WASHINGTON (Dow Jones)--A U.S. Senate vote Tuesday on tax legislation could be the death knell for a partnership between ConocoPhillips (COP) and Tyson Foods Inc. (TSN) that promised to generate as much as $175 million in tax credits annually through the production of cleaner-burning diesel fuel.
Soap makers and producers of biodiesel, a diesel additive made from vegetable oil, joined lobbying forces to help kill the $1 per gallon tax credit for the Tyson-ConocoPhillips venture
The Senate legislation would renew for one year the $1 per gallon federal tax credit for biodiesel production, but would end it for the kind of renewable diesel made in the ConocoPhillips-Tyson deal.
That partnership takes beef tallow, or fat, from Tyson's food-processing operations and blends it with diesel fuel, using ConocoPhillips existing refinery facilities. The so-called renewable diesel would still be eligible for a 50-cent-per-gallon federal alternative-fuel tax credit.
But that won't be enough, company officials say, for the partnership to make a profit. "Without the $1 per gallon credit, it is highly unlikely that this venture could continue," said Jeff Webster, senior vice president and general manager of Tyson's renewable-products division.
The House of Representatives has already passed legislation that would end the tax credit for the Tyson project. Previous versions of Senate legislation - including a bill introduced as recently as Sept. 11 - would have preserved it for the Springdale, Ark.-based poultry, beef and pork processor, but capped the credit at 60,000,000 gallons per facility. That language was championed by Sen.
Blanche Lincoln, D-Ark., in a bid to preserve the credit while limiting it to satisfy its critics. Soap and detergent makers protested that preserving the tax credit for the Tyson-ConocoPhillips project would further drive up prices for animal fats.
A panoply of government subsidies for biofuels has helped drive the price of tallow to 39 cents per pound, from around 16 cents per pound in 2006, according to the Soap and Detergent Association. The result of the Sept. 11 Senate bill, the group wrote senators this month, "is to give the big oil companies an extravagant $1.00-per-gallon subsidy for a process that requires a minimal capital investment."
Sen. Jon Kyl, R-Ariz., also weighed in with Senate Finance Committee leaders in favor of ending the credit for the Tyson-ConocoPhillips project. Scottsdale, Ariz., is home to Dial Corp., a leading producer of soaps and detergents. A Kyl spokesman said the senator generally opposes tax credits that favor one industry at the expense of another, and this one would disadvantage the soap and fast-food industries.
On Sept. 16, senators announced agreement on a broader $17 billion package of tax incentives for renewable energy, which is expected to pass the Senate Tuesday. That version of the bill would eliminate the $1 per gallon credit for the Tyson-ConocoPhillips deal.
A spokesman for Senate Finance Chairman Max Baucus, D-Mont., said the language on tax credits for diesel fuel was changed in order to more easily reach agreement with the House on the overall package. Besides soap makers, producers of biodiesel lined up against allowing the credit for the Tyson-ConocoPhillips project. Those producers contend that the federal subsidy is meant to offset the cost of building new "greenfield" facilities to process the fuel additive.
The renewable diesel produced at ConocoPhillips existing refinery doesn't face such costs, they argue. Biodiesel production has soared since federal tax credits were enacted in 2004, from 25 million gallons up to about 500 million gallons last year.
ConocoPhillips began production of renewable diesel last December, and is producing 300 to 500 barrels a day - the equivalent of five or six million gallons a year, Webster said. At the outset of the project, the companies claimed they would be able to produce as much as 175 million gallons annually, but have ramped up more slowly, mostly because of uncertainty surrounding the future of the tax credit.
Tyson argues its renewable-diesel technology has several advantages over biodiesel that make it worthy of eligibility for the credit. For one, it can be transported over the existing pipelines for diesel fuels.
Currently, biodiesel must be trucked to its distribution point. In addition, unlike other biofuels such as biodiesel or ethanol, the renewable diesel doesn't use a food-based feedstock.
Biofuels have drawn criticism for driving up food prices and contributing to a worldwide food shortage, though economists debate how much of an impact biofuel subsidies have had.
"This is a second-generation technology that uses animal fats instead of food. Why would you want to create an economic situation that shuts that down?" Webster said. House and Senate leaders are aiming to complete work on the tax-incentive package by the end of this week.
But that timetable will be challenging, given that, even after Tuesday's Senate vote, the House and Senate will need to resolve differences between the two packages.
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com
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