The refineries that are linked to the Keystone XL tar sands pipeline as committed shippers will receive between $1 billion and $1.8 billion in tax breaks. They are paid specifically for investing in equipment to process the heavy sour oil the pipeline promises to deliver.

The largest of these refineries, Motiva, is half owned by Saudi Refining Inc., and will receive between $680,000 and $1.1 billion in U.S. taxpayer support.

Keystone XL, like all oil industry projects, is enabled by substantial taxpayer subsidies. Three of the refineries that are planning to process the pipeline’s oil have invested in special equipment to handle the extra heavy tar sands oil. According to our conservative estimates, the U.S. taxpayer is subsidizing these investments to the tune of $1.0-1.8 billion. Here’s how it works.

Tar sands oil is not like most other crude oil. It is a semi-solid bituminous sludge that has to be diluted with much lighter oil in order to be transported by pipeline. Once it arrives at a refinery, the diluent is removed and the bitumen is refined into petroleum products using special equipment. The equipment required includes cokers and hydrocrackers.

In anticipation of the Keystone XL pipeline, three refineries in Port Arthur, Texas have added this equipment in order to be able to profitably process the bitumen. Their goal is to maximize their production of high value fuels such as gasoline and diesel rather than be left with less valuable fuels such as residual oil (for shipping and industrial burners) and Petroleum Coke, a coal like substance that is burned in aluminum smelters and the like. Heavy oil yields high proportions of these less valuable fuels if you do not have the specific equipment to increase the higher value yield.

Special tax rules apply to these investments that are unique to the refining industry. Title 179C of the tax code allows the refining companies to deduct the value of these investments from their tax returns at a highly accelerated rate. Rather than spread the expense over the life time of the equipment, say 20-30 years, the refiners are allowed to expense (i.e., deduct from their taxable income) 50% in the first year and expense the rest through the next 9 years. This is tantamount to a massive interest free loan from the taxpayer to big oil refiners, making it cheaper for them to process a particularly dirty form of foreign oil. In the case of the three Port Arthur refineries preparing to process Keystone XL crude, we calculate this to cost the taxpayer between $1.0 billion and $1.8 billion.

In the case of the Valero Port Arthur refinery’s hydrocracker project, the company has described the project to investors as one that will enable the refinery to process Canadian heavy oil into diesel and jet fuel for the export market. See below.

Does that look like the ‘national interest’ to you?

Of the three refineries involved, two of them, Valero Port Arthur and Total Port Arthur made these investments explicitly to process Canadian heavy oil that would be delivered by Keystone XL. Both companies are committed shippers on the pipeline meaning they have signed contracts committing them to a specific proportion of the pipeline’s capacity.

The other refinery, Motiva Port Arthur, jointly owned by Shell and Saudi Aramco, is expected to take some Keystone XL oil but it is also expected to use the new equipment to process large quantities of heavy sour oil imported from Saudi Arabia.

When the work finishes later this year, this refinery will become the largest in the United States.  It will have the capacity to process up to 325,000 barrels per day of heavy sour oil. The United States is not a significant producer of heavy sour oil. Countries that are expected to increase their production of this difficult-to-process crude include Canada (tar sands), Venezuela, Colombia, Saudi Arabia and Kuwait among others. So the subsidy received by this refinery is directly to enable the processing of a particularly dirty form of oil that is not produced in America.

Hmm, what was it pipeline proponents, including the owners of these refineries, were saying about reducing dependence on oil from hostile and unstable countries?

The special tax treatment of refinery investments that allows the 50% accelerated depreciation was introduced in the 2005 Energy Policy Act and was targeted at refinery investments that expand the capacity of the refinery. However, in August 2011, the act was amended specifically to extend the tax break to refinery investments that enable the refinery to process tar sands oil or enable an increase in capacity to refine tar sands oil if the new equipment is commissioned between 2008 and 2014. All of these projects qualify.

We have calculated the value to these three companies of this accelerated depreciation for the investments listed in the table below. These investments were made specifically to process heavy sour oil in refineries closest to the terminus of the proposed Keystone XL pipeline and owned by companies who are known committed shippers on the pipeline.

