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.
