|
CWN report supports oil tax reduction Group just one of statewide interests lining up in favor of changes in ACES, Alaska oil tax system, which is bringing in billions Kristen Nelson Petroleum News
Commonwealth North and major Native corporations with companies doing work for the oil and gas industry spoke out the week of March 21 in favor of reducing the state’s immediate take from oil and gas in favor of encouraging longer-term investment and production.
The Alaska Legislature’s House Finance Committee met in Anchorage March 21 to hear from corporations established under ANCSA, the Alaska Native Claims Settlement Act, and other invited businesses on House Bill 110, Gov. Sean Parnell’s proposal to reduce progressivity and make other changes in the state’s oil and gas production tax.
In its most recent study report, “Alaska’s Oil Investment Tax Structure: Establishing a Competitive Alaska,” released March 23, Commonwealth North endorsed the governor’s proposal and recommended passage this year, saying: “If it takes a special session, hold one.”
The CWN report said that there is a philosophical tension between a tax policy that takes all it can and a tax policy that provides more moderate amounts of revenue so as not to deter investment. After weighing that tension, Commonwealth North said it concluded that it is in the best interest of present and future generations of Alaskans for the tax structure to encourage long-term North Slope production, allowing producers to earn returns on North Slope investments comparable to returns they can earn elsewhere.
It also noted that the current tax system, ACES, Alaska’s Clear and Equitable Share, was enacted in late 2007 amid concern that the 2006 tax change, PPT, the Petroleum Profits Tax, had been approved by corrupt means.
ACES, passed in November and made retroactive to July 1, 2007, made Alaska’s oil and gas taxes the highest in the nation, the report said. Compared to taxes PPT would have raised, ACES brought in an extra $5 billion through 2010.
Commonwealth North said the facts are clear: the current progressivity formula in ACES has brought in billions in revenue; investing on the North Slope by major producers — “primarily maintenance of the fields and not new oil production” — has continued; and oil production is declining faster than projected by the Alaska Department of Revenue.
Responsibility of Alaskans Commonwealth North said it is the responsibility of Alaskans to ensure that the state “establishes a fiscal and tax structure that does not inhibit growth.”
Multiple factors go into investment decisions, the report said, but Alaska producers have made it clear since ACES was proposed that the current oil tax structure “is one of the main contributing factors to have a chilling effect” on North Slope investment decisions.
Commonwealth North said it “determined that a tax adjustment is required for oil explorers and producers to increase investment and stem or stop the decline in oil production and preserve long term revenue for the State.”
The intention of ACES was to combine a net profits tax and tax credits “to make the state an investment partner with the producers allowing the state to share in the risk of developing petroleum resources,” the report said, with the state distributing more than $2 billion in tax credits under ACES (2007-10), while receiving some $14 billion in production tax revenue, more than three times the amount that would have been generated under the pre-PPT gross-value based system, generally referred to as ELF because of the economic limit factor which reduced taxes on less productive fields.
Commonwealth North said the study group concluded that “trading some current oil tax dollars for the likelihood of a longer North Slope production cycle is in the best interests of all Alaskans.”
CIRI sees ‘dramatic downturn’ Corporations formed under the Alaska Native Claims Settlement Act expressed their concernes to House Finance in Anchorage March 21.
Margie Brown, president and chief executive officer of Cook Inlet Region Inc., said CIRI has significant ownership interest in Peak Oilfield Services Co. and Alaska Interstate Construction Co., both of which do a lot of work on the North Slope. Brown said she was concerned by a “very, very dramatic downturn” in estimated income from those companies, reflecting a decline in work on the North Slope.
She said the oil patch is sometimes up and sometimes down, but the magnitude of this decline was alarming. Money will go where there is opportunity, and she said she didn’t want private investment dollars slipping away from Alaska.
The easy oil on the North Slope has been found, Brown said: The remaining oil is challenged; there is risk and there needs to be an appropriate return.
She said House Bill 110 is on the right track, and CIRI supports the governor’s efforts to reform the oil tax.
