By Christopher M. Matthews and Amy Harder 

The linchpin of a corporate tax overhaul proposed by House Republicans would mark a massive change for the U.S. oil-and-gas industry and has companies frantically studying whether to support it, fight it or stay on the sidelines.

The proposal, a border-adjustment tax, would remove companies' ability to deduct import costs, including on raw materials, as regular business expenses. In turn, exports and other foreign sales wouldn't count as income, meaning the U.S. would stop taxing companies' foreign revenue and profits.

Such a system could benefit companies that export fuel products or sell domestic crude, because it would make imported crude more expensive. It could hurt those companies that must import crude from other countries.

The proposal faces an uphill challenge on Capitol Hill, where it has encountered strong opposition from some major companies, including retailers and conglomerate Koch Industries. Many senators are also opposed. But President Donald Trump spoke positively about the proposal in an interview with Reuters Thursday, saying "I certainly support a form of tax on the border." The White House had previously sent mixed signals on the issue.

For now, energy companies are taking it seriously. Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee and an architect of the proposal, met last week with company tax executives at the headquarters of the American Petroleum Institute.

"Coming from an energy state, I thought our meeting was very productive, " Mr. Brady said.

The API and the American Fuel and Petrochemical Manufacturers have both concluded in internal reports that a border adjustment would raise gasoline prices by 20 cents a gallon or more in the short term, according to people familiar with the matter. Supporters of the border adjustment have said it would have corresponding currency impacts that would ultimately leave fuel prices relatively unchanged.

The groups haven't made their findings public and haven't taken a stance on the proposal because of splits among their membership, the people said. The API represents many domestic drillers that could be helped by the program, while the AFPM tends to represent refiners, some of whom could end up paying more for imports.

"AFPM supports comprehensive tax reform, but refiners are concerned that a border-adjusted tax could have considerable impacts on the industry, consumers and the economy," AFPM President and CEO Chet Thompson said in a statement.

Even within the industry there are splits. Refiners on the east or west coast that rely heavily on imported crude, such as Tesoro Corp. and PBF Energy Inc., are opposed to the plan, people familiar with the matter said. Refiners with better access to U.S. crude and the ability to export fuel products from the Gulf Coast, such as Texas-based Valero Energy Corp., are more neutral to the idea.

Valero, Tesoro and PBF declined to comment.

Some independent drillers such as Devon Energy Corp. have indicated the proposal could be beneficial, believing the proposal would likely lead to increased prices for U.S. crude oil.

"We do see where it could be a positive overall for our portfolio," Devon Chief Executive David Hager said last week. The company said in a statement Thursday that it hasn't formally endorsed the proposal, which it still considers conceptual, but supports broader tax reform.

Continental Resources Inc., a producer headed by oil man Harold Hamm, who served as an adviser to President Donald Trump, a Republican, during his campaign, has yet to take a position on the proposal or the broader tax package, said Blu Hulsey, the company's vice president of government and regulatory affairs.

"It's an incomplete puzzle," he said. "We're going to reserve judgment."

Retail gasoline sellers, including the Society of Independent Gasoline Marketers of America trade group, have come out against the proposal. But most energy companies and trade groups have kept their positions quiet, commissioning internal studies on its effects and lobbying behind the scenes.

A Koch Industries study concluded that if U.S. drillers sold to domestic refiners at current prices, about $53 a barrel, they would pass on a roughly $10 premium to compensate for the 20% levy they would be paying for not exporting the oil. Refiners would be forced to buy that marked-up domestic crude to avoid their own 20% levy on imported crude.

Conversely, Goldman Sachs concluded the border adjustment would be a boon for drillers, leading to a 25% appreciation of U.S. crude and product prices and an extra $20 billion in cash flow from higher domestic crude price and increased production.

Several studies have concluded that U.S. gasoline purchasers would take a hit: Barclays PLC said in an analyst note in January the tax could cost a family an additional $400 a year in gasoline costs as refiners pushed increased costs onto consumers.

"[It's] really is going to increase domestic crude prices at the benefit of domestic producers, to the detriment of the consumer," Marathon Petroleum Corp. Chief Executive Gary Heminger said in the company's earnings call earlier this month.

--Erin Ailworth contributed to this article.

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Amy Harder at amy.harder@wsj.com

 

(END) Dow Jones Newswires

February 23, 2017 19:14 ET (00:14 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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