the fuel that came through Enbridge Energy Partners LP's Michigan oil sands line, through Keystone XL or through any other pipe originating in Canada that carries its bituminous product. Pipeline companies typically accept fuel in "batches" that can include "dilbit," a mixture of oil sands crude and natural gas condensate subject to the tax, or "syncrude," a partially upgraded fuel that appears exempt (Greenwire, Aug. 23, 2011).

What is clear is the precarious financial future that the trust fund faces following the $626 million-plus strain imposed on it by cleanup of the Deepwater Horizon spill in 2010.

The per-barrel tax that oil sands crude was exempted from by the IRS comprises more than 90 percent of the fund's intake, according to a recent Government Accountability Office audit that said it would soon run dry if Congress did not extend the levy beyond 2017 (E&ENews PM, Oct. 24, 2011).

Sen. Charles Schumer (D-N.Y.) submitted an amendment ahead of a Finance Committee vote yesterday on funding for a two-year transportation bill that would have ended the oil sands crude exemption. Yet his plan would have sent the resulting money to the nation's cash-strapped highway trust fund, not the spill-liability fund, according to a summary released by the Finance panel. Schumer's amendment never came up in the Finance markup last night (see related story).

The oil industry's top trade group does not "currently have a position" on whether lawmakers should expand the spill liability tax to cover oil sands crude, American Petroleum Institute tax policy manager Stephen Comstock said in an interview.

"I think the policy we'd have is, as long as the money is used to go to the [spill liability] fund, to us that's the proper policy," Comstock added. "There are some discussions about the money going off to do something else, and from our perspective, as long as you have a fund ... you shouldn't be diverting those dollars away."

With Congress increasingly consumed by debate over oil sands crude in the wake of Keystone XL's rejection by the White House, however, the taxation status of that Canadian fuel is likely to draw fresh scrutiny in the coming weeks.

Swift, of NRDC, warned that oil sands companies could be getting "a free ride." Using the preferred appellation of greens opposed to Keystone XL, he added: "It appears that these tar sands are a product that places an inordinate strain on a fund they're not contributing to."

Kate Colarulli, associate director of the Sierra Club's oil campaign, sounded a similar note in blasting the GOP as "incredibly irresponsible" for pushing Keystone XL when the taxation of oil sands crude remains an unsettled question. "At the same time that we're seeing intense Republican pressure to permit an oil pipeline, right now this isn't being treated as oil" for tax purposes, she said.

Click here to read the IRS memorandum on taxation of oil sands products.