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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2018

Vol. 23, No. 5 Week of February 04, 2018

HB 288 proposal faces industry objections

Tax Division, North Slope, Cook Inlet producers testify on bill which would increase minimum crude oil production tax from 4% to 7%

Kristen Nelson

Petroleum News

The House Resources Committee took testimony Jan. 26 and 29 on House Bill 288, which would increase the minimum crude oil production tax from 4 percent to 7 percent.

Ken Alper, director of the Department of Revenue’s Tax Division, told the committee Jan. 26 that the minimum 4 percent tax currently in place kicks in at $25 oil and that is maintained for the proposed increase to 7 percent. Alper said oil profitability is very different at $30 oil, $50 oil and $70 oil, and said a producer might be able to absorb something of an increase at $70 per barrel oil but that increase would have a substantial fiscal impact at $30 oil.

He said Alaska’s tax auditors have a hard job, because the state’s production tax is among the most complex in the world and the increased minimum tax maintains all that complexity. But most of that complexity wouldn’t be used because at a wide range of prices the production tax would be zero for new oil eligible for the gross value reduction, and 7 percent for legacy oil not GVR eligible.

Alper said the increase in the minimum tax would increase the breakeven price of the typical field by about $1 per barrel.

And it could unfavorably impact economics for future projects because of the replacement of cashable credits with carry-forward lease expenditures in HB 111, with carry-forwards only able to be used to reduce taxes to the minimum tax. An increase in the minimum tax is more likely to trigger down-lift provisions, reducing the value of the reduction by 10 percent each year.

The current system, Alper said, assumes the minimum tax will be the tax paid, even at higher prices, until a company is able to recover its development costs and increasing the effective tax rate by 75 percent during what would be peak production years could impact present value, and breakeven price, for a project.

AOGA

The committee heard from industry at a Jan. 29 hearing.

Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, the industry trade association, cited the increase in production over the past two years, a 1-2 percent increase compared to the 4-8 percent historic decline from 2002.

ACES, passed in 2007, incentivized spending, Moriarty said, whereas Senate Bill 21, passed in 2013, incentivized production.

Oil revenues are projected to be 75 percent of the state’s unrestricted general fund budget this fiscal year, and based on estimates of the state’s resources, “we have the potential to be the state’s economic driver for generations to come,” she said.

But Alaska isn’t the only place in the U.S. with oil and gas, and with an estimated $120 billion in capital expenditure by the industry this year, Alaska is capturing less than 2 percent, some $1.9 billion in capital. Based on recent history, she said, it takes at least $3.6 billion in capital investment to grow Alaska production.

There would be negative impacts from HB 288, she said: it would increase the minimum production tax by 75 percent; it would be the third year in a row of increases in oil and gas production taxes; it would increase costs; that would reduce competitiveness, and likely reduce investment.

ConocoPhillips

Scott Jepsen, vice president, external affairs and transportation for ConocoPhillips Alaska, said the future for Alaska looks pretty good but unconventional plays in the Lower 48 are setting the cost for investment, and the cost of supply in the Lower 48 is below that for Alaska.

Alaska is still competitive because of recent cost cutting, he said, but is on the upper edge of what’s competitive at ConocoPhillips.

Jepsen said the increase proposed in HB 288 is a tax increase at low prices. The net tax structure has been in place for four to five years, he said, and that has helped with ConocoPhillips’ investment decisions, and oil and gas investment is one of the key elements of trying to manage the budget gap.

Jepsen said if ConocoPhillips hadn’t reduced costs the company wouldn’t be investing in Alaska because opportunities for investing elsewhere are considerably cheaper.

The North Slope is on the cusp of significant new development investment, Jepsen said, and ConocoPhillips would recommend that the committee not pass HB 288.

Glacier Oil & Gas

Carl Giesler, CEO and president of Glacier Oil & Gas, said he wanted to present a little bit of small company perspective.

He said his company believes HB 288 would cause substantial real harm and reputational harm to the state.

There has been good news in Alaska recently with discoveries announced, but he said in spite of positive headlines the industry is eroding in the state, with operators and service companies leaving, making it difficult and costly to get work done.

The second thing we’re seeing is capital flight, he said, with investors becoming wary of the state. This fall Glacier talked to a couple of local banks about reservoir-based loans and was told they weren’t in that business because there weren’t enough producers in the state to justify investing in that business. They also talked to 15 banks in the Lower 48 and all but a couple stopped the discussion when they learned the company’s assets were in Alaska, citing both the state’s reputation and the small commercial opportunity set.

BP

Damian Bilbao, BP Alaska’s vice president of commercial ventures, said BP’s view is that investment is competing for less oil demand, and said BP’s view is that HB 288 would make Alaska less competitive for investment.

He said BP’s view is that demand begins to peak in 2030-40, driven by economic growth and an increase in efficiency that begins to impact oil demand over the next 20 years, making the oil investment climate more competitive.

On the supply side, there are some 2.5 trillion barrels of technically recoverable oil in the ground globally, but only about one barrel of demand is expected for every two barrels in the ground, he said.

That’s why you keep hearing about the importance of Alaska remaining competitive, Bilbao said: If it doesn’t, investment will flow to more competitive regions.

HB 288 would make barrels in the ground less competitive, he said, asking what policy will encourage investment to come here?

Bilbao said at a 1 percent decline rate vs. the historic 6 percent rate, looking out to 2055, there is a 40-plus year future for the North Slope, with an additional 5 billion barrels of oil and taxes and royalties to the state of $66 billion. At a 6 percent decline rate, flow through the trans-Alaska oil pipeline soon reaches the 300,000 barrels per day point at which it becomes more expensive to move, and additional production drops to some 1.5 billion barrels and taxes and royalties to the state drop to $11 billion.

ExxonMobil

Cory Quarles, Alaska production manager for ExxonMobil, said he recognizes the challenge legislators have, trying to find good solutions to reduce the budget while improving the economy, but said HB 288 is not one of the good solutions.

ExxonMobil opposes the bill, he said, as not good for industry or Alaska’s economy, and said it would stall momentum in the industry that continues to drive Alaska’s economy.

Quarles said it takes the federal government, the state government and industry working together to really get the economy moving in a resource state like Alaska, with government providing access and a stable and competitive fiscal policy and industry responsible for safe and responsible development.

HB 288 drives a wedge into the works, he said, slowing down, stalling or even stopping the momentum industry has seen recently.

Quarles said there is increased industry interest in Alaska, but the state remains one of the most unstable fiscal environments in the world based on 12-13 years of changes, and told legislators they have a strategic choice: what do you want to achieve or how competitive do you want to be? And where do you want to compete?

Bills such as HB 288 which increase taxes in a high-cost resource state are a major step in the wrong direction for competitiveness and the economy as a whole, Quarles said.






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