Finally, all the refineries that will receive Keystone XL tar sands crude operate are in a Foreign Trade Zone (FTZ), which gives tax benefits to companies that use imported components to manufacture items within the United States (FTZ Act – 19 USC 81a-81u). Usually, refineries importing oil tax-free will still pay taxes when selling the refined products into the U.S. market. By both importing into and exporting from foreign trade zones the companies will avoid paying tax on the product sales.  In other words, it’s a great deal for the oil industry, and a raw deal for the taxpayer.

Nobody in the oil industry can claim that Keystone XL, or any other oil and gas project, is free of taxpayer support. The subsidies we have revealed here are just a few examples among many forms of fiscal support to Keystone XL and the tar sands industry. Further, the full costs of our oil addiction in terms of health, environment and security are never included in an official analysis of these projects.

The public has the right to both know how our money supports Big Oil and see a thorough evaluation of any proposal the oil industry has for expanding its infrastructure. Such an examination would throw light on the true costs of expanding fossil fuel infrastructure at a time when we need to reduce our dependence on oil, rather than simply trumpeting the short term benefits to companies involved. Now that the project has been stopped, the true cost of Keystone XL is only just coming to light.

For full details of our analysis see here.

Table: Three refinery refit projects intended for processing Keystone XL oil

Yesterday, Bloomberg reported that “the U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency, a goal the nation has been pursuing since the 1973 Arab oil embargo triggered a recession and led to lines at gasoline stations.”

On the surface, at least, America’s recent gas revolution is great news for people worried about energy security and jobs. Domestic oil output is said to be the highest in eight years.

And as Bloomberg reports “The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal.”

So America is moving from an importer to having so much gas it has a gas glut. Bloomberg reports that so great is the gas boom that it could even become the world’s top energy producer by 2020.

Other media outlets are full of stories of even more unexplored basins that could have huge gas reserves too.

As any regular reader of this blog will know the expansion in gas production isn’t without a hugely controversial downside – fracking – which has been shown to cause widespread water contamination and ever minor earthquakes.

Ironically Bloomberg points out that gas glut is forcing down the gas price which is also making the use of alternative energy sources such as solar, wind and nuclear power less attractive. Still, says Bloomberg, “those concerns probably won’t be enough to outweigh the benefits of greater energy independence.”

But there is another major downside about gas that the oil industry doesn’t want you to know about.  One which has major ramifications for climate change.

Proponents of natural gas have long argued it is a “clean” fossil fuel, cleaner than oil and a great transition fuel that bridges our addiction to fossil fuels as we head towards renewable energy sources.

But gas may not be as clean as the industry would like you to believe, due to high leakage of methane.

As Nature reported yesterday:  “When US government scientists began sampling the air from a tower north of Denver, Colorado, they expected urban smog — but not strong whiffs of what looked like natural gas. They eventually linked the mysterious pollution to a nearby natural-gas field, and their investigation has now produced the first hard evidence that the cleanest-burning fossil fuel might not be much better than coal when it comes to climate change.”

Nature reports that researchers at the National Oceanic and Atmospheric Administration (NOAA) and the University of Colorado, Boulder, estimate that gas producers in an area known as the Denver-Julesburg Basin are losing about 4% of their gas to the atmosphere and this does not include potential losses in the pipeline and distribution system, which could also be significant.

This is more than double official estimates by the industry.  As Nature argued “And because methane is some 25 times more efficient than carbon dioxide at trapping heat in the atmosphere, releases of that magnitude could effectively offset the environmental edge that natural gas is said to enjoy over other fossil fuels.”

“If we want natural gas to be the cleanest fossil fuel source, methane emissions have to be reduced,” argues Gabrielle Pétron, an atmospheric scientist at NOAA and at the University of Colorado in Boulder, and first author on the study, currently in press at the Journal of Geophysical Research. “I think we seriously need to look at natural gas operations on the national scale.”

$135 billion

Not the 2010 GDP of Hungary or Kuwait, no it’s slightly more than either of those. In fact, if it was a figure for the 2010 GDP of a nation, it would rank 54th, between Kuwait and Ukraine.

