High Oil Prices Again Threaten Coal-based Synfuels

With oil prices remaining high, up to $4 billion worth of tax credits available to companies that produce synthetic fuel (synfuel) from coal under a government-sponsored program may become partially or completely unavailable in 2006. A provision contained in the Section 29 tax credit program calls for a reduction or elimination of the credit should oil prices stay above a certain level on an annualized basis. A recent analysis completed by CERA has determined that

* Should oil prices stay around $70 per barrel for the remainder of 2006, as much as 60 percent of the Section 29 tax credits that were claimed in previous years would not be available in 2006.
* A 60 percent phaseout of the credits has the potential to decrease corporate earnings by $1.3 billion in 2006, as well as increase the cost of fuel at coal-fired plants by close to $200 million.
* Prospects of a phaseout also are prompting many owners of synfuel production lines to temporarily idle them, perhaps for the remainder of 2006; most synfuel plants operate at a loss when the tax credit is not included.
* Companies involved in the synfuel business are examining ways to make up for the loss of the tax credits, including taking opposite positions in the oil market.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.