Bright side of tax reform
Energy practice leader for KPMG expects a wave of positive effects for the local economy
THE next major boost for Houston’s economy comes compliments of the recently passed tax bill, says Regina Mayor, who leads consulting giant KPMG’s global and U.S. energy practice.
Her practice includes oil and gas, power and utilities, chemicals, mining and renewables, and it covers three major businesses — audit, tax, and advisory.
She recently talked to the Chronicle about the impact of tax reform on the Houston economy, the mood at the recent World Economic Forum’s annual meeting in Davos, and the need for energy companies to adjust to a less hydrocarbon-intensive planet.
Q: How do you expect tax reform to affect Houston’s economy?
A: It’s going to have a positive impact. You’ll see money being repatriated. Companies that had pursued inversion strategies in the past are actively looking at how to pull many of their activities back to Houston. We’ll see many jobs returning. We’ll see people having more free cash as their taxes go down. I think we’ll see companies being more generous with bonuses and increases, to share some of the benefits with employees.
Q: What effects will we see globally? A: Now here is something I did not appreciate till I was in Davos. The world is watching what the U.S. is doing and the results — growing corporate profits, all-time high consumer confidence, near all-time low unemployment. And this is encouraging other countries to sort of kick-start their own economies. I underappreciated how the U.S.’s positive economic output and confidence would have a trickledown effect on the rest of the world.
If what the U.S. has done with tax reform helps shake off the global economic doldrums, it might just have a huge knock-on effect. You know, everyone was there to say invest in my country, we’ve got terrific people, we’ve got terrific resources, we’re going to promote investment, we’re going to be business-friendly. It sounded a lot like what President Trump was saying about the U.S. Trump’s tag line was “America is open for business.” Then many
other countries’ leaders said the same thing. The level of optimism from all these other countries was stark and amazing. My big take-home message was how energized other parts of the world were due to U.S. tax reform.
Q: Did you expect this to turn out so well?
A: I was originally skeptical when the administration and Congress were pushing tax reform at the end of last year, but when I saw how encouraged everyone else was at Davos, I thought maybe there was more to this. And even the protectionist patter, the tariffs, didn’t have a damper on how bullish the rest of the world seemed to be on economic opportunities, not wanting to be left out of what they see happening in the U.S.
Q: Do you think the new tariffs on solar panels, and any repercussions, will ultimately diminish that optimism?
A: There will be an effect. No doubt we’ll see retaliatory kinds of moves from other countries. But the negatives were a tiny fraction compared to what everyone was focused on — economic growth. It was truly encouraging. I came back fired up!
Q: Is tax reform changing how you are advising your Houston and U.S. clients?
A: It’s resulting in alternative strategies, and our team has been working night and day with our clients to understand what it means for them. We can’t generalize because our clients have individual considerations. We are reading the fine print and going through a lot of modeling and scenarios and trying to figure out if our interpretations are correct. The taxing authorities are going to have to weigh in; not everything is black and white and cut and dry.
Q: What are energy companies focusing on now?
A: I hear consistent dialogue around two key focus areas. One is digitization — how to drive efficiency from technological changes and tools that are available today.
And the second is the energy transition and how quickly we might hit a peak energy demand scenario. Some think it’s coming sooner rather than later, and some think it’s at least 100 years off. There are quite divergent points of view about when it will happen, but not about if it will happen.
Energy businesses are dealing with many challenges and opportunities as they migrate their portfolios to adapt to a changing set of requirements on the energy front. As companies contemplate the transition, they are exploring how they are going to operate as a hydrocarbon company in a non-hydrocarbon world. What’s their energy transition going to look like? How will they emerge? It’s quite fascinating because everyone — power companies, chemical companies, mining companies, oil companies — has to transform.
Q: What is your view on the timing of a peak energy demand?
A: I think it’s a long way off because the mature economies are still hungry for power. And our devices and technologies consume more and more power. It takes a ton of energy to process all the data that’s being generated.
Additionally, we still have 1.3 billion people on the planet who don’t have access to electricity. And electricity is the single biggest driver of wealth creation. It’s a key way we need to lift the rest of the world out of poverty.
And then we also still need petroleum-based products in everyday things. Big oil becomes big plastic. And I don’t see alternatives for that yet. So, I think fossil fuel will be part of our portfolio at least through the end of this century. And I don’t necessarily see it going away ever, because of the petrochemical component.
So, I’m not sure we will ever hit “peak demand” because I think the world gets hungrier and hungrier for power, and power is life. It’s such a key ingredient for how we get everyday life done. I’m not saying the renewables aren’t part of it, like solar, wind, geothermal, even small-scale nuclear. Liquefied natural gas has a role. If we could get “clean” coal — people say that’s an oxymoron — but there are still a lot of countries that are burning coal to generate power. The world needs to figure out a way to respond collectively. How do we pull together and drive a more conscious climate-friendly approach to energy consumption and generation while still providing energy to places like Africa, India and Pakistan?
Q: Do you have an answer?
A: There’s no easy answer. But my answer is, let’s not demonize any one source. Let’s look at carbon-friendly ways that all the components can play. We did a project with the World Economic Forum about how to identify and accelerate the investment in new technologies for energy sustainability, because right now it’s an uneven market that can sometimes create winners and losers, and I don’t think we want winners and losers. Achieving the world’s energy requirements requires an all-of-the-above strategy.