Company Claims Proposed PTP Regs Are Inconsistent With Statute

G2X develops, owns and operates production facilities that convert natural gas into methanol and drop-in automotive gasoline. In 2013, prior to committing to the construction of a production facility in Lake Charles, Louisiana, G2X requested and received two private letter rulings from the Internal Revenue Service (the "Service"). In the first, Priv. Ltr. Rul. 201315015 (Apr. 12, 2013), the Service concluded that producing gasoline and liquefied petroleum gas ("LPG") from natural gas and marketing the gasoline and LPG would constitute qualifying income within the meaning of section 7704(d)(1)(E). The second ruling, Priv. Ltr. Rul. 201346007 (Nov. 22, 2013), which G2X received on July 18, 2013, concluded that income derived from producing methanol and synthesis gas from natural gas and marketing the methanol and synthesis gas would constitute qualifying income under section 7704(d)(1)(E).

In reliance on these rulings G2X committed to construct and has begun to construct a $1.3 billion facility in Lake Charles, Louisiana that will produce methanol, synthesis gas, gasoline and LPG from natural gas.² G2X also recently completed a facility in Pampa, Texas that produces methanol and synthesis gas from natural gas.³ In addition, G2X has committed to and begun investment in excess of $1.5 billion with WPX Energy for the production of natural gas in the Piceance Basin in Western Colorado to supply natural gas feedstock to its production facilities.⁴ G2X, and its partners in these ventures, invested in the facilities with the intention -- as fully described in G2X's private letter ruling requests -- of forming a publicly traded partnership once the facilities were operational.

As stated above, in July 2013, the Service ruled that the income derived from producing methanol and synthesis gas from natural gas and marketing the methanol and synthesis gas would constitute qualifying income. This ruling was consistent with section 7704(d), the legislative history and at least one other private letter ruling issued in 2013 (Priv. Ltr. Rul. 201324002 (Jun. 13, 2013)). Nonetheless, in May 2015 -- less than 24 months later and absent any Congressional action or other indication that the Service's rulings were incorrect -- the Service reinterpreted section 7704(d)(1)(E), reversed its position and concluded that producing methanol and synthesis gas from natural gas and marketing the methanol and synthesis gas does not generate qualifying income.

In addition to constituting an arbitrary reversal of the Service's previous position, upon which G2X and others relied to their detriment, the Proposed Regulations are irreconcilable with section 7704(d)(1)(E) and the legislative history. G2X has reviewed the recently-submitted comment letter prepared by OCI Partners LP and OCI USA, Inc. and, insofar as such comments relate to methanol and synthesis gas, G2X concurs in full. To reiterate what G2X believes are the most salient points:

• The Proposed Regulations incorrectly focus on the output rather than the input. Section 7704(d)(1)(E) requires only two things: that a qualifying activity (e.g., refining, processing) be directed at a mineral or natural resource (e.g., natural gas). The Proposed Regulations' preoccupation with the output of such activity is unsupported by the statute and the legislative history. G2X produces methanol and synthesis gas from natural gas (a mineral or natural resource) using processes, catalysts and equipment currently used in oil refineries in the United States and around the world. Therefore, income derived from such activities constitutes qualifying income.

• One example of this incorrect focus on process outputs is that under the Proposed Regulations the conversion of methane produces qualifying income only if the output is a liquid fuel otherwise produced from petroleum. The Proposed Regulations go on to say that the production of methanol from natural gas does not generate qualifying income because methanol is not a liquid fuel otherwise produced from petroleum. This is simply incorrect, and example 3 of the Proposed Regulations is, therefore, wrong on the facts. Methanol can be produced from a number of sources including oil, coal and natural gas.⁵ Additionally, methanol has been and continues to be used throughout the world as a liquid transportation fuel.⁶ For instance, more than a million automobiles in China currently run on methanol. In fact, in the very year Congress enacted section 7704, California was in the midst of an experimental program during which thousands of methanol-fueled automobiles were in operation.⁷ As an MIT interdisciplinary study chaired by Ernest J. Moniz, the current U.S. Secretary of Energy, found "[t]he potential for natural gas to reduce oil dependence could be increased by conversion into room temperature liquid fuels that can be stored at atmospheric pressure. Of these fuels, methanol is the only one that has been produced for a long period at large industrial scale. Methanol has the lowest cost and lowest [greenhouse gas] emissions. . . ."⁸ Therefore, as methanol is a liquid fuel, even by the Proposed Regulations' own terms, the production of methanol from natural gas generates qualifying income.

• The Proposed Regulations read refining out of the statute with respect to natural gas. Section 7704(d)(1)(E) lists processing and refining as separate activities. The proposed regulations ignore this and address only the processing of natural gas. Refining is generally understood in the oil and gas industry to mean an activity that uses heat, pressure and/or the presence of a catalyst to effect a physical or chemical change in a particular hydrocarbon. Such a definition encompasses G2X's production of methanol and synthesis gas from natural gas, which activities, therefore, generate qualifying income.

• The Proposed Regulations ignore relevant sections of the legislative history and incorrectly restrict the definition of mineral or natural resource. Under section 7704(d)(1)(E) oil, gas and products thereof are minerals or natural resources. The legislative history clarifies that "products thereof" include a wide variety of products ranging from the simplest hydrocarbons to complex compounds of hydrocarbons and non-hydrocarbon additives. The legislative history draws the line of what constitutes a "product thereof" at plastics and similar petroleum derivatives produced by additional processing beyond that undertaken by refineries and field facilities. Methanol is produced directly from natural gas using standard oil refinery processes and equipment and is, therefore, not processed beyond what the legislative history permits. Therefore, methanol is itself a mineral or natural resource and G2X's production of a mineral or natural resource using another mineral or natural resource as a feedstock generates qualifying income.

• Sincerely,

   

   

  Timothy E. Vail

   

  President and CEO

   

  G2X Energy

   

  Houston, TX

   

²See Exhibit A.

³See Exhibit B.

⁴See Exhibit C.

⁵See GEORGE A. OLAH ET AL., BEYOND OIL AND GAS: THE METHANOL ECONOMY 218-229 (2006); R. Rapier, The Global Petroleum Picture, in THE ECONOMICS OF ALTERNATIVE ENERGY SOURCES AND GLOBALIZATION 3, 6 n.6 (Andrew Schmitz et al. eds., 2011).

⁶See Exhibit D.

⁷ L. BROMBERG & W. K. CHENG, SLOAN AUTO. LAB. MASS. INST. TECH., METHANOL AS AN ALTERNATIVE TRANSPORTATION FUEL IN THE US: OPTIONS FOR THE SUSTAINABLE AND/OR ENERGY-SECURE TRANSPORTATION 7-9 (2010).

⁸ THE FUTURE OF NATURAL GAS: AN INTERDISCIPLINARY MIT STUDY 128 (2011), available at https://mitei.mit.edu/system/files/NaturalGas_Report.pdf.