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Do more taxes equal more investment? ConocoPhillips tells legislators the more profits the state takes with PPT, the less money the companies have for investment Kristen Nelson Petroleum News
The relationship of taxation to investment has been a major point of discussion as the Alaska Legislature works on a revision of the state’s severance tax for oil and gas, changing it from a gross tax on production that varies by field to a statewide tax on net profits.
Consultants and economists working for the administration and for the Legislature have maintained that the state can increase taxes and also increase investment in the state, necessary to stem the state’s declining production rate.
The major North Slope producers supported the governor’s initial 20 percent tax and 20 percent credit proposal as a step toward a gas pipeline project. Both the House and the Senate have adopted committee substitutes which increase the proposed tax rate.
BP Exploration (Alaska), ConocoPhillips Alaska and ExxonMobil Alaska Production have all told legislators they cannot support the tax levels in the committee substitutes, and have also disputed the views of the state’s economists and consultants that the state can have both increased production taxes and increased investment.
Consultant Pedro van Meurs, in presentations of Gov. Frank Murkowski’s proposed petroleum profits tax, the PPT, compared Alaska’s present and proposed fiscal systems with areas where Alaska’s major producers have interests. Van Meurs has told legislators that the new tax proposal would result in more investment by oil and gas companies.
Van Meurs and consultant Daniel Johnston have also told legislators that governments throughout the world are increasing taxes as oil prices increase and van Meurs told House Finance April 3 that one of the important reasons for the PPT is what’s happening elsewhere in the world, where governments are reviewing their fiscal systems and raising their take from oil and gas.
He called the change proposed in Alaska “modest” compared to what is going on worldwide.
Companies being forced out Marianne Kah, ConocoPhillips’ chief economist, told Senate Finances April 5 that with higher taxes the company will have less money to invest. Changes in Alaska’s tax rate are also a concern she said, because it means the fiscal system is less stable and could change again.
When countries increase taxes “we don’t go there,” Kah said.
She said increased taxes on production are a concern worldwide.
ConocoPhillips used to think of the upstream industry as king, she said, but is now investing in midstream and downstream things it wouldn’t have invested in five years ago because of the increasing share of the production profits pie that governments are taking.
Eventually, Kah said, there will be only national oil companies: private investors will be pushed out, and capital investment will shift to other areas, except for investments by national oil companies.
She said she was concerned that the governor’s 20/20 proposal is at “the outer edge and won’t encourage investment,” and said she thinks the companies agreed to that rate to get a gas line.
Jim Bowles, president of ConocoPhillips Alaska, said the governor’s 20/20 proposal, did strike a balance. Whether it struck the right balance or not is difficult to say, he added, but industry was prepared to go forward on that basis because of the prospect of commercializing Alaska’s North Slope natural gas through a gas fiscal contract.
An OECD comparison
ConocoPhillips gave legislators a different take on how Alaska compares to other oil producing regions.
Consultant David Bramley, vice president of CRA International, said Alaska should be compared with areas which are also mature oil and gas provinces.
Bramley, presenting for ConocoPhillips Alaska March 30 to the House Finance Committee, and April 5 to the Senate Finance Committee, said he compared Alaska with countries in OECD, the Organization for Economic Cooperation and Development. Bramley’s peer group for Alaska included the Australia Northwest Shelf, the Canadian oil sands, Norway, the UK North Sea, the U.S. Gulf of Mexico deepwater and the U.S. Gulf of Mexico shallow water.
These are large, established oil and gas producers with similar political and business risks, he told the committees, and which public data shows to have a high level of comparability in remaining oil and gas potential and costs and similar fiscal systems, based on royalty type tax structures rather than production sharing agreements.
And, he said, because of the similarities, these areas play similar roles in investment portfolios — they are substitute investment opportunities.
Bowles: ConocoPhillips wants to be in Alaska Bowles told legislators ConocoPhillips supports work the state is doing to make its share of the take competitive, and thinks OECD countries are the best comparisons to Alaska on worldwide capital competition.
ConocoPhillips very much wants to be in Alaska, Bowles said, but there are areas around the world that the company will be looking at for investment opportunities. He told Senate Finances it was their policy call on what they’d like to see developed in the state, their call on how much of company profits in Alaska they want to take.
But there are other areas in the world where companies may decide to invest, he said.
Bowles said one notion that has been circulated among legislators is to raise the tax rate as far as possible without crippling the industry — take the golden goose as close to death as possible and then revive it.
He said as the golden goose gets weaker, investment and production decline accordingly.
Decline in production Bramley compared Alaska and OECD countries on production rate changes between 2000 and 2004: from drops of 27 percent in U.S. Gulf shallow waters and the Australian Northwest Shelf to gains of 64 percent in Canadian oil sands, with Alaska’s 6 percent decline about in the middle. He said Alaska has 44 percent of its known conventional oil and gas reserves remaining. This compares to a range of 28 percent remaining in the United Kingdom and 92 percent remaining in the Canadian oil sands.
He noted that Alaska and the United Kingdom are the only regions in the OECD group to show decline in proven oil and gas reserves over the last decade. Alaska has only had eight new fields go into production since 2001 and the average field size, 34 million barrels of oil equivalent, was the smallest of any in this group across a considerable range of numbers of new fields (more than 70 in the United Kingdom) and field sizes up to 1.2 billion boe in the Canadian oil sands.
Alaska was also lowest in exploration activity from 1995-2004, and had only a 17 percent success rate, compared to success rates up to 49 percent in Norway. Likely new developments in Alaska are relatively small and high cost, an estimated $15 per barrel of oil equivalent compared to $13 in Norway and a low of $7.50 in the U.S. deepwater Gulf of Mexico.
The result, Bramley said, is that Alaska — on a variety of measures — is a relatively mature and high-cost petroleum area, with low remaining prospectivity.
In relative terms, he said, Alaska ranks low in investment attractiveness.
Bramley said that total government take in the governor’s 20/20 PPT proposal would give Alaska the second highest level of total government take among the areas compared (it is third highest under the existing severance tax system). High costs (the highest in the comparison group) and low prospectivity compound to reduce attractiveness for investment, he said. The majority of Alaska’s future resource potential is known — heavy oil, producing oil fields and gas — each significantly larger than resources likely to be available through exploration, he said. The mitigation measures proposed as part of the PPT are most likely to be useful to new entrants for exploration and light oil, while the increase in government take falls on the known resources.
Bramley said the PPT proposals will “inevitably reduce future investment in oil and gas” in the state.
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