The Internal Revenue Service (IRS) released a rule last week that could help boost domestic oil refining capacity by as much as 1.5 million barrels daily.  The agency has published regulations enabling companies such as Valero Energy, Marathon Oil, and others to take advantage of a 50 percent tax deduction for domestic refineries that increase capacity by 5 percent or more per day.

The original provision was enacted as part of the 2005 energy law, at a cost estimate of $406 million at the time, but the administration did not make the tax break available until last week.  The provision would enable companies to claim the tax break for expansion projects that have been placed in service after August 8, 2005, and before January 1, 2012. Written, binding contracts for a refinery project must have been signed between June 14, 2005, and January 1 of this year, however; new projects announced in the future cannot claim the 50 percent tax deduction.

Senate GOP leaders have proposed a substitute tax extenders bill that would extend the placed-in-service date by two years, and grant an additional year for companies to ink expansion deals, at a $922 million cost. The IRS move has the force of law for two years, although the agency has opened the rulemaking up for public comment, with a September 8, 2008 deadline and a November 20, 2008 public hearing.

According to National Journal’s CongressDaily, the move would give a tax break to companies like Valero, which finished a $600 million expansion at its Port Arthur, Texas, facility last year.  Costs are adding up for Valero, an independent refiner based in San Antonio, Texas that has a pending expansion project at its St. Charles, Louisiana refinery. A spokesman noted the company has no in-house oil production facilities, and thus has to pay the current $140-plus per barrel prices for the roughly 3.1 million barrels a day of crude and other "feedstocks" it processes.

The biggest planned expansion announced thus far that could qualify is a proposal by Motiva Enterprises LLC, a joint venture of Shell Oil Co. and Saudi Aramco, the state-owned national oil company of Saudi Arabia. Last December, Motiva broke ground on a project to expand capacity at its Port Arthur, Texas refinery by 325,000 barrels a day. 
That would create overall capacity of 600,000 barrels a day, making it the largest refinery in the United States, expected to begin producing as much as 23 million gallons of gasoline, diesel, jet fuel and other transportation fuel per day when it comes online in 2010.

Other beneficiaries that will qualify for the tax break include Houston, Texas-based Marathon Oil, which has announced plans to expand its refineries in Detroit and Garyville, Louisiana. The Garyville facility is expected to add 180,000 barrels a day of refining capacity, the second-largest increase after the Motiva facility.

Smaller refiners would benefit as well. Dallas, Texas-based Holly Corp. plans an expansion project adding about 4,000 barrels of sweet and sour crude oil processing capacity a day to the 26,000 it pumps out of its Woods Cross, Utah, facility. United Refining plans to add 5,000 barrels a day at its Warren, Pennsylvania facility.

Democrats have proposed to repeal various tax incentives for energy companies to offset other initiatives, such as the Section 199 deduction for domestic production, named for its placement in the tax code by the GOP-controlled Congress in 2004.  However, they have left the 50 percent deduction for refinery expansion alone.  A Senate GOP aide said "I don't think it'll be the punching bag that 199 is” because it mostly affects smaller, independent refiners.