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Industry less and less happy with ACES Companies tell Senate Finance that more taxes will lower, not raise, investment levels; bill includes more than two increases Kristen Nelson Petroleum News
Industry representatives were glum when they testified at Senate Finance Nov. 14. They’d had less than 24 hours to look through the committee substitute for Senate Bill 2001, the evolving bill that began life in mid-October, at the beginning of the 30-day special session of the Alaska Legislature, as Gov. Sarah Palin’s Alaska’s Clear and Equitable Share, or ACES.
The governor said ACES had two goals: a fair share of oil revenues for Alaska — and incentives for industry to invest.
The incentives for investment weren’t apparent to industry.
ConocoPhillips: higher taxes will impact investment Kevin Mitchell, ConocoPhillips Alaska vice president of finance and administration, said the committee substitute “gives us major cause for concern” and will require the company to go back and look at its business plans. The most recent version of the bill would be a $2 billion tax increase at current prices, he said.
ConocoPhillips has previously said higher taxes would have an impact on investment and absolutely stands by those comments, Mitchell said. It is unrealistic, he told the committee, to expect that an increase in taxes of this magnitude won’t have an impact.
He said the committee has heard testimony from consultants who say you can increase taxes and it won’t have an impact on investment. “In my view this is wrong,” Mitchell said.
On the provision in the House bill — not included in the Senate Finance CS — for a standard deduction for operating expenses for Kuparuk and Prudhoe based on 2006 levels, that’s a “disincentive to invest in new activity,” Mitchell said, and “encourages more of a harvest type operation,” not growth.
Various components of the bill have the effect of reducing allowable deductions, he said, and noted that in modeling ConocoPhillips has done, a 5 percent reduction in allowable deductions is the equivalent of a 1 percent increase in the tax rate.
Asked by Finance Committee Co-Chair Bert Stedman, R-Sitka, if ConocoPhillips prefers a higher base tax rate and lower progressivity or a lower base rate and higher progressivity Mitchell quipped that it was the equivalent of being asked if he preferred being hit by a truck or a bus. “I can’t pick one or the other,” he said.
BP: visible and invisible increases Claire Fitzpatrick, BP Exploration (Alaska)’s senior vice president commercial, told the committee that while there are two visible tax increases — rates and progressivity — there are “many, many hidden tax increases” in the bill.
Responding to consultants statements that progressivity will make investments look better, Fitzpatrick said: “Not the way I make investment decisions.” She said she looks at investments over a range of prices and at prices over $50 “I’ll have to assume additional taxes,” which won’t make an investment look better.
Bernard Hajny, BP’s tax and royalty manager, said all of the changes in the bill could aggregate to more than $100 million in additional taxes, on top of the changes in the base rate and progressivity.
On the standard deduction for operating costs at Prudhoe Bay and Kuparuk Fitzpatrick said that the 3 percent per year inflation over 2006 costs doesn’t equate with what third parties told the Department of Revenue — that there had been a 53 percent increase in costs since 2005. Net taxes allow self adjustment, he said, and if high prices stay, costs will move up. “2006 costs means 2006 activity,” she said. There wouldn’t be adjustments allowed in the standard operating deduction for satellites and heavy oil development.
As far as a House proposal to exclude costs from outside the state, Fitzpatrick said not everything needed is made in Alaska. She told the committee that if exclusion of out-of-state costs and a standard operating deduction were in the bill it would make her business planning a lot easier — she said she couldn’t do anything under those conditions.
Chevron: from half a million to $1.5-$2.5 billion John Zager, general manager for Chevron in Alaska, told the committee that while the governor called ACES fair and equitable, and Econ One said it would raise an additional $500-$600 million above PPT, the numbers now quoted are $1.5-$2.5 billion above PPT.
While the proposed changes may bring the state more money in the near term, charts from the consultants don’t reflect what production will look like in the state in five or 10 years, if the current 6 percent decline in production increases due to reduced investment following on higher taxes, he said.
Zager also said he was concerned about unintended consequences, including the fact that the trigger for progressivity was based on nominal, not real dollars. A $30 kickoff point today is not the same as $30 in the future, he said, and would result in progressivity kicking in at lower real prices in the future.
Pioneer: industry disagrees with consultants on effect Pat Foley, manager land and external affairs for Pioneer Natural Resources Alaska, noted that all members of industry disagree with consultants who say you can increase taxes and investment will not be affected.
Pioneer has some different investment concerns than the majors, he said, because its competing projects are in the Lower 48 where there is lower government take than in Alaska. Texas and Colorado, Pioneer’s primary investment areas, do not have progressive taxes, he said, and if Pioneer had equal investment opportunities in Texas and Alaska, at higher prices investment dollars would be motivated to flow to Texas because government take in Texas allows the company to keep the upside, the additional dollars that come in when prices are high.
Compared to Lower 48 opportunities, Foley said Alaska is advantaged in size of projects but disadvantaged in costs and cycle time.
At Oooguruk, the North Slope project the company is bringing online, Pioneer faces a unique problem because a high percentage of the resource is on net profit share leases. He said he believes Pioneer has come to an agreement with the administration that net profit share can be deducted under a net tax, and asked the committee to keep that benefit in the bill.
Anadarko: a lot of things in bill are tax increases Mark Hanley, public affairs manager for Alaska for Anadarko Petroleum, said a lot of people had already delivered the messages Anadarko wanted to deliver. “A lot of things in the bill are tax increases,” he said: they’re costs to the company, so effectively are the same as tax increases.
He agreed with ConocoPhillips that if the state prevents industry from taking 5 percent of costs as deductions, it’s the same as a 1 percent tax increase.
Anadarko does not support retroactivity provisions in the bill, he said: We don’t even have regulations yet for everything the Legislature adopted in 2006.
Higher tax rates make projects less economic, he said, and also noted that progressivity was steep in the range where companies make investment decisions. He said Anadarko is concerned about the bill being too much of a tax increase — and also about all of the other things that are in the bill.
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