By Donna Hayes, Lead - Energy, NYSE Listings,
& Carrie Slagle, Regional Head - Texas, NYSE Listings
The NYSE was honored to host Chief Economist of RSM US Joe Brusuelas, and Managing Partner of VE Capital Eric Kaufman at the NYSE in March 2017, to discuss regulatory rollbacks and potential impact of new U.S. government policies on the energy sector.
According to our panelists, more than 3,000 new regulations were imposed on US businesses during the last eight years, with a staggering carrying cost of $872B. Many of these regulations were borne by the energy industry at a total estimated cost of $548B. While regulatory burdens skyrocketed, the energy industry also experienced an unforeseen colossal collapse in oil prices with a very slow recovery. Some companies did not survive, and many significantly reduced capital expenditures to preserve assets and reduce expenses.
New Administration Energy Policies
Although we’re only a few months into a new administration, we’re seeing ongoing discussion around potential policy change that will impact MLPs.
Thus far, some key regulatory hurdles have cleared for Keystone XL, Dakota Access, Rover and Atlantic Sunrise pipelines. Quick progress was achieved through Presidential Executive Orders and expedited environmental reviews and approvals. Looking ahead, MLPs, and energy companies in general, may expect direct relief through the potential rollback of regulations, but it will take many years to fully realize the benefits.
Brusuelas and Kaufman believe that the energy distribution infrastructure in the US will be inadequate and incapable of meeting both domestic and export demand, in its current state, over the next 6-8 years. Today, worldwide, approximately 96 million barrels of crude are consumed daily, and demand is expected to rise steadily by 1-1/2 million barrels a day over the next five years. During this same period, production declines from current fields will be roughly five million barrels per day, leaving a yearly supply deficiency of between 6 and 7 million barrels per day that must be replaced. Today, demand growth comes primarily from the rapidly expanding economies in Asia. If these predictions hold true, the industry will need to add 30 to 35 million barrels of crude per day in total over a five year period. Increased volume over this same period could lead to bottlenecks in our energy transportation and storage infrastructure. Should the economy surprise to the upside and demand growth accelerate faster than anticipated, the energy transportation infrastructure bottlenecks could develop very quickly.
President Trump asserts that, following years of neglect, the U.S. must address North American infrastructure issues. He aims to put forward a $1T expenditure project to improve and rebuild roads, bridges, sewers, waterways, transportation and communication systems, and our country’s energy infrastructure. These types of transformational projects are long-term in nature and are expected to take many years to complete. As it specifically relates to the MLP sector, legislators hope the private sector will respond quickly to the general decrease in regulatory burdens and will invest in energy infrastructure transportation and storage projects.
On Capitol Hill, infrastructure projects are segregated into two categories - Little Infrastructure (“Little I”) and Big Infrastructure (“Big I”) initiatives. Little I projects consist of roads, bridges, sewers and waterways. Experience has shown that these types of projects have little chance for success when they are privately funded. Therefore, these projects would likely be funded by the public sector with an Infrastructure Bank, which is commonly used in Europe. The Infrastructure Bank will take 5+ years to create and would be seeded with $250B+. These extensive projects tend to have a 15-20 year time horizon. By contrast, Big I projects are large, modern communications systems (5G) and energy infrastructure projects. These will be privately financed and privately built and tend to have a 5-7 year time horizon. The Federal Government will support these initiatives by offering tax credits as opposed to direct financing.
Brusuelas and Kaufman anticipate that corporate tax reform and the border adjustment tax proposals will also affect the MLP sector. Certainly, abolishing the corporate income tax policy as it stands today would benefit companies, but legislators must replace the associated tax revenue since other entitlement programs such as Social Security and Medicare are not being reduced. The Border Adjustment Tax (BAT), which is essentially a value-added tax, is being contemplated to replace the corporate income tax revenue. Corporate Tax Reform will not proceed without a BAT.
The Border Adjustment Tax could have significant ramifications for the energy industry. For example, if imported oil is subject to the tax, then refining costs would be driven higher leading to higher prices at the pump. Should such a tax be phased in over 3-5 years, then the value of the dollar would be expected to rise in tandem, which would minimize the impact to consumers. In sum, if a slow phase-in of a Border Adjustment Tax is adopted, then the economy should have time to adjust appropriately.
Brusuelas and Kaufman concluded with the assertion that if the U.S. achieves revolutionary corporate tax reform, it must include a thoughtful implementation of the Border Adjustment Tax especially as it relates to the oil industry. President Ronald Reagan was able to achieve broad tax reform in 1986 with a divided Congress, but it required two years of negotiation and compromise. With Republican control of both Houses of Congress, President Trump has the opportunity to implement a once-in-a-generation, comprehensive corporate tax reform policy, assuming the public is accepting of his agenda.
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