It is in fact the combined 2011 profits of the five largest international oil companies.  These are the same companies that receive much of the over $10 billion in subsidies and tax breaks that the federal government lavishes upon the oil and gas sector every year.

All in the name of maintaining our addiction to oil at precisely the time when we should be reducing oil use to prevent catastrophic climate change.

We need to get the money out of politics and get serious about standing up to Big Oil.

Watch this space…

The Canadian press are reporting this as the two governments listening to their critics and restoring badly needed credibility.

The Ottawa Citizen reports this morning that it “is a positive step toward restoring Canadian credibility on the issue … It is important that Canada not only be seen to be taking environmental concerns seriously around the oilsands, but to actually be doing something.”

Some people seem pleased by this action.

For example, University of Alberta researcher David Schindler, who has drawn attention to the pollution problems for the tar sands is said to be “impressed”. “I think they’re sincere in their efforts to move management of this to an independent panel. That’s the battle that’s been won. “

But others suggest that, as is so often the case with the Albertans and Canadians and the tar sands, there could be just as much spin at play here as substance.

As Mike De Souza, from Postmedia News reported last week “internal federal documents suggest the real reason governments are stepping up monitoring efforts on the oilsands sector is to boost the industry’s sagging reputation.”

So its spin over substance again.

As de Souza reported “a collection of government documents released to Postmedia News over the past year through access to information legislation suggests that federal officials were particularly concerned about the industry’s image as a producer of “dirty oil.”

Make no mistake, anything that improves oversight of this dirty industry must be a good thing, especially if it is truly independent from the deep claws of the oil industry.

However, one internal Environment Canada document noted: “Implementing this new monitoring system is an urgent priority to head off threats to the industry, which needs credible scientific information on its environmental performance as soon as possible.”

One of the biggest threats to the tar sands industry, along with the  Keystone XL decision, has been the moves by Europe to give tar sands oil a different greenhouse gas value than conventional oil, under its proposed Fuel Quality Directive.

So Environment Minister Peter Kent said the monitoring programme would be “another benefit” in trying to persuade the Europeans not to target the dirty tar sands.

“Certainly, the more robust our facts and science (are) with regards to oilsands development will allow us to counter some of the more outrageous expressions of criticism, myths and financially damaging mischaracterizations of our development of the oilsands,” Kent said at a news conference. “Social licence comes in many forms and this will provide one of the elements of arguments in defence of the responsible development of oilsands.”

The monitoring program will take up to three years to be fully operational, by which time the Canadians will have hoped to have sold their dirty, polluting tar sands to Europe and the rest of the world as “responsible oil”.

The latest casualties in this push, along with the climate, rivers and indigenous peoples of Canada, seem to be its native wolf population.

The National Wildlife Federation released a paper yesterday, showing that the tar sands are contributing to the decline in caribou herds.

Rather than improve environmental practices to protect and restore caribou habitat, Canadian wildlife officials are poisoning wolves with strychnine-laced bait.

Over the past five years, the government of Alberta has spent more than $1 million poisoning wolves with strychnine and shooting them from the air. In all, more than 500 wolves have been destroyed.

All in the name of “responsible” oil development.

Even before the Exxon Valdez scarred Alaska in 1989 people warned that drilling in the high north can have terrible consequences.

And there was one major lesson from the Exxon Valdez: oil is much harder to break down, and hence clean up, in the cold waters of the North. It also showed that the industry was woefully unprepared for a spill of that kind.

When the Deepwater Horizon oil rig exploded in the Gulf of Mexico it spawned one of the worst environmental disasters in US history. Once again the catastrophe showed the clear need for a massive, well-coordinated response when disaster strikes.

If BP had spilled that amount of oil in the Arctic, the consequences would have been utterly catastrophic. They would still be cleaning up their mess, now.

Although Deepwater may have delayed some drilling off America’s coasts this was only a temporary hindrance.  After spending over five years and $4 billion on the process, Shell is now on the cusp of receiving the green light to begin exploratory drilling in Alaska’s Beaufort and Chukchi Seas next summer.

