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Senate Finance works decoupling bill Committee substitute for bill expected to address cost allocation between oil and gas, tighter title, effective date of decoupling Kristen Nelson Petroleum News
Dividing costs between oil and gas would be a big consideration if the two were decoupled for production tax purposes, Alaska Commissioner of Revenue Pat Galvin told the Alaska Senate’s Finance Committee March 12.
Allocation of costs was one of the things Finance Co-Chair Bert Stedman, R-Sitka, told the committee could be in a committee substitute when the bill is next heard, expected to be the week of March 15. Stedman said the title of the bill, already tightened in the committee substitute adopted March 12, would probably be further tightened, and the effective date of decoupling oil and gas might also be addressed.
Senate Bill 305, a bill by Senate Finance, addresses the issue of what happens under the state’s production tax system, which taxes oil and gas production jointly, when North Slope gas begins to be sold in large volumes after the construction of a gas pipeline from the North Slope to market. A House bill to separate oil and gas production tax, House Bill 414, was introduced March 10 and is in House Resources. As of March 17 it had not been scheduled for a hearing.
SB305 is being pushed this session because the Alaska Gasline Inducement Act locks in taxes at the beginning of the first open season under AGIA for the first 10 years of gas delivery, and TransCanada plans to begin that open season at the end of April.
When there is a large disparity between the value of oil and the value of gas, the current production tax — Alaska’s Clear and Equitable Share or ACES — produces less revenue to the state because gas drops the overall value of the combined resources below the level at which progressivity is triggered. Progressivity is the feature of ACES which increases the state’s take at high prices.
Models run for the committee showed that at some price differentials between oil and gas the state could get less revenue for combined oil and gas sales than it would get for oil sales alone.
The solution proposed by the Finance Committee bill is to remove natural gas from the progressivity calculation.
Progressivity goes both ways Galvin showed the committee calculations which compared the state’s take when there is a large disparity between oil and gas prices ($120 a barrel for oil and $8 per million Btu for gas) and when there is less disparity ($120 oil and $15 gas), comparing the status quo (a combined tax) with standalone taxes for oil and gas and with the proposal in SB305, which separates the two for the purposes of progressivity.
When there is a large disparity between oil and gas prices the state would receive $5.5 billion from the status quo system and $7.5 billion from either standalone tax systems or SB305.
But at the higher gas price the state would receive $11.6 billion with the status quo, $11.9 billion with standalone tax systems and $10.1 billion with the system proposed in SB305.
SB305 results in a lower state share than the status quo when upside profits and gas prices are relatively high because there is no progressivity for gas, Galvin said. (Stedman said the committee has language on progressivity for gas which could be inserted into the bill.)
But SB305 also imposes a higher tax burden than the status quo when gas prices are relatively low, Galvin said.
“And I think that’s something that you really need to think about” in terms of balance, he said: The balance of revenue to the state while still providing an attractive environment for investment in the gas line when its economics are challenged.
Cost allocation issues Galvin told the committee that cost allocation issues are significant when oil and gas taxes are separated because as costs move from the more to the less profitable side it shifts the tax burden, and SB305 provides little guidance on how costs would be spit.
He said the Department of Revenue would “much prefer to have such a significant policy issue be clearly articulated in statute by the Legislature rather than leave it for” the department to develop regulations.
Costs can be allocated on an item-by-item basis or by formula or rule.
When item-by-item cost allocations are used, the producer typically makes the initial cut and the regulator checks it, Galvin said. Historically differences have led to disputes, either producer vs. government or producer vs. producer, because different producers are affected differently so there could be disputes between working interest owners.
A formula or rule method can be based on proportion of production, i.e. barrel of oil equivalent; proportion of sales; proportion of reserves, anticipated rather than current production; a rule of dominant use, either oil or gas; a rule that deems a cost to be oil related unless it is 100 percent gas related; or any combination.
Galvin showed the committee examples of the impact of different allocation methods, a variation of up to a billion dollars between types of allocation.
BP concerns The committee has yet to take testimony from producers on SB305, but did receive a letter from Claire Fitzpatrick, senior vice president with BP Exploration (Alaska) and the company’s chief financial officer, containing comments on the bill.
One concern BP has with the bill, she said, is that while the bill addresses a “potential problem that may arise a decade from now, it would come into effect today and require allocation of costs between oil and gas long before the potential risk it addresses could begin to materialize.”
The allocation of costs between oil and gas would affect some gas sold currently, she said. “Allocation threatens to make a mountain out of a molehill because the change in gas taxes due to cost allocation during the coming decade will be tiny relative to the tax when major gas sales begin, but the Department of Revenue will have to apply the allocation rules with strictest rigor lest it create a bad precedent for the major gas sales,” Fitzpatrick said.
She told the committee a solution would be to make the bill effective with the start of major gas sale deliveries from the North Slope. The substance of the bill could be locked in “for AGIA purposes without triggering prematurely all the disputes and difficulties over allocating costs to gas before production for major North Slope gas sales begins,” she said.
Fitzpatrick also said that BP asks that the committee not follow the ACES pattern of leaving “significant matters … to the determination of the Department of Revenue.” SB305 “uses the term ‘applicable to’ to describe the allocation of lease expenditures between oil and gas. Such a broad term does not provide the industry or the Department of Revenue enough guidance of the legislative intent,” she said.
Both Btu equivalent barrels and relative volumes are in use in state law, she said, and urged the committee to make a choice of the allocation method to be used in decoupling, “because that will clarify the obligation that taxpayers are held to, reducing latitude for argument about what compliance requires and making it easier for the Department of Revenue to enforce.”
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