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PPT, contract on deck again in Juneau Gov. Murkowski tells legislators time is now for Alaska gas project, before Lower 48 locks in agreements for foreign LNG Kristen Nelson Petroleum News
The Alaska Legislature gaveled in for its second special session of the summer July 12, heard from the governor, did a couple of days of committee work in the Senate and then took a week off so members could attend out-of-state events scheduled before the summer became a marathon of trying to reach agreement on the production profits tax and the gas line fiscal contract.
The administration introduced a new PPT and some amendments to the Alaska Stranded Gas Development Act.
The bills were heard and held in the Senate Special Committee on Natural Gas Development July 13-14; House Finance is scheduled to take up the PPT bill July 25.
The PPT retains the 20 percent tax rate and 20 percent credit rate introduced in the regular session and incorporates some changes made by the Legislature to earlier versions, but not progressivity, which kicks up the tax rate as the price of oil goes up.
There is a ceiling for Cook Inlet oil and gas based on the current severance tax with the economic limit factor.
Robynn Wilson, director of the Department of Revenue’s Tax Division, told the committee that the administration doesn’t believe a tax floor is appropriate. The bill includes the 2 for 1 provision for transitional credits — those for investments in the five years prior to the new tax — developed by the Legislature.
Net vs. gross Asked by Sen. Kim Elton, D-Juneau, why the administration objects to a tax on the gross, Wilson said the administration believes that a tax on the net encourages more investment.
The present production severance tax is based on the gross oil price at the wellhead, with transportation costs deducted.
Dan Dickinson, a former director of the Tax Division and now a consultant to the administration, said a tax on the net makes investment in the state more attractive. On more expensive projects, such as heavy oil development, deductions on the net take those higher costs into account, while a tax on the gross doesn’t reflect the costs and investments necessary to bring on production.
Sen. Fred Dyson, R-Eagle River, asked about royalty reductions as a way to adjust for higher-cost projects and Dickinson said that to provide an effective reflection of higher costs on projects like heavy oil there would need to be changes in both royalties and in a gross production tax. Dyson said the Legislature has provided royalty relief in Cook Inlet, and Dickinson said he believes the Legislature set a fairly high standard for royalty reduction, and that it is burdensome on industry to meet the standard.
Van Meurs: formula to encourage investment Pedro van Meurs, the consulting petroleum economist who helped the administration develop the PPT, participated by phone, telling the committee the PPT is a “formula to encourage reinvestment” in the state. If Alaska doesn’t encourage reinvestment, van Meurs said, companies will take profits made in Alaska and invest them in areas which encourage investment.
Van Meurs told Dyson that investment credits have created an incentive to invest elsewhere and said the state’s goal should be to double investment.
Elton asked about fixing the ELF and van Meurs said there were “so many friction points” in the existing Alaska gross severance tax. Alaska would need a sophisticated gross formula-based system, and it would be complicated, van Meurs said.
Deductions a concern Committee Chairman Ralph Seekins, R-Fairbanks, said his constituents are concerned about a tax on the net and said legislators need to be able to explain what net costs would be.
Wilson said it was comparable to building a home: net costs are the direct costs like nails, a nail gun and the carpenter’s wages; indirect costs — which would not be deductible for purposes of taxation — would be things such as marketing costs for the home and donations the builder might make to charities.
Deductible costs would be lease expenses, she said.
Dickinson said at a field like Prudhoe Bay, which BP operates, partners ConocoPhillips and ExxonMobil verify expenses at the unit before paying their share; the state would start with those numbers, he said, and then apply its own tests, one of which would be to look at federal income tax returns.
Committee will work on SGDA amendments Jim Clark, the governor’s chief of staff, said the administration will work with the committee on the bill amending the Stranded Gas Development Act, which was introduced in a much shorter format than in the previous special session. Clark agreed with the committee that legislators needed to see the limited liability corporation agreement. There are some issues among the producers on the LLC, he said, but they’ve run out of time and need to get them resolved.
Sen. Gary Wilken, R-Fairbanks, told Clark the LLC is a showstopper and said he was not sure the contract could proceed without at least a broad template of what that agreement contains.
Governor urges action Alaska needs to get on with a gas pipeline project before imported liquefied natural gas eats up contracts in the Lower 48, effectively locking the state’s gas out of the market, Gov. Frank Murkowski said July 13 in an address to a joint meeting of the Alaska House and Senate. He said he intends to work with all members of the Legislature to get the job done, no matter how long it takes.
The governor told the press afterwards that nobody was getting out of Juneau without taking a stand on the gas contract. He said he was working with the legislative leadership to identify what they need to have changed in the contract, which requires legislative approval once the governor and the producers finish negotiating amendments to the draft contract which was presented in May.
In urging legislators to move ahead on both the PPT and the gas contract Murkowski said 20 years ago Alaska’s gas would have faced competition only with other North American gas, but now the competition is from worldwide LNG — LNG from countries where lifting costs are 5 cents compared to much higher costs in Alaska.
LNG and reserves’ tax double threat The governor said there is a double threat to the Alaska gas pipeline project: imported LNG and the reserves’ tax which will be on the ballot in November. He called the tax punitive and said it would add $8 billion to $10 billion to project costs. The contract will protect the project from the reserves tax, he said, but only if it is in place by November. That’s the reason for holding the special session now, he said, so the administration can get the necessary approvals and negotiate changes to the contract with the producers in order to obtain ratification before November.
“Those who advise you to gavel out and go home without acting or to wait until November are either ignorant of the LNG and the reserves tax threats to this project or don’t care,” the governor said.
To those who might wonder why he reintroduced a 20/20 PPT when legislators had twice rejected it, the governor said a 20/20 PPT will get the state a gas pipeline agreement and more investment on the North Slope. “This means two more Prudhoe Bays,” he said: “13 billion barrels of heavy oil … and 12 billion barrels of oil-equivalent gas.”
The governor urged legislators to stop focusing on what the producers get and focus instead on what Alaska gets.
The 20/20 PPT was reached in a negotiation: the producers wanted to pay 12 percent. He noted some have said that if the producers would pay a 20 percent tax they would pay more.
“If there is an attitude that anything the producers agree to is unacceptable, the project is doomed to failure,” he said.
The administration is working on changes to the contract, he said, among them no fiscal certainty on oil until project sanction, which would be four to five years from now, and fiscal certainty for 14 to 16 years for construction of the project and capital recovery.
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