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  • Energy Tax Facts
  • 27 Aug 13

Tax Reform Should Complement the Robust Growth in U.S. Energy Infrastructure

By Amos Snead

Efforts are underway to reform the U.S. tax code, and the oil and natural gas industry is facing the unknown in many different ways. There may be changes to how this critical industry is taxed at state and federal levels, even as it stands on the threshold of substantial growth.

As America continues to experience an energy renaissance, it makes sense that any restructuring of the tax system should help fulfill the nation’s transformational energy future. And Master Limited Partnerships (MLPs) have done just that by ensuring that a wide variety of energy products make their way efficiently and safely from the production fields to American homes, businesses and communities.

One way to ensure that America’s energy independence is viable is to allow MLPs to retain the flow-through tax treatment they currently receive.  The MLP structure lowers their cost of capital, making it possible for these businesses to invest in capital intensive, low return energy assets like pipelines and still earn a reasonable return.

Consider what MLPs have contributed to the U.S. economy over the past two decades. MLPs have invested billions in the country’s energy infrastructure. In fact, the total market capital of MLPs is approximately $460 billion, of which just under $406 billion is in the natural resource sector, being used to build our energy future

This investment in the economy reaches far, as MLPs have helped finance the nation’s expansive energy infrastructure and contributed to the development of modern energy assets, while providing a reliable income stream for primarily fixed income investors. In fact, the majority of MLP investors – up to 80 percent – are individual retail investors. And many are seniors – roughly 75 percent are over the age of 50.

Midstream energy MLPs operate in every state, producing, processing, transporting, storing, and distributing energy products to meet the increasing energy demands the country faces.   Most importantly, MLPs own about 300,000 miles of pipelines – natural gas, NGL, refined product and crude oil pipelines – which constitute the backbone of the country’s domestic energy system. Pipelines carry 60 to 70 percent of oil shipments and essentially all natural gas in the United States, by far the largest carriers of energy products across long distances.

Without flexible investing opportunities and without the ability of MLPs to continue as flow-through entities, the potential for U.S. energy independence will be severely limited by inadequate infrastructure.

Thanks to energy growth in the U.S., it is estimated that over the next 25 years $251 billion will be needed in natural gas, NGL, oil pipelines and related infrastructure. From 2007 to 2012, large MLPs have made non-acquisition capital investments of about $88 billion, many of them in areas burgeoning with shale energy growth.  They are expected to invest another $25 billion in 2013.

Along with billions of dollars in economic investment, MLPs support hundreds of thousands of quality jobs – currently more than 320,000 directly and indirectly throughout the country. Over the next five years the midstream MLP industry will pay cumulative wages of $147 billion.

Particularly at a time when the country sorely needs an economic boost, the free flow of energy supplies – with limited tax burdens – is critical. Midstream MLPs are a catalyst for this, and support further investment and job growth within the energy sector.

Altering MLPs’ tax status could potentially reduce pipeline investment by close to 30 percent – or more – immediately, and by 13 to 20 percent over the following 10 years.

Additionally, a delay in building the infrastructure necessary for this energy dynamism could end up costing U.S. businesses and households over $13 billion in higher energy costs.

However, the midstream sector wouldn’t be the only segment of our energy industry to be negatively impacted by a short-sighted elimination of the MLP structure. Upstream independent producers would also experience an increase in their cost of capital if they were forced to continue on as C corps. This would discourage these vital companies from producing in new areas, and the reduced production would be another potential driver of higher energy costs. It is important to note that whether or not upstream companies continue as MLPs, the loss of related tax treatments like intangible drilling costs and depletion deductions would have similar negative effects on production.

In short, MLPs – along with all elements of our energy infrastructure – are critical to the U.S. economy in a number of ways, including robust job creation, investment and capital growth, and perhaps most importantly, helping to provide the path to U.S. energy independence and security. The hope is that MLPs will be able to continue supporting robust energy growth throughout the United States for many more years to come.

 

The National Association of Publicly Traded Partnerships, formerly the Coalition of Publicly Traded Partnerships, is a trade association representing the publicly traded limited partnerships (PTPs) that are commonly known as master limited partnerships (MLPs), and those who work with them. Learn more about the group on their website.