As President Trump lays out his tax overhaul, the oil and gas industry is poised to win big. Refiners and pipeline companies will embark on a capital-spending spree due to the recently passed tax bill, which rewards investment in new projects. The bill contains a bonus depreciation provision that allows all companies to write off the full costs of capital improvements in the year of their occurrence instead of depreciating the new asset over time, Reuters reported. This change lowers the tax burden for the energy sector while encouraging capital spending.
The corporate tax rate will drop from 35 percent to 21 percent; however, energy companies have had a higher tax burden than other companies. The sector's median tax rate, according to MarketWatch, was 36.8 percent. Reuters added the immediate expensing of capital costs will make less financially attractive projects more viable and free up capital for stock buybacks and increased dividends. The benefit begins to phase out in 2023, which means companies could look to advance projects to take advantage.
"It's good for our company and our economy," stated Doug Sparkman, COO, Fuels North America, BP plc, at CERAWeek hosted by IHS Markit. "It places us on the playing field globally."
While energy companies will benefit under this new tax reform, refiners are projected to benefit the most. The refining sector could potentially move up projects to expand plants and build pipelines to move increasing volumes of petroleum, aiding the sector to invest billions of dollars in the domestic economy while creating new jobs. As companies look to add terminals on the Gulf Coast, this new tax incentive could move projects along.
Moreover, many companies have to consider the very small margins that affect the business while analyzing capex.
"You have to be very accurate, very efficient in the process of your business, and you can't afford to make errors," stated Jeremy Weir, CEO, Trafigura Group Pte. Due to this business model, IT -- with an emphasis on lowering carbon emissions -- is also where capital will be spent.
"As for technology, the big question that we are all asking ourselves is how to create a lower carbon business for the future," he said. "We feel it is by making small investments in various technologies, some of which are emerging, so we can stay on top of where the energy industry is going."
Because energy accounts for two-thirds of total greenhouse gas emissions and 80 percent of CO2, any effort to reduce emissions and mitigate climate change must include the energy sector. Advances in renewable energy, electric vehicles and hybrid technology have led to significant reductions in emissions and waste already, and further improvements are being made in biofuels, organic photovoltaics and hydrogen cars, added Sparkman.
According to the latest global electric vehicle (EV) outlook by the International Energy Agency, a record number of 750,000 EVs were sold worldwide in 2016, almost half of them in China. In France, almost 31,000 new EVs were put on the road in 2017. In Germany, the numbers were slightly smaller but in a very similar range. Globally, the sales of EVs should keep rising in the years to come.
"We see e-vehicles continuing to gain traction," commented Weir. "The rise in EVs is a conversation among the energy sector, but it's not enough to curtail oil and gas production."
Sparkman commented on Germany's recent move in banning diesel engines. A court ruling in February said it would start to implement limits on diesel vehicles from the end of April. Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centers by 2025, while the mayor of Copenhagen wants to ban new diesel cars from entering the city as soon as next year. France and Britain will ban new petrol and diesel cars by 2040.
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