The oil giant is at pains to point out that its wells will not be in deep water and that it has adequate protection in place. But these arguments are destroyed in a new report by the Centre for American Progress that warns against the dangers of Arctic drilling.

The report, entitled, Putting a Freeze on Arctic Ocean Drilling America’s Inability to Respond to an Oil Spill in the Arctic argues that the oil industry is not prepared to prevent disaster to this remote and fragile region.

It will come as no surprise to many that the report finds the preparations by the oil and gas industry, federal agencies, and Congress to be completely inadequate, overstretched, and untested.

The Centre, like many people before it, argues that the fundamental characteristics of the vastly unexplored and uninhabited Arctic coastline may increase the likelihood of a spill and will certainly hamper emergency response capability.

And they are not alone is sounding the alarm bells. At the end of last month, nearly 600 scientists from around the world signed an open letter urging President Obama and Interior Secretary Ken Salazar to base Arctic drilling decisions on science, not politics.

“Already stressed by rapidly melting summer ice, the whales, walrus, ice seals, polar bears, and other wildlife in these waters are especially vulnerable to oil spills and industrial activity,” the Pew Environment Group and the Ocean Conservancy explained in a full-page ad that ran the New York Times.

As the National Oceanic and Atmospheric Administration chief Jane Lubchenco said at the time “We don’t fully understand what the consequences of that are going to be.”

As the report details, the resources and existing infrastructure that facilitated a grand-scale response to the BP disaster differ immensely from what could be brought to bear in a similar situation off Alaska’s North Slope.  “Our Arctic response capabilities pale by comparison”, argues the report.

The report highlights that there are no U.S. Coast Guard stations north of the Arctic Circle, and we currently operate just one functional icebreaking vessel. Alaska’s tiny ports and airports are incapable of supporting an extensive and sustained airlift effort. The region even lacks such basics as paved roads and railroads.

It argues: “This dearth of infrastructure would severely hamper the ability to transport the supplies and personnel required for any large-scale emergency response effort. Furthermore, the extreme and unpredictable weather conditions complicate transportation, preparedness, and cleanup of spilled oil to an even greater degree.”

The report concludes that “Drilling for oil in this fragile region … should not be pursued without adequate safeguards in place. If we’ve learned anything from the Deepwater Horizon tragedy, it’s that the importance of preparedness cannot be overstated.”

The Centre recommends that “until the oil and gas industry and its federal partners can demonstrate with certainty that they can identify and respond to a true worst-case scenario incident, the Arctic should remain off-limits to exploration and drilling.”

David Wilkins, who was George Bush’s ambassador to Canada from 2005 to 2009, is one of the many people who think this is the case.

“It’s become a big political issue. Huge. You’ll see a lot more of it as the campaign for president unfolds,” he said earlier this week. It’s not hard to see which side of the political fence Wilkins is on, as his US-based law firm represents the Canadian Association of Petroleum Producers in Washington.

“If President Obama gets re-elected, he may approve the pipeline. If President Obama is not re-elected, the pipeline will absolutely get approved because all of the Republican candidates have indicated they are very much in favour of it,” Wilkins added.

All the leading Republican candidates have become vocal on the issue, pushing what one pundit calls “petro-populism”.

In his “State of the Union response,” a speech given in Tampa under a giant “Obama isn’t working” banner, Mitt Romney called Keystone, “a real ‘shovel-ready’ project that would put 20,000 Americans back to work.”

The only problem with this is that figure, as any regular reader of this blog will know is wildly inaccurate, and Greenpeace recently asked the US authorities to investigate such claims.

But the candidate who is really supercharging the petro-populism garbage is Newt Gingrich, who is now daily whipping up hysteria on the issue.

Speaking in a Florida retirement village this week he told the assembled audience that Obama had “recently vetoed the Keystone pipeline ..  to appease left-wing environmental extremists in San Francisco.”

Gingrich added, repeating a script straight out of the oil industry’s mouth, that: “Here was an opportunity to have oil come from Canada through the United States, to the largest petrochemical complex in the world, in Houston. It would have provided jobs for the next 50 years, processing the oil, sending some of it to the ports overseas, so you’d got jobs for the ports, jobs for the refineries, jobs from building the pipeline. He cancelled all that. Right now the Canadians are looking seriously at a partnership with China.”

