Pete Ide readied lures on the deck of his fishing boat and talked about the old gas terminal off in the early morning darkness, somewhere down the shore of the Chesapeake Bay.
Ide thinks local government played a poor game of hold ’em against the gas company, with hundreds of millions of dollars on the table.
“We, Calvert County and Maryland, had all the cards,” the fisherman said. “We folded a full house to their pair.”
The company, Dominion Resources, began work in October at Cove Point, the shipping terminal that the company plans to convert into an export facility for natural gas. The ambitious $3.8 billion project will involve about a thousand workers a year over several years.
Dominion’s project is intensely controversial in Lusby, Md., where residents are concerned about pollution and safety. Protests against the plan have led to dozens of arrests across Maryland and in Washington. Environmental groups have asked federal regulators to reconsider their approval for the project and have threatened to sue if construction isn’t halted.
Meanwhile, a sizable tax credit Dominion received to build the project has received little public attention. Last year, Calvert County’s commissioners voted unanimously to waive about $506 million in county property taxes that Dominion would have owed over 14 years if the project is successfully completed.
By comparison, the county’s entire budget this year is $309 million.
The issue of financing for the project divides this relatively conservative county, with some arguing that the local government gave Dominion special treatment.
“I’m not anti-growth,” Ide said. “I’m certainly not anti-development.”
“I’m all for business,” said Matthew Keen, who owns a construction company and commercial property in Solomons. “We all aren’t on the same playing field. That’s what I’m against.”
Dominion’s renovation will allow its clients to ship natural gas bound for India and Japan through Cove Point. The workmen there are just one sign of the boom in oil and gas drilled in America, which is transforming the nation’s energy industry.
Before it can be shipped overseas, natural gas must be chilled to minus-260 degrees Fahrenheit, at which point it condenses into a liquid. Liquids occupy less space than gases by weight and can be more easily loaded onto tankers. The process requires specialized heavy machinery.
There is only one port in the country that could connect overseas buyers with the newly abundant gas, a plant in Alaska that was mothballed until this spring. Energy companies are racing to build new terminals, or, like Dominion, to retrofit older facilities that were built to import gas in days when fuel was harder to come by.
As engineers drill wells, lay pipe and design cooling plants like Dominion’s, lobbyists are pressing for favorable tax policies to make new investments more profitable.
That often puts local governments in a difficult position. Subsidies for fossil fuels can strain public budgets and compound the effects of pollution. At the same time, officials worry that companies will move to another state or continent if they don’t receive subsidies.
Dominion’s competitors are also likely to receive subsidies. Three proposed liquefied natural gas facilities in western Louisiana could be made exempt from state property taxes. The state may subsidize their employees’ wages as well.
Authorities in Coos Bay, Ore., would give a Canadian company planning a similar facility there a tax subsidy worth $200 million, the (Portland) Oregonian reported. Energy companies with facilities in Texas are anticipating tax abatements, too.
The federal government provides subsidies as well. Dominion is organizing the Cove Point project as a master limited partnership, a separate legal entity that will exempt some of the company’s earnings on the facility from federal corporate income tax. Master limited partnerships are chiefly found in the fossil-fuel industry. There are more and more of them as firms look to maximize profits on the boom in natural gas, said Doug Koplow, whose research organization Earth Track monitors fossil-fuel subsidies.
Koplow is skeptical of these awards. He thinks they unnecessarily encourage businesses that pollute and deplete natural resources and that they distort markets.
“Are we a developing country where we’re subsidizing our resource extraction and export?” he said. “Or are we a developed country where we price our resources accurately?”
When Dominion approached with a request for a 50 percent discount on property taxes, the maximum allowed by law, county officials were willing to negotiate.
The county commission feared that without some kind of deal, Dominion would shutter Cove Point. Ten years ago, Cove Point bustled with tankers loaded with natural gas, but prices have fallen as domestic production has boomed. Only two ships docked at Cove Point in 2013.
Without a cooling plant, Cove Point would become “obsolete,” said Matt Tucker, an analyst at KeyBanc Capital Markets who follows Dominion. “The facility would have very little value without the opportunity to export.”
If Cove Point were mothballed, the county would lose the $15 million that Dominion already pays in property taxes, as well as the 100 jobs at the plant.
