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Senate Resources ups ante for PPT Committee substitute increases production profits tax rate from 20 to 25 percent, keeps Cook Inlet oil under present tax Kristen Nelson Petroleum News
Senate Resources, like House Resources, introduced a committee substitute for the governor’s production profits tax, Senate Bill 305. Senate Resources’ committee substitute increases the tax from 20 percent to 25 percent of net profits and adds a progressivity tax, but keeps existing Cook Inlet oil production at the existing tax rates, basically zero severance tax. The transition provision was reduced to portions of capital expenditures in the most recent three years, and the period during which those deductions could be claimed was stretched to seven years.
Industry representatives told the committee March 18 that they couldn’t support the committee substitute.
Brian Wenzel, vice president of finance and administration for ConocoPhillips Alaska, told the committee ConocoPhillips Alaska “absolutely opposes” the committee substitute for SB 305 and said if enacted it would adversely affect investment. He said a tax increase for industry of more than $2.4 billion over the present severance tax that is possible under the committee substitute would maximize short-term state revenue and put long-term revenue at risk. He said the committee substitute destroys the balance of the original bill, which had maximizing production as its goal, and which would also have maximized state revenues and jobs. CS tax increase $1.8-$2.4 billion Committee Chair Tom Wagoner, R-Kenai, said he didn’t believe the committee substitute was too much more punitive than the governor’s bill. Wenzel said he disagreed.
The $1 billion increase under the governor’s bill was a significant tax increase but in the context of what industry intended to do in the future it could step up to that level, Wenzel said. The committee’s substitute, he said, could be an increase of more than $2 billion. In response to a question from Sen. Ralph Seekins, R-Fairbanks, Wenzel said the range of the increase under the committee substitute would be $1.8 billion to $2.4 billion.
Seekins asked if the rate under the committee substitute was punitive and Wenzel said it was too high and would result in less investment over the long term than the state would get with the governor’s proposal.
Sen. Fred Dyson, R-Eagle River, asked why there wasn’t more investment on the North Slope at today’s lower tax and Wenzel said that was one of ConocoPhillips’ concerns also. Given current investment levels, Wenzel asked if this was really the right environment for a tax increase. The credits are supposed to provide an incentive for investment, he said, but the companies are concerned about the state’s overall fiscal direction.
Wenzel said tax rates weren’t the only thing affecting investment: Prospectivity is low in Alaska, he said, and costs are high. Fiscal policy, he told committee members, is one of the levers the state Legislature has in trying to push more projects over the line. He encouraged the committee to look at opportunities to increase production, which results in more royalty, production tax, property tax and corporate income tax as more oil moves down the pipeline.
Wagoner asked Wenzel if ConocoPhillips would invest more in Alaska under the governor’s bill.
Compared to the committee’s higher tax proposal, 25 percent compared to 20 percent in the governor’s bill, Wenzel said he would expect more investment over the long term at 20/20. That represents something the three major North Slope owners — ConocoPhillips Alaska, BP Exploration (Alaska) and ExxonMobil Production — agreed on with the state, he said.
Getting to that agreement was difficult and he said he expects a large influx of investment if we can hold onto that four-way agreement. He also said he thinks the governor’s bill stands on its own as a fair balance: more revenues to the state and more investment opportunities. BP: investment the issue Angus Walker, BP Exploration (Alaska)’s commercial vice president, told the committee that North Slope production is declining, and with an investment level of $1 billion to $1.5 billion a year decline can be held at about 6 percent a year. The Department of Revenue’s latest forecast, he said, shows a 3 percent decline, a rate of decline that can’t be maintained without an investment of $2-$3 billion a year.
The real question, he said, is what would it take to double investment? Under the House Resources committee substitute Alaska would have the highest marginal tax rate in the United States, Walker said, and the House Resources committee substitute taxes at a lower rate than the Senate Recourses committee substitute.