Gingrich says that approving Keystone would be one of the first executive orders he would sign on the first day of his presidency.

“My message to the people of Canada is don’t cut a deal with the Chinese, help is on the way”.

But after yesterday’s heavy defeat in Florida, Gingrich’s dream of becoming the Republican candidate looks to be in real trouble.

A new report undertaken for the Commission by the Belgian law firm Philippe & Partners, argues that there is no need for more environmental legislation concerning fracking until it reaches commercial scale.

“Neither on the European level nor on the national level have we noticed significant gaps in the current legislative framework, when it comes to regulating the current level of shale gas activities,” the study says.

However in words that are meant to reassure people the report added that: “However, this is no reason for complacency, since this assessment explicitly refers to the current level of experience and scale of operations as can be expected during the exploration phase. “

Although the study was finished last November, it has only just been released by the Commission. It also just covered four countries: Sweden, Poland, France and Germany.

But the report argues that activities relating to exploration of shale gas are already subject to EU and national laws and regulations, such as the Water Framework Directive, the Groundwater Directive and the Mining Waste Directive. The use of chemicals is covered by the REACH regulation.

“It is a new technology and we do not have a specific legislation on shale gas, because it is so new,” said Marlene Holzner, European commission spokesperson on energy. “So the study only says that the existing regulations are applicable for shale gas, that the tool is there and has only to be applied.”

Ironically this report is at odds with another report submitted last summer to the Commission, which was written for the European Parliament’s Committee on Environment, Public Health and Food Safety.

That report called for “consideration to be given to developing a new directive at European level regulating all issues in this area comprehensively”. The report, entitled Impacts of shale gas and shale oil extraction on the environment and human health also recommended that for fracking, “all chemicals to be used should be disclosed publicly, the number of allowed chemicals should be restricted and its use should be monitored.”

But of course by the time fracking gets to a commercial scale it could well be too late to monitor all the chemicals being used and to rush in EU-wide legislation, especially given the time it takes to draft legislation and then get it past the EU’s various respective bodies.

Meanwhile, there would be huge financial and other pressure from the oil industry to carry on drilling without having to wait for further regulations. It is a scenario that many communities in America are finding to their cost.

The new report will be used by the oil industry as a green light to carry on fracking. Poland, where the fracking revolution is occurring full steam ahead, is planning to begin commercial shale gas production in two years’ time. So if laws are to be implemented at the EU level to cover commercial drilling, that needs to happen now.

Not every country in the EU though is fracking mad, though.

A couple of weeks ago, thousands of Bulgarians protested against fracking over fears it could poison underground water, trigger earthquakes and pose serious public health hazards. Protestors rallied in more than six Bulgarian cities calling for a fracking moratorium.

“I am opposed because we do not know what chemicals they will put in the ground. Once they poison the water, what shall we drink?” said Olga Petrova, 24, a student who attended a protest in Sofia.

Days later Bulgaria’s National Assembly voted to impose an indefinite fracking ban in the country. France also banned fracking last July, while in Britain fracking has caused minor earthquakes.

Whose going to draft a law to stop that happening again?

Our colleagues at Public Campaign and 350.org revealed that those Senators who co-sponsored the bill have received $22.3 million in oil and gas money since 1989.

We also ran the numbers through our Dirty Energy Money database and found two additional notable facts:

• Those Senators who co-sponsored this bill have taken more than three times as much oil and gas money on average in this current Congress than those who did not co-sponsor;
• Seantor Joe Manchin (W.Va), the only Democrat to sponsor, has received more money from the oil industry so far in the 112th Congress than any other Democrat – $42,250.  That is more than 5 times the average amount of oil industry donations than his fellow Democrats in the Senate.

Download our analysis here.  It’s worth noting that our database only goes back to 1999, while the earlier analysis went to 1989.

It’s also worth noting that TransCanada has spent more than $1.3 million in lobbying in Washington over the last year.

Hoeven’s bill, that would seek to take control of the Keystone decision, looks like a political non-starter.  To become law it would have to be approved by the Democratic-controlled Senate.

