|
Legislators quiz companies, consultants House, Senate Finance committees hold Q&A sessions with panels from industry, legislative consultants and the administration Kristen Nelson Petroleum News
If the sight of legislative consultant Daniel Johnston seated next to BP’s Angus Walker at a Senate Finance Committee hearing didn’t bring a smile to your lips, you haven’t been following the petroleum profits tax in the Alaska Legislature. The committee invited consultants and industry representatives to answer questions on the PPT April 10, one of three panels that took questions in both the House and Senate Finance committees.
Johnston has been pushing progressivity — higher taxes at high oil prices — and has characterized industry’s response to that proposal as “terror tactics.”
BP and ConocoPhillips have been the most vocal in arguing that Alaska has high taxes already, along with high costs and low prospectivity, and have been telling legislators that higher taxes will result in lower investment rates and faster drops in already declining production rates.
Marianne Kah, ConocoPhillips’ Houston-based chief economist, told committee members she resents the “terror tactics” accusation. Legislators, she said, have heard a lot of concern from companies, concern that the proposed tax increase will interfere with investment plans. The tax rate, she said, has to be commensurate with prospectivity — the likelihood that there are major resources to be found and developed in an area — and costs. Russia has costs similar to Alaska, she said, but ConocoPhillips is looking at the potential of 750 million barrel fields in northern Russia, fields which make it possible to pay higher taxes, compared to much smaller new field prospects in Alaska.
The companies “had to swallow hard” to agree to the governor’s proposed 20 percent tax and 20 percent credit proposal, Kah said. If the existing severance tax, with its economic limit factor, had just been converted to progressivity that would be a 15 percent rate, she said.
Walker, BP Exploration (Alaska)’s commercial vice president, said Alaska North Slope production is declining at 6 percent a year and needs more investment. To meet the Department of Revenue’s production forecasts investment would have to double, he said, from present levels (for all companies) of $1 billion to $1.5 billion a year to close to $3 billion a year. He said it is BP’s opinion that the lowest possible tax rate will attract the most investment: zero severance would be the best rate, he said, with 15 percent better than 20 percent and 20 percent better than 25 percent.
Dan Dickinson, former director of the state’s Tax Division and currently a consultant to the administration, agreed with Walker that current high oil prices are masking the production decline.
Econ One consulting economist Tony Finizza said a lot of his company’s testimony had been focused on existing fields, some on exploration. Econ One, consulting for the Legislature, believes a 20 percent tax with a 20 percent credit, the so-called 20/20, or even a 25 percent tax with a 20 percent credit, 25/20, would not stifle investment and would encourage new exploration.
CRA: conventional economic theory Consultant David Bramley, vice president of CRA International, who studied the tax proposals for ConocoPhillips, told the committee CRA looked at the issue independently and is “not unmindful our reputation” is at stake. CRA put forward views quite different from earlier consultants on the impact of changing government take on investment, he said, and that opinion is one we “absolutely stand by.”
He said CRA’s opinion that when taxes go up investment attractiveness goes down is “founded in conventional economic theory.” If others are arguing that the laws of economics don’t apply in this case, the onus should be on them to prove that assertion, Bramley said.
CRA selected OECD countries (developed countries which are members of the Organization for Economic Cooperation and Development) with mature oil and gas operations as a comparison to Alaska, Bramley said, and on that basis Alaska, even with the existing severance tax and ELF, “doesn’t look attractive,” which is the most powerful explanation of low present investment levels.
The marketplace is the heart of the tax-credit rate issue, he said, and the relevant fiscal comparisons for Alaska are with areas with similar prospectivity and costs. With that comparison, he said, existing Alaska terms look tough on new investment.
Anadarko, Chevron: PPT worse Mark Hanley, Alaska public affairs manager for Anadarko Petroleum, said 25 percent tax and 20 percent credit is worse for Anadarko than 20/20 on exploration. He said Anadarko views the proposed PPT as a worse system than the present severance tax, although the company may still explore at higher prices under the proposed new tax.
As for assertions that 25/20 is better for exploration at low prices, Hanley said Anadarko generally doesn’t have prospects that are economic at low oil prices.
John Zager, general manager of Chevron in Alaska, said the ratio of tax to credit depends on where you are in the life cycle of exploration vs. production. Production companies look at the tax rate, he said. While credit may be more advantageous to explorers, for a mature basin such as Cook Inlet, a 20 percent tax requires a 26 percent credit.
What is the benchmark? Legislative consultant Daniel Johnston compares Alaska to worldwide oil and gas tax systems and has told legislators that Alaska is not getting the tax rate it could, based on international comparisons. He has argued that to have a 21st century tax system, the state needs a progressivity feature.
Johnston said some of the comparisons companies made on the proposed increases are based on the old ELF system, but with oil prices so much higher, “I’ve begun to abandon that as a benchmark.”
Once the producers agreed to 20/20 that became an appropriate benchmark, he said.
Johnston said he hoped Alaskans were comfortable that the Legislature was not really talking about a huge difference, just a 2 percent increase in government take as the proposed tax rate goes from 20 percent to 25 percent. At $25 a barrel oil prices the net profits tax won’t work, he said, but at higher prices there’s profit to be made by both the oil companies and the state.
John Barnes, Marathon Oil’s Alaska production manager, said Marathon is not one of the producers that agreed 20/20 made sense.
“It does not make sense in Cook Inlet,” he said, and Cook Inlet is where the North Slope will be in a few years.
BP’s Walker noted that he and administration consultant Dan Dickinson were the only ones who were actually in the room when the agreement was struck between the governor and CEOs of BP, ConocoPhillips and ExxonMobil on the proposed PPT.
The producers had made an offer to the administration of a 12.5 percent tax rate with a 25 percent credit. At the end of the day, he said, the companies agreed to 20/20 along with transition credits and a July 1 start date as a means to move ahead with gas.
The companies were always clear with the administration, Walker said, that industry would engage in debate and let the Legislature decide the tax rate. Industry has always believed 20/20 is too high, he said.
| 