For Calvert County, every penny counts. While the county is relatively affluent, the budget relies heavily on property taxes, and when property values declined following the financial crisis, so did revenue. Salaries have stagnated for the county’s employees and sheriff’s deputies. Teachers have received one raise in three years --and not enough to cover the cost of rising medical insurance premiums.
In the renovation, by contrast, county officials saw economic promise. Dominion has said the project will employ an average of 1,000 construction workers over three years and add roughly 75 employees to the terminal’s current staff.
Dominion and the county have said the company needed a break in order to make attractive offers to potential customers and investors.
“It is a globally competitive market, and tax credits help make projects like this economically viable,” said Chet Wade, a spokesman for Dominion. “There’s no other way around it.”
“If it weren’t built here, or if it weren’t built at all, we the taxpayers of Calvert County would be getting nothing,” said Commissioner Susan Shaw.
The parties eventually agreed on a fixed series of payments for five years after the plant begins operating, and a 42 percent discount on property taxes for nine years after that.
With this schedule, the size of Dominion’s tax credit depends on the future value of the property. The more Cove Point is worth, the larger the credit. The property’s value, in turn, depends on the global market for natural gas.
Dominion has predicted that even with the subsidy, the project would add $40 million to county tax revenues annually. Based on a back-of-the-envelope calculation, the new taxes would have been twice that amount without the agreement, which would save the company $506 million in taxes over 14 years.
Since money in the future is worth less than money now, the credit is the equivalent of a lump-sum payment of $390 million to Dominion, using the yield on 10-year U.S. Treasury bonds as the interest rate.
Yet when asked about the credit’s size, county officials and Dominion representatives demurred, saying that any forecast would be unreliable.
“I don’t know how you could come up with a number like that,” Dominion’s Wade said.
Trey Erwin of Colliers International, who works in the real estate broker’s energy practice in Houston, said the property could be worth much more than Dominion’s forecast of tax revenue suggests. The subsidy could be worth as much as $1.3 billion, he said, adding he didn’t have much confidence in the estimate.
“That’s just a very hard valuation to come upon,” he said.
Any attempt to estimate the value of Cove Point property would have to take into account the prime location, which Dominion would have had to give up if it were not retrofitting the plant.
The pipelines, storage tanks and a pier are already there. In Oregon, developers would be building from the ground up.
Also, while there is a glut of inexpensive natural gas nationwide, the problem is especially acute for drilling companies in the mid-Atlantic. There aren’t enough pipelines in the region to transport gas from the Marcellus shale play beneath northern Appalachia to consumers.
The Cove Point terminal will be the only one of its kind on the East Coast, and Dominion will keep the gate to the Marcellus.
For these reasons, some think Dominion would have built the plant even if the county hadn’t agreed to give up any tax revenue.
“It certainly sounds like a windfall” for Dominion, said Bob Chirinko of the University of Illinois at Chicago. “There’s just no indication they really needed this money.”
Chirinko, an economist and an expert on tax policy, noted that local authorities rarely have the expertise to evaluate claims by potential investors about whether a tax credit is necessary to make a venture profitable.
Calvert County officials have declined to discuss in detail why they agreed to the tax credit, citing an obligation to protect information that could put Dominion at a competitive disadvantage if it became public.
“The county commissioners gave away the farm, and didn’t have any idea what they were doing,” said Paul Harrison, who ran unsuccessfully for commissioner at large after learning about the deal with Dominion.
Commissioner Gerald Clark, a vocal supporter of the project who lost his seat in a Republican primary, has no regrets about the tax credit. “The economics of this thing made it necessary for the local government to step up and participate,” he said.
“I still believe this is the future of Calvert County,” he said. “If it cost me the election, so be it.”
Clark rejects the view that the county did Dominion a special favor, which is what some businessmen in the county think.
While Dominion’s tax bill was cut roughly in half, Larry Murphy, a mechanic, said his bill tripled after the county forced him to buy extra parcels around his Lusby auto garage. Zoning officials wanted him to build a parking lot for his clients’ cars.
Now he’s the owner of a grassy field and a dilapidated house, that, according to the partially effaced sign on one wall, was once a liquor store.
“The taxes are killing me,” Murphy said. “I’m just a small businessman. I ain’t no Dominion.”
Dominion received a sizable tax credit to build the project after Calvert County commissioners waived property taxes over 14 years if the project is completed.
Calvert County’s 2014 budget. Dominion predicts that even with the subsidy, the project would add $40 million to county tax revenues annually.