And for some crazy reason this did happen, the President himself would have still have to approve it.

But still Hoeven is pushing ahead. “We’ve been working with (the Republican) leadership in the Senate and all our colleagues, and we believe Senator Hoeven’s bill has support from a lot of people in the Senate,” said Ryan Bernstein, an energy advisor to Hoeven.

One of the main reasons the pipeline is rapidly becoming a key election issue is over jobs. The oil industry and its friends in the GOP maintain that the pipeline is a huge job creator, but the pipeline’s critics have always maintained that those figures are highly inflated and misleading.

And now Greenpeace has upped the game in this department and written to the Chairman of the US Securities and Exchange Commission alleging that TransCanada “is using false or misleading statements about the proposed Keystone XL pipeline project”, especially in relation to the numbers of jobs the pipeline would create.

The letter argues that TransCanada has “has consistently used public statements and information it knows are false in a concerted effort to secure permitting approval of Keystone XL from the U.S. government. In the process, it has misled investors, U.S. and Canadian officials, the media, and the public at large in order to bolster its balance sheets and share price.”

Greenpeace is arguing that TransCanada’s statements violate U.S. securities disclosure laws. The environmental group maintains that TransCanada has asserted that the each mile of the pipeline constructed in the U.S. would create American jobs at a rate that is 67 times higher than job creation totals given by the company to Canadian officials for the Canadian portion of the pipeline.

“These false and misleading job creation numbers are part of TransCanada’s lobbying and public relations campaign designed to create congressional pressure on the U.S. government to issue a Presidential Permit approving construction of Keystone XL”, argues Greenpeace, which has asked the SEC to make TransCanada correct its figures.

At the heart of the jobs propaganda is a report commissioned by TransCanada from economist Ray Perryman, entitled The Impact of Developing the Keystone XL Pipeline Project on Business Activity in the U.S. Based on Perryman’s report, TransCanada has claimed that the pipeline would create more than 20,000 high-wage manufacturing jobs and construction jobs in 2011-2012 and more than 118,000 “spin-off” jobs.

But Greenpeace argues these “claims are false and in conflict” with TransCanada’s own filings to Canadian and U.S. regulators and is exaggerated by possibly over 350 per cent.

The Greenpeace letter concludes that it is “clear that TransCanada has consistently used public statements and information it knows are false in a concerted effort to secure permitting approval of KXL from the U.S. government. In the process, it has misled a large number of people – investors, U.S. and Canadian officials, state officials, the media, and the public at large – in order to bolster its balance sheets and share price. This is a direct violation of SEC public disclosure regulations and must be addressed.”

Greenpeace and many others will be watching closely to see how the SEC responds.

What if you were in Vegas, and a friend told you there was a slot machine in the corner that was giving out $59 for every $1 that was put in?  You’d think the machine was broken, and that it was rigged.

What if an investment advisor told you that he could get you $59 back for every $1 you gave him?  That’s a 5800% rate of return.  Even Bernie Madoff only promised 10.5%.  Obviously a scam, right?

Clearly this is a scam, but if you’re the oil, gas and coal industry, it’s legal and business as usual in Washington. For every $1 the industry spends on campaign contributions and lobbying in DC, it gets back $59 in subsidies.

Here’s how it works:

Amount the fossil fuel industry spent during the 111th Congress (2009 & 2010) on contributions to Congress’ campaigns: $25,794,747

Oil and Gas lobbying total 2009:  $175,454,820

Oil and Gas lobbying total 2010 : $146,032,543

TOTAL amount spent by Big Fossil in 111th Congress: $347,282,110

2009 amount given to fossils in federal subsidies: $8,910,440,000

2010 amount given to fossils in federal subsidies: $11,578,900,000

TOTAL amount given to fossils during 111th Congress: $20,489,340,000

(Original OECD source for subsidies here and broken out by US Federal totals here)

Divide total subsidies by total money spent by the industry and you get 59.

$1 in.  $59 out.  That’s a 5800% return on political investment.  Not bad.

(Note that an earlier post touched on this topic of return on political investment but did not include the lobbying figures and included conservative estimates of subsidies).