$1 billion-plus Uinta Basin oil train could hinge on tax break

(Brian Maffly | Tribune file photo) Since 2014, the Price River Terminal in Wellington has been trans-loading oil from trucks to rail cars, opening a new path for Uinta Basin crude to reach out-of-state markets. It shipped about 7,500 barrels a day to Houston-area refiners in 2018.

The following was written and reported by The Utah Investigative Journalism Project in partnership with The Salt Lake Tribune.

Last June, Utah’s Permanent Community Impact Board (CIB) doled out $21.4 million from the state’s share of federal mining royalties toward a rail line proposed to connect the oil of the Uinta Basin to national markets.

The project is controversial for a number of reasons: its estimated $1.2 billion price tag; that it would primarily benefit one industry; and because the Utah Attorney General’s Office has questioned the legality of its public funding source.

“Is this going to be the last time that [public] money is appropriated or needed?” board financial adviser Marcus Keller asked at the June 13 meeting in Vernal.

A chorus of supporters said the $21.4 million grant, along with an earlier $6.5 million award, was all the public support needed to prime the project and attract the private capital needed to lay tracks and unlock the Basin’s vast potential underground wealth.

Among the project’s champions was CIB board member and state Sen. Ron Winterton, R-Roosevelt, who is now sponsoring legislation to give oil and gas producers a big tax break aimed at expanding production — something critical to producers to hit shipping quotas for the planned railroad.

SB41 appears to be in trouble. It is still awaiting its first committee hearing with time running out on the legislative session, which concludes March 12. The cost could be the sticking point, with a fiscal note that says it would grant a $5.7 million tax break next year, ratcheting quickly up to $53.1 million by its fourth year.

The proposal comes at an awkward time for supporters.

Legislators are warning about a faltering sales tax revenue stream that has grown too thin in recent years, and threatens to upset the balance that makes for sound state budgets. Just last December, the Legislature passed a big increase in grocery sales taxes and on a few select service industries — along with more than offsetting income tax reductions — only to quickly repeal it in the face of a popular referendum backlash.

While Winterton has not directly promoted his proposed tax cut as the linchpin to the Uinta Basin railroad, it isn’t difficult to connect those dots.

Boosting production

Supporters who stressed the CIB’s $27.9 million funding would be the end of public subsidies said private investment would cover the lion’s share of the rail line.

Drexel Hamilton, the institutional broker-dealer employed by the Seven County Infrastructure Coalition that is spearheading the project, indicated it would put in $5 million to $15 million and raise capital from other sources to finish it.

Drexel Hamilton executive Mark Michel explained the demand was there and he just needed to get the oil producers to commit to being able to ship out enough product.

According to Pam Juliano, a spokesperson for Rio Grande Pacific and member of the project team, oil producers in the Basin need to be able to cumulatively move 130,000 barrels of oil more per day by rail for the project to be viable — a 173% or better increase from the current daily production rate of 75,000-85,000 barrels.

A big sales tax break could be just the spark to drive that expansion.

(Francisco Kjolseth | The Salt Lake Tribune) Sen. Ronald Winterton, R-Roosevelt, on the Senate floor at the State Capitol in Salt Lake City on Tuesday, Feb. 11, 2020.

"We have done this for every industry except this one,” Winterton says. “We’ve done it for manufacturing, we’ve done it for Silicon Slopes.”

He points out that only fossil fuels get taxed on “inputs” of product, and explains how this would be unfair if it were applied, for example to a sales tax on food, where it wasn’t just a tax applied at checkout to the consumer but also on the grocer upon delivery.

‘The majority of the time, I’m a senator'

Winterton as it turns out is not just a supporter of the rail project, he was, at the time of the CIB funding decisions, a member of the CIB board and was also employed as a consultant by Jones & Demille Engineering, the engineer of record for the Seven County Infrastructure Coalition.

When asked why he didn’t disclose back at that pivotal meeting in June that he was being paid by the firm involved looking for the CIB funding, Winterton said that the disclosure was on his legislative conflict-of-interest form. Minutes of the June meeting say he participated in the vote.

Winterton also said that he didn’t do any work for the engineering company’s application related to the railroad project. He adds that he hasn’t done much work for the firm lately.

“The majority of the time I’m a senator,” said Winterton, who was a Duchesne County Commissioner before taking his seat in the Senate last year.

He said from last April to just prior to the legislative session’s start he worked helping Jones & DeMille with applications for CIB funding other than the rail project. He stepped down from the CIB post last October and the seat was filled by Duchesne County Commissioner Irene Hansen.

Jones & Demille also employed another influential legislator in 2019, Sen. Ralph Okerlund, R-Monroe. Okerlund’s 2019 conflict of interest form lists him as the full-time salaried executive director of the Seven County coalition, as well as being employed by Jones & Demille for “Project development.”