Richard Owen, production manager and vice president for ExxonMobil Alaska Production, told the committee that the 20 percent tax rate and 20 percent credit proposed by the governor may not be low enough to allow challenged developments to be funded, but does allow the company to move forward with the investments it can currently see before it. Chevron: carving out Cook Inlet a plus John Zager, general manager of Chevron in Alaska, told the committee March 19 that Chevron applauded the elimination of current Cook Inlet oil production from the committee substitute because it believes Cook Inlet cannot support additional tax.
But, he said, because of substantive changes in many areas the company could not support the bill in its entirety.
He said Chevron agrees with many of the points the large producers made on the committee substitute March 18.
He said Chevron feels that the balance of the original bill is gone. He also said Chevron’s sense is that the original bill was highly negotiated, which often results in the best deal. Chevron wasn’t at the table, he said, so this is only his sense of the original bill.
The increase to 25 percent on tax from 20 percent is a clear disincentive for further investment, Zager said, as is changing the implementation date to April 1, especially with the high interest rates and penalties for guessing wrong on tax payments. The 11 percent interest charged by the state has been an issue for years, he said, and tips the balance in favor of the state on audits which often don’t happen until two years after the tax is paid, often resulting in an interest payment larger than the additional tax payment.
Zager said the consultants will leave and Alaskans will be left to deal with the decisions and urged legislators to vote in the best interests of Alaska. He said over the coming years investors will vote with their dollars, and more, less or the same investments will be made.
A lot of variables affect investment, Zager said, including future prices, prospectivity, technology and fiscal terms.
Industry has told the Legislature it has stepped over the line with the increases proposed, he said. Originally industry said it could live with the governor’s proposal, even though it was a huge increase in taxes.
“It was tough to swallow,” Zager said of the original tax bill.
Chevron cannot support the committee substitute, he said, and urged the committee to return to the original bill, with changes for Cook Inlet. Pioneer: original proposal a balance Pat Foley, manager of lands and external affairs for Pioneer Natural Resources Alaska, told the committee investors have a common theme: while the governor’s initial proposal was a balance everyone could accept, the balance is now being tipped to the disadvantage of many of the investors.
The investment-friendly nature of the original proposal is going away, he said, calling the $73 million exemption in the original bill significant. He urged the committee to find a mechanism to replace it. Start-up costs are enormous, he said, and the giant fields that opened the North Slope aren’t there to be found anymore, leaving the companies fighting around the edges to find smaller fields.
Foley also said he was worried by the progressive nature of the tax in the committee substitute: costs increase dramatically at higher oil prices, and Pioneer found its drilling costs for Lower 48 development wells increased 50 percent last year and expects another large jump this year.
The state’s fiscal policy needs to make it easier for the smaller guy to get in the game, he said.
Dyson asked if fuel rates were driving the increase in drilling expenses and Foley said no, it was higher day rates, what the companies have to pay those who own drilling rigs, because the number of available rigs is limited. Operating expenses also go up, as labor rates and the cost of capital for operating fields also increase, he said. Anadarko: not enough drilling Mark Hanley, Anadarko Petroleum’s Alaska public affairs manager, said the focus needs to be on the forecast for declining production. The original bill, he said, represented “a tenuous truce between companies.” For Anadarko while there was a tax increase, there was some downside protection and some improvement in exploration economics.
Anadarko wants to find more oil and stop the decline in production, and that’s where the focus needs to be, Hanley said.
Even under today’s tax system there isn’t enough North Slope drilling going on, and a new system needs to improve exploration beyond the present system, he said. The $73 million deduction was very important to smaller producers and new players. For Anadarko, removing the $73 million from the 20/20 proposal had the same effect as a 25 percent tax and a 20 percent credit, while eliminating the $73 million from a 25/20 proposal has the same effect for Anadarko as a 30 percent tax and 20 percent credit. Most of our projects would look worse than under the present system, “so I think you’ll find we’ll drill fewer wells,” Hanley said.
The credits are an incentive to invest, he said, but it’s not one to one, it’s about four to one, so credits to accompany a 25 percent tax rate would have to go up to 40 percent. He said it’s not exactly linear, but somewhere around 25/40 keeps the exploration incentives the same.
Hanley said Anadarko was still waiting for details on the committee’s progressivity plan, but it would take more of the high side.
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