$6 billion windfall for oil refiners hits ‘IRS roadblock’

Bloomberg

An obscure gasoline additive could lead to a windfall of more than $6 billion for struggling US oil refiners. There’s just one hurdle: the Internal Revenue Service.
Fuel makers are examining whether their occasional use of butane — a liquefied petroleum gas — qualifies for a big tax credit under a now-expired law that was intended to promote the use of cleaner-burning fuels sold at the pump. Refiners usually add butane to gasoline during winter months to help comply with government limits on smog-causing emissions.
LPGs such as butane, propane and ethane were defined as alternative fuels under the 2008 law, which means a credit of 50 cents a gallon is still available for anyone who used them as additives from October 2014 until the law expired at the end of last year, according to an analysis by Houston-based tax attorneys Shawn R. O’Brien and May Y. Chow at Mayer Brown LLP. US refiners mix about 6 billion gallons (142 million barrels) of butane in gasoline annually.
While the industry and even some IRS guidelines identify butane as an LPG, the agency has indicated that the definition shouldn’t apply under the alternative-fuel-mixture credit. The IRS is reviewing the matter and seeking public comment before issuing a final ruling. For an industry that saw profits tumble more than 60 percent last year, claiming the credit is something refiners should consider, even before the IRS ruling, O’Brien said.
“There’s a way to construct the argument that you’re entitled to this credit if you mix butane,” O’Brien said by telephone. “And because that’s a common mixture, people in the industry are looking at it as a huge opportunity.” Whether butane can be claimed for a fuel-mixing credit by refiners is among the long list of tax-related questions the agency aims to clarify over the next year, according to its Oct. 20 priority guidance plan for 2017-18.
Butane accounts for about 4 percent of what Americans put in their gas tanks every year, said Andy Lipow, president of Lipow Oil Associates in Houston. By comparison, corn-based ethanol is 10 percent, according to the Energy Information Administration. Butane is often cheaper and helps meet smog standards for fuels sold in winter, when different mixtures may be required because of cold weather.
Mostly derived from natural gas, butane also can be extracted from crude oil in the refining process. The gas can easily be converted to a liquid. While US natural-gas production has almost doubled since 2000, demand hasn’t risen fast enough to keep pace, resulting in a prolonged glut and low prices.