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Ethane tax-credit plan similar to Canadian one

| Sunday, June 10, 2012, 8:58 p.m.

Industry officials fed Gov. Tom Corbett's administration the model for an ethane tax-credit program he proposed, and it arrived from half a continent away in Alberta, Canada, a Corbett official said.

"Industry experts" consulted with Corbett officials as they tried to figure out how to encourage business growth around the state's natural gas industry, said Steve Kratz, spokesman for the state Department of Community and Economic Development. Those experts pointed to Alberta and its ethane incentive as a model, Kratz said.

He would not name anyone involved and could not recall who had the idea.

"I honestly don't remember. We had several discussions," Kratz said. "It might have been a phone conversation or a general conversation. I can't remember which."

Corbett proposes to give $66 million in annual tax breaks to petrochemical companies that locate in Pennsylvania, including a Beaver County plant that Royal Dutch Shell plc plans to open in 2017. He said the $1.7 billion in tax credits over 25 years for Shell's "cracker" plant would help bring 10,000 to 20,000 jobs. The credits are on top of tax breaks the company would get for locating in a state-designated "opportunity zone."

The proposed credits go beyond what exists in Alberta, said Canadian industry and government officials. The Alberta government owns all but a fifth of the mineral rights in the province and simply offers to return its royalty payments on ethane -- about 5 percent of the gas there -- when that gas is processed locally, government officials said. Corbett's plan essentially would be a cash payout -- 5 cents for each gallon of ethane Pennsylvania manufacturers purchase.

"Yours looks a little bit more like a subsidy," said David Podruzny, vice president of business and economics at the Chemistry Industry Association of Canada. "(Alberta's) looks like a little bit more a deferral."

"My whole goal is to grow good, sustaining jobs for the people of Pennsylvania," Corbett said last week on WHP Radio in Harrisburg.

Alberta government officials chose a royalty rebate instead of a subsidy after consulting with treasury and finance officials about which would cost taxpayers the least, said Bob McManus, spokesman for the Alberta Department of Energy. Six years after its creation, they consider the program successful.

Provincial leaders, with industry input, designed it to help supply Alberta's petrochemical industry, which employs about 8,000, McManus said. Corporations didn't want to invest the money to extract more ethane from Alberta gas supplies because commodity prices were too low to make it profitable, experts said.

The government handed out $162 million in royalty credits since then, most of it in the past year after the program expanded to include ethane that comes as a byproduct from Alberta's vast oil sands, McManus said. That leveraged $550 million of private investment, he said.

"There was little incentive really for recovering incremental amounts of ethane, largely because all the easy stuff had been found and was already being recovered," said Gerry Goobie, managing consultant at the IHS Purvin & Gertz energy consulting branch in Calgary. "It's kept the industry fairly strong and vibrant at a time when people were pretty much ready to write the obituary for the petrochemicals industry in North America."

Royal Dutch Shell is one of three companies approved to receive credits from Alberta's program, up to $14 million (Canadian) during the next five years, according to a government report about the program in 2011.

Officials from Shell Chemicals Canada were part of the working group that expanded the program to use gas from oil sands and benefit ethylene users, including Shell, the report said.

Shell's U.S. subsidiary is mulling a multibillion-dollar investment in an ethane-fed plant in Beaver County, possibly giving it the most to gain from Corbett's proposal. The plant, known as a cracker, would take ethane from shale-gas drilling in Appalachia and convert it into ethylene, and then possibly into the building blocks of plastic.

A Shell spokeswoman did not address direct questions about which Shell officials consulted with the Corbett administration and whether they suggested the Alberta model.

"Shell supports and endorses incentive programs provided by state and local authorities that improve the business climate for capital investment, economic expansion and job growth," the Shell spokeswoman, Emily Oberton, said in an email. "We shared our views about the (tax credit proposal) with the Corbett administration. We will carefully consider it as one of a variety of factors to determine the economic viability of our proposed petrochemical project before taking an investment decision."

Whether the proposal comes to fruition could factor into Shell's decision to build, Goobie said. There are questions about the potential ethane supply from Appalachian shale fields and pipelines slated for construction to ship that ethane to processors in Ontario and the Gulf Coast, he said.

None of the numbers are firm enough to help Pennsylvania leaders decide how much is too much to pay, he said.

"The question the state has to grapple with, 'Would Shell have built it anyway?' The answer is maybe, maybe not," Goobie said. "There's no doubt, if you put the money on the table, that will make the decision easier and faster for Shell. They will build it sooner and the benefits will come quicker. The real question becomes exactly how much quicker and how much economic value is that going to be.

"That one really is a judgment call (for Pennsylvania)."

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