Trump time clock

The Seven County Infrastructure Coalition, a group of counties pushing for the railroad, has made fast progress in the past year on the project that had previously stalled out for years, tripping over various logistical roadblocks in figuring out how to get trains into the Basin. But the project has picked up momentum as the coalition races against the upcoming election, with fears that if President Donald Trump is not reelected, it might be harder to make the project a reality. Under Trump the United States has become a net exporter of oil — meaning our oil exports have become more valuable than our oil imports.

The preferred alignment of the rail project, originally given a $5 billion price tag, can count on only 10 miles of flat land, with the rest traversing rocky elevations between 4,500 and 9,000 feet to get the 80 miles from near Roosevelt to the Union Pacific tracks at the head of Price Canyon. The cost estimate was pared down to $1.2 billion in the plan by digging fewer tunnels, and avoiding expanding sections of highway.

Legal counsel for the CIB board, Assistant Attorney General Allison Garner, warned the board at its June meeting, for the second time, of the shaky legal ground they were on.

“As you know, the office of the attorney general issued an opinion in 1993 that mere economic development is not proper under the Mineral Lease Act,” she said referring to the federal law allowing a portion of mineral royalties to be directed to local governments to compensate for the negative impacts experienced by frontline communities to the mining and fossil fuel industries.

Garner stressed the board needed to ask the right questions about the project to demonstrate due diligence.

“The project may generate more royalties for CIB to distribute along with jobs and taxes for local governments, but at bottom, does it primarily benefit oil companies — as is stated in the application?” she said. “Does it alleviate the burden of impacts of mineral development or does the project actually exacerbate current burdens or even create new burdens associated with mineral development?”

Seven County Infrastructure Coalition Executive Director Mike McKee is not worried about the legal warnings of the Attorney General’s Office.

“One of the first things stated in the law itself is that ‘planning’ is an appropriate use of the funds,” Mckee said. “I believe we’re on solid ground on that.”

The law does list “planning” but it then goes on to specifically say “construction and maintenance of public facilities” and “provision of public service.”

Winterton was upbeat about the project in a recent interview.

“Now if people see that the rail is economic development, yeah, well what’s the downside to that?” he asked. “If we don’t do it, the taxpayers are going to continue to put their dollars into maintaining the highways,” he said.

It was a much-repeated theme during the June CIB board meeting where it was explained that oil tanker trucks will simply continue to wear down U.S. Highway 40 in bringing oil from the Basin to Salt Lake refineries. By using a public-private partnership, Winterton argues the public risks very little with the finance company Drexel Hamilton and the Rio Grande Pacific railroad working to maintain and operate the railroad.

Critics like Ryan Beam of the Center for Biological Diversity point out that this railroad will be maintained and operated by a private entity and its biggest customer will be another private industry — while its biggest victim will be the air breathing public at home and abroad.

“To subsidize the Uinta Basin Railroad is effectively to dump fuel on the fire of the climate crisis right now,” Beam said.

Winterton said that other goods besides oil can be shipped on the railroad, and that if it can be built to the refineries it will be easier in the future then to connect it to a larger population center, like Vernal or into Colorado. Doing so could also help entice manufacturing to set up in the Basin that could also utilize the railroad. The key, Winterton said, is to start linking legs of the rail up to existing opportunities.

“So you have to establish markets for it.”

Out of the ordinary

The CIB grant was atypical — not just because of the warnings of legal counsel — but because of its size. Normally the royalty monies are doled out in much smaller amounts on projects that more obviously benefit local communities

An August 2019 report from the CIB to the Legislature provides a look at how massive the rail project funding was compared to normal grants.

The $27.9 million railroad study grant made up 25% of all the CIB funding for the 2019 fiscal year and was more than any single county got — in fact it was nearly equal to the $30 million received by the top three counties for funding — Sevier, Kane and Tooele.

The report also crunched five-year totals for CIB funding projects by counties that over the years helped cash-strapped communities pay for things like ambulances and a community center in Milford, cemetery improvements in Emery County and a senior citizens center in Escalante.

The railroad funding was even larger than the five-year totals for 21 different counties, including some heavily impacted by mining and fossil fuels such as Sevier, Carbon, and Emery counties.

Uintah and Duchesne were the top recipients of CIB funding, receiving $53 million and $50 million, respectively, given the high impacts of rigs in those counties.

As for the Basin railroad, Utah State Treasurer David Damschen warned at the June CIB meeting that many things could go wrong with the project, especially given the rushed nature of the project.

“The return on investment here could be significant — and it could be zero,” Damschen said. “This grant differs from pretty much everything else this board does with public resources. Question is, can you get this across the finish line?”