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ACES: working well but needs adjustment Parnell says that the tax credit rules could be improved to provide further exploration and development incentives; no rate changes Alan Bailey Petroleum News
When on Jan. 14 Alaska Gov. Sean Parnell announced his administration’s proposals for some changes to the state’s ACES oil production tax, he said that he is conscious of industry’s need for a stable tax regime but that he has also remained open to the possibility of changes in ACES, if those changes can be justified.
But, the ACES tax has been operating as intended, he said.
“Since the passage of ACES we have verified that our net tax, which only taxes oil companies on profits, did what it was supposed to do when oil prices spiked and (then) plunged during the period immediately after ACES was passed,” Parnell said. “When oil profits were extremely high, the state’s share of the revenue stream was high. When oil profits were low, the state’s share was likewise much smaller.”
Economic model Parnell said that in August he asked the Department of Revenue to show him its economic model, to enable him to verify that the tax was giving the state its fair share of oil revenue and to evaluate the operation of the ACES tax credits in attracting more jobs for Alaskans. But Revenue had already been analyzing public and confidential company data, to gain insights into how recent company investments compared with past investments, he said.
“We’ve been open to industry’s communications about what they felt was working with ACES and what was not working with ACES,” Parnell said. “I personally talked with many of the oil company employees and executives, and members of the Alaska Oil and Gas Association board, to get their views on Alaska’s tax regime.”
Parnell said that the Department of Revenue used the information that it gathered to prepare an ACES status report and that he had asked Revenue Commissioner Patrick Galvin to use the findings in the report to formulate recommendations for any ACES changes that might result in increased oil investment and more jobs for Alaskans.
Four recommendations Galvin made four recommendations for what Parnell characterized as “refinements” to the ACES statute, and Parnell has endorsed those changes for submission to the state Legislature in the 2010 legislative session. The proposed changes are:
• To make available to in-field, well-related activity, such as infill drilling, the 30 percent tax credit currently available for exploration activities more than three miles from an existing well.
• To enable companies to use all of their capital credits in the year that the credits are earned, rather than having to defer the use of at least half of the credits into the following year.
• To enable new explorers to claim tax credits for exploration costs without having to make subsequent investments equal to the value of the credits.
• To waive state claims for interest on additional taxes that a company might have to pay in arrears, as a consequence of the retroactive application of ACES tax regulations that the state is currently finalizing.
The 30 percent tax credit for in-field activities would translate to a $250 million to $350 million benefit to the oil industry in the current fiscal year, with that benefit being obtained in exchange for investments in Alaska that would create hundreds of new Alaska jobs and benefit the development of North Slope heavy oil, Parnell said. And accelerating the use of capital credits into the year in which they are earned would confer another $250 million in benefit to industry in the year that it becomes effective, he said.
The proposal to enable new explorers to claim tax credits up front would put those explorers on “a fair and level playing field” with companies that already have oil production in state, while the waiver of interest on some underpaid taxes would “be a matter of fairness,” given the retroactive application of the ACES regulations, Parnell said.
No rate changes The state administration does not propose making any changes to the ACES tax rates.
The administration’s discussions with oil companies failed to reveal any evidence that the lowering of the progressive tax rates in ACES would result in new investments and new jobs in Alaska, regardless of claims that lower rates would make Alaska more competitive for those investments, Parnell said. Lowering the tax rates would simply provide the oil companies with more money to invest wherever they wish.
“At this moment I am working for providing more opportunity for Alaskans in jobs,” Parnell said. “I’m not interested in changing progressivity so they (the companies) can take that money and invest it somewhere else. If they’re willing to invest it here, I’m open to considering it, but I’m standing up for Alaskans in this, not some other country.”
Revisit 2007 analysis The original impetus for Revenue’s investigation of the impact of ACES was a desire to revisit the 2007 analysis of the previous tax system, known as PPT, said Commissioner Galvin. That original analysis had led to the development of the ACES tax.
“I wanted … to look at how ACES is performing under the same type of analysis, looking at the balance between revenue generation and those investment incentives that were a key part of the ACES proposal,” Galvin said. And one purpose of the analysis was to address a public debate about whether the new tax was acting as a disincentive for new oil and gas investment, he said.
The Revenue investigation has concluded that oil revenues have been higher during the past two-and-a-half years than they would have been if PPT or the system previous to that (referred to as “ELF”) had been in place, Galvin said. And during that same period company spending, both in terms of capital investment and operational spending, also increased.
Operational expenditure climbed initially but has leveled off in the past year, paralleling oil industry costs that rose dramatically with the price of oil and then came down somewhat as oil prices dropped, Galvin said. Oil industry capital expenditure usually tends to track the price of oil, but capital expenditure estimates and projections for Alaska have remained on an upward trend in the past year, despite the decline in oil price, he said.
Moreover, the 2007 run-up in maintenance and pipeline replacement costs resulting from Prudhoe Bay pipeline problems in 2006 did not contribute to a continuing increase in capital and operational expenditure, Galvin said.
“Jobs are also up,” Galvin said. “In fact the jobs in the oil and gas industry in Alaska are at the highest level in history.”
Many factors However, although oil industry spending is up, it is too early to attribute that increase to ACES, especially since there are so many factors that influence industry investments, Galvin said.
Galvin also pointed out that a standard tax deduction that had applied to expenses associated with the Prudhoe Bay and Kuparuk River units when calculating ACES taxes expired at the end of December, thus placing these two units under identical tax rules to other North Slope units from the start of 2010.
“This (standard deduction) provision … was intended to moderate the risk associated with adopting a profits based tax without substantial historical data on which to rely for future cost estimates,” the Department of Revenue said in its ACES status report.
The standard deduction substantially increased the state’s tax revenues, especially in 2008 when oil prices were particularly high, the report said. Conversely, the demise of the standard deduction will now put more money into the companies’ pockets, Galvin said.
Influencing decisions Reports and anecdotal information from industry indicate that incentives available under ACES are directly influencing decisions made by some exploration companies, Galvin said.
“That’s an important consideration for us in terms of recognizing that on the exploration side they do seem a driver of those investment decisions,” he said.
Hence, the motivation to adjust the ACES tax credit provisions, with changes such as the wider application of the 30 percent tax credit rate.
Marcia Davis, deputy commissioner of the Department of Revenue, explained some of the details of that particular proposed change, saying that some capital expenditure within an oil field currently qualifies for an ACES tax credit of 20 percent. The proposed extension in the scope of the ACES 30 percent tax credit rate would apply that rate to in-field well work, some of which currently qualifies for credits at the 20 percent rate and some of which does not currently qualify for any tax credit, she said.
The Revenue investigation of ACES uncovered some areas in which the administration of ACES could be improved, especially with regard to the complexity of tracking tax credits over more than one year, to the lack of accounting for the time value of money when the use of credits has to be delayed and to the need to be fair to new explorers in terms of their ability to use tax credits, Galvin said.
And the lengthy time required to complete ACES regulations, with the subsequent proposal to waive the state’s interest on some unpaid back taxes, resulted from the state using a regulation development process that was highly interactive with industry, to ensure practical, understandable and usable regulations, Galvin said.
But, having assessed the impact of ACES within Alaska, the Department of Revenue is embarking on an analysis of how Alaska’s oil-tax regime compares with regimes elsewhere in the world in terms of competing for investment, Davis said.
“That is a second phase of what we’re looking at, and we’ll start to be able to respond to questions on how Alaska compares to other jurisdictions,” she said.
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