New tax bill introduced
House Finance hears reviews by Revenue, consultant, industry on House Bill 411
Rep. Paul Seaton, R-Homer, co-chair of the House Finance Committee, provided an overview April 10 of a committee bill introduced April 6 intended to raise production taxes on the oil and gas industry in Alaska.
Seaton told committee members that tax increase provisions in House Bill 411 were almost identical to those contained in HB 111 last year. The portion of that bill which passed the Legislature addressed just the credits issue, he said, not taxes.
Seaton said that worldwide about two-thirds of the wealth from oil and gas production goes to nonproducers, what is referred to as government take. The Alaska metric, he said, has been one-third, one-third and one-third - federal government, state government and producers.
But in Alaska, he said, producers are now taking 48 percent, instead of a third, compared to 37 percent last year.
The state is not getting its fair share of either legacy oil or new oil, he said.
Seaton said HB 411 would repeal the per-barrel credits, lower the production tax rate from 35 percent to 25 percent and establish three additional 5 percent tax brackets - one each at $40 production tax value, $50 PTV and $60 PTV, with the additional tax applying only to the PTV amounts above each value.
Revenue’s viewThis is not an administration bill but the Department of Revenue provided an analysis.
Ken Alper, director of Revenue’s Tax Division, agreed that HB 411 was very similar to the House version of HB 111 last year, with slight differences in supplemental tax brackets and the elimination of the $5 per barrel credit for GVR (gross value reduction) oil.
Another similarity, Alper said, is that the revenue impact is concentrated at oil prices of $50-$90.
The tax brackets are different from ACES progressivity in that ACES applied the highest tax calculation to all oil profits while HB 411 only changes the higher rate on the portion above the rate cutoff.
Revenue Commissioner Sheldon Fisher told the committee that with what appears to be legislative consensus on a partial fiscal plan using Permanent Fund earnings, there remains a budget gap in the $500 million to $700 million range.
He said the administration believes the most appropriate mechanism to fill the gap is a broad-based tax tied to the state’s overall economy.
Fisher said the Legislature set in motion a process last year to revisit fair share issues and said it may be premature to address substantial tax revisions under that process is complete.
The consultantRich Ruggiero of In3nergy, a consultant to the Legislature, said in an April 11 hearing on the bill that lawmakers should focus on what is necessary to bring on new North Slope developments. He recommended lowering the base tax, 10 percent is the number cited in his slide presentation, and making the highs higher. He told legislators that because costs rise with sustained price increases, windfall taxes will only occur with short duration price spikes. With sustained price increases, costs rise, lowering the production tax value, which includes costs the companies incur in producing the oil.
Ruggiero said that with a liquefied natural gas project in the works, the Legislature should put together a comprehensive new fiscal system before next January.
Industry oppositionThe committee also heard from the oil industry, which was uniformly opposed to HB 411.
Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, noted the unstable nature of the state’s tax policy, and said changes since 2005 have been opposed by industry, with the exception of the 2010 Cook Inlet Recovery Act, which provided incentives for industry. All other changes have involved tax increases, and were either entirely opposed, supported with concerns or opposed in the final version.
She said Alaska is only capturing 1.7 percent of total U.S. industry investment, less than $2 billion in capital annually in each of the last two years and said there is a need for at least $3.6 billion in investment capital to grow production.
She also said that at $60 oil, with costs and state taxes are removed, producers earn $31 per barrel in West Texas, $12 on the North Slope and potentially $1.50 per barrel for a new Alaska field. Where would you invest, she asked.
Scott Jepsen and Paul Rusch, testifying for ConocoPhillips, told legislators there is a robust outlook for North Slope investment, but said the state faces competition from unconventional fields in the Lower 48 where there is enormous potential, tens of thousands of drilling opportunities, with a lower cost of supply. Those opportunities are closer to market, easier to permit and are in areas with stable fiscal policies.
Taxes and royalties are only part of the equation, they said - total cost drives competitiveness.
And since HB 411 raises taxes at lower prices it will likely cause reduced investment at times when the state’s economy and the North Slope need more investment.
Alaska remains competitive, they said, because of a focus on cost reduction and efficiencies, with the core structure of Senate Bill 21 remaining unchanged for more than four years.
Damian Bilbao and Lewis Westwick, testifying for BP, said the impact on BP Alaska of HB 411 would be some $200 million, the equivalent of two rigs at Prudhoe ($70 million) and one new North Slope pad ($120 million) and said the impact could mean no drilling at Prudhoe and no spend on a new pad.
Addressing BP’s Alaska profits, they said while $830 million was reported, that included $454 million in one-time items, primarily driven by the change in the federal corporate income tax and excluded $258 in pipeline and shipping costs.
The company’s actual profit in Alaska in 2017 was $118 million, they said, noting that BP Alaska made total payments to the state in 2017 of some $543 million.
In language which mirrored his testimony last March on the House version of HB 111, Dan Seckers, ExxonMobil tax counsel, said he was disappointed to be in June testifying on another proposed tax change. He said ExxonMobil supported the AOGA testimony and echoed the testimony of other industry representatives on the negative impact the bill would have on investment in Alaska. Seckers also noted that the bill takes effect July 1, which would mean that companies would have to change course in midyear on how they figure their taxes.
In addition to others testifying live, the committee got written testimony from Benji Johnson, president and CEO of BlueCrest Energy, which operates the Cosmopolitan project in Cook Inlet. While Cook Inlet is not affected by the bill, he said that for the “long term good” of the state BlueCrest urges legislators not to support the bill.
He cited competition for investment dollars and said while super giant finds can justify enormous investments, “smaller finds are generally much more sensitive to costs” and will only be developed if returns can compete with opportunities elsewhere.
Johnson said production taxes in Alaska are “one significant component” of the higher costs in Alaska, compared with Lower 48 basins. Approval of HB 411 would, he said, provide another confirmation of the state’s disinterest in promoting competitiveness and while there would probably be short-term revenue increases, “we believe it would be at the cost of much larger lost potential growth for many years into Alaska’s future.”
As Petroleum News went to press the committee had two more hearings scheduled on HB 411.