Brown also said that she thinks discussion about work commitments in exchange for lowering of tax is not a healthy dialogue. CIRI requires work commitments as part of its unit agreements and leases, and she said she believes it’s stepping over the line to discuss that in taxation.
Set a fair tax regime and let free enterprise work, she told legislators, and don’t overreach when you’re in the tax regime.
Doyon Aaron Schutt, chief operating officer of Doyon Ltd., said Doyon supports House Bill 110 and would like to see provisions of the bill effective this year.
Doyon Drilling is the oldest and most successful of Doyon’s businesses, and Schutt said about three-quarters of Doyon’s corporate assets are invested on the North Slope, most heavily in drilling rigs.
Doyon is also the state’s largest private landowner, and roughly half of its 12.5 million acres were selected for resource development potential. Those factors align Doyon with the state in wanting success in oil and gas, he said.
Doyon has 1,500 employees who rely on success in the oil fields and he said the bottom line is that Doyon believes it’s time to adjust the state’s oil and gas tax structure.
Asked to distinguish between production and exploration companies, Schutt said what he sees in Alaska is a lot of small companies generally without the balance sheets to go to full production with remote fields, exploring with the intent to find something and sell all or part of the working interest to a larger company.
He said one of the things he hasn’t heard a lot about is the secondary impacts of oil tax policy on service and supply companies. Five years ago, with high commodity prices, Doyon had to search for employees, even outside Alaska, he said. Then there was the worldwide recession and lower commodity prices, and Doyon struggled to keep its contracts. As commodity prices have risen, Doyon would expect more activity and the ability to adjust wages upward, but can’t command higher contract rates, Schutt said, speculating that it’s because there just isn’t any margin left.
He also said that while Doyon was successful in keeping a lot of its contracts, other companies were not, which meant an exit of skilled workers from the state. Because companies recruit from each other, a decline in the business other companies have isn’t good for Doyon, Schutt said.
Doyon believes there are fewer opportunities now, and that a tax reduction is needed, Schutt told the committee.
ASRC: Wants to protect, grow jobs Tara Sweeney, senior vice president external affairs for Arctic Slope Regional Corp., said ASRC’s family of companies represent a broad swath of Alaska and the corporation wants to protect and grow Alaska jobs.
The oil and gas industry is the bedrock of Alaska industry, she said, creating thousands of jobs and accounting for a third of the state’s economy and most of state revenues.
But the state’s oil and gas industry is at a turning point, Sweeney told legislators: Dropping production on the North Slope could force a shutdown of the trans-Alaska oil pipeline within a decade with the loss of thousands of jobs and irreversible damage to the state’s economy.
The state needs a competitive tax structure that attracts new companies to the North Slope she said. And while some have questioned whether reforming ACES will result in increased investment, “I wouldn’t be here if I didn’t believe it,” Sweeney said.
She said ASRC Energy has had many conversations with companies with money to invest, but until the state’s tax regime is more competitive they are waiting on the sidelines and will invest elsewhere.
“ASRC Energy is losing out every day,” she said.
ACES reform isn’t about saving money for the producers, Sweeney said, but about protecting jobs and growing jobs in the future. The issue is complex, but future success depends on the state’s ability to attract investment, she said.
NANA: ACES negative impact Eric Fox and Joe Mathis, representing companies that are part of NANA Regional Corp., said the corporation supports House Bill 110 as a way of making Alaska more competitive and creating opportunities for which NANA companies can compete.
Fox said that ACES is having a negative impact on the 2,400 employees of NANA Management Services; more than half of the company’s revenues come from services to the oil and gas industry.
Mathis said Alaska’s investment climate is driving away business and said the state must become more competitive. He said the combination of what he called the “Great Recession” and ACES has been devastating.
NANA WorleyParsons, for example, is operating at half its previous staff, and the decline in business is creating an industry brain drain as people leave Alaska for better opportunities.
The services offered by NMS come into play with the production phase, Fox said, and often provide jobs for NANA shareholders. Formerly there was a charter flight into Kotzebue every week to transport workers; in the last three years that charter has only operated every other week. NANA is seeing the effects of ACES as are its shareholders, he said.
| 