Gas Processors Concerned About Effects of Proposed PTP Regs

GPA has served the U.S. energy industry since 1921 as an incorporated non-profit trade association. GPA is composed of 122 corporate members of all sizes that are engaged in the gathering and processing of natural gas into merchantable pipeline gas, commonly referred to in the industry as "midstream activities." Such processing includes the removal of impurities from the raw gas stream produced at the wellhead, as well as the extraction for sale of natural gas liquid products (NGLs) such as ethane, propane, butane and natural gasoline. GPA members account for more than 90 percent of the NGLs produced in the United States from natural gas processing. Our members also operate hundreds of thousands of miles of domestic gas gathering lines and are involved with storing, transporting, and marketing natural gas and NGLs.

GPA is submitting these comments on the proposed regulations promulgated on May 5, 2014 under section 7704(d)(1)(E) relating to qualifying income from the exploration, mining, or production, processing, refining, transportation, and marketing of minerals or natural resources. GPA believes the proposed regulations set forth contain definitions of processing and refining that are without statutory support and that could potentially impact GPA's member's operations. GPA respectfully requests the Internal Revenue Service (IRS) to consider the following points.

There are two fundamental requirements to generate qualifying income under section 7704(d)(1)(E): (i) the income generating activity must relate to a "mineral or natural resource" and (ii) the income must be derived from one or more listed activities, including "processing" and "refining." If these two requirements are met, then income from the activity is qualifying income for purposes of section 7704.

Natural Gas Liquids (NGLs) are by their very nature natural resources. NGLs are comprised of ethane, propane, isobutane, methane, and butane -- all of which are naturally occurring, often found in the raw natural gas stream when first produced from the ground. NGLs are hydrocarbon components of oil and gas, falling within the statutory definition of "natural resources" in section 7704(d)(1)(E). NGL's should be treated as natural resources for purposes of determining qualifying income.

The proposed rule directly impacts, and as a result, prohibits GPA members' from treating revenue associated from the processing (or removal) of NGLs from the raw gas stream as qualifying income -- this is contrary to the historical treatment of such activity and contrary to the very intent of Congress when it adopted Section 7704 to assist operators with capital intensive, low or controlled rate of return investments that are critical to supporting the livelihood and needs of Americans, not to mention the manufacturing industry, each day.

As Qualifying Natural Resources, NGLs may be either "processed" or "refined" to produce qualifying income. Indeed, NGLs are processed and refined in both crude oil refineries and in steam crackers and other NGL processing facilities such as fractionators. There is no legislative history to suggest that the natural resource being treated or the location of the processing or refining should affect whether the activity is qualifying income.

GPA believes that the proposed definitions of processing and refining are overly restrictive and do not have statutory support. GPA requests that the proposed definitions be amended so that there is no disparate treatment of crude oil versus NGLs. In other words, regardless of the commodity being processed -- oil or natural gas -- the activity and resulting revenue stream should, and will be treated equally and will be considered qualifying income for the purposes of determining the entity's treatment under Section 7704.

Thank you for your time and consideration of our request. Please contact me at (918) 493-3872 or mhite@gpaglobal.org if you have any questions.