Oil Patch Insider: More ACES trivia: Conoco’s state tax jumps from $537 million in 2005 to $3.4 billion in 2008

Petroleum News recently reported that Alaska oil and gas production makes up about 12 percent of ConocoPhillips’ worldwide output, but yielded more than 55 percent of the company’s E&P profit in the second quarter.

In the first quarter, Alaska production yielded 29 percent of the company’s total E&P profits of $840 million, but the $244 million that came from Alaska was, in part, due to more than $100 million in tax credits against the cost of exploration and development.

The State of Alaska’s production tax, referred to as ACES, takes away much of the risk at relatively low oil prices, but as prices increase, ACES takes a bigger and bigger bite.

The highest tax rate possible under ACES is 75 percent of net profits, but this level can only be reached when the net profit per barrel of oil is $342.50.

The lowest base tax rate under ACES, a progressive system, is 25 percent of net profits. This rate could be applicable when prices are $9 or $150, depending on the company’s mix of oil and gas investments, and its cost to produce that oil or gas, but somewhere in the $90-per-barrel price range, the state could easily take 50 percent of a company’s profits.

During the first two quarters of 2009, ConocoPhillips fared pretty well under ACES, but in looking at the company’s state tax hit in 2006, 2007 and 2008, a different picture emerges.

According to ConocoPhillips, in 2005, under the former production tax system, commonly referred to as ELF, the company paid $537 million in State of Alaska production and other taxes, excluding income tax.

In 2006, under the new net profits tax, called PPT (retroactive to Jan. 1, 2006), ConocoPhillips paid $914 million.

In 2007, under ACES (again retroactive), ConocoPhillips paid $1.66 billion.

In 2008, when oil prices were exceptionally high, ConocoPhillips paid $3.4 billion.

The price of Alaska North Slope crude averaged $50.14 in 2005; $61.05 in 2006; $69.75 in 2007; and $98.18 in 2008. As of Oct. 6, 2009, the average ANS price per barrel was about $63.

Also part of the larger picture is the fact that North Slope explorers and producers are eligible for a tax credit equal to 20 percent of their qualified capital expenditures (whether exploration or development). These would be taken over two years; so half would be immediately applied to reduce a company’s current tax bill, and the other half taken in the following year.

According to Alaska Revenue Commissioner Pat Galvin, because ConocoPhillips is a current tax payer (producer), it can deduct the credit immediately, and does not need to apply for a certificate, which would mean facing a lag time before enjoying the economic benefit.

Because the National Petroleum Reserve-Alaska, where ConocoPhillips has been a major explorer and is looking at developing several prospects, is within the territory of Alaska, it falls within the jurisdiction of the state’s production tax. This means expenditures for NPR-A exploration and development are deductible from state production revenue, and capital costs are eligible for capital credits, Galvin said.

Production from NPR-A would also be subject to production tax.

Outer Continental Shelf development, because it is outside the territorial boundary of the state is not subject to production tax, even though some OCS production (in the 3-6 mile band) is subject to royalty sharing with the state.

—Kay Cashman