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Gas tax reduces progressivity ACES base tax, royalties on gas would increase revenues; lower value of gas per boe would reduce progressivity surcharge Kristen Nelson Petroleum News
Alaska’s production tax on natural gas may need to be changed to accommodate a major gas sale from the North Slope, but as it stands now, it would benefit companies selling both oil and gas by reducing the overall progressivity surcharge.
That was the conclusion Deputy Revenue Commissioner Marcia Davis presented to the Senate Resources Committee Jan. 19. Progressivity is the increased rate the state charges in production tax when the gross value at the point of production less lease expenditures exceeds a trigger point.
Davis said the gas tax issue was set aside during the debate over the Alaska Gasline Inducement Act or AGIA when the new administration of Gov. Sarah Palin was still studying the Petroleum Profits Tax, determining if it wanted to propose a gross tax to replace the net tax enacted under PPT by the previous administration.
The gas tax issue was also parked, Davis said, during the debate over the tax changes, Alaska’s Clear and Equitable Share or ACES (passed in a special session late last year), which confirmed that the state was sticking with a net system and raised both the base rate and the progressivity surcharge. Rates for North Slope production in PPT and ACES are the same for oil and gas.
Resources Committee Chair Charlie Huggins, R-Wasilla, told Davis he’s been asked why gas taxes were raised in ACES.
Davis said “… we essentially raised oil taxes and chose not to examine, at that time, whether that rate was perfect or not for gas, because we knew that we were going to be needing to revisit the issue of gas taxes in the context of a gas project.”
The type of gas project — liquefied natural gas or an overland pipeline to market — might require different approaches because they “might have different economic drivers,” she said.
Fiscal stability was also an issue, because there was a concern that if the gas tax was changed in ACES it might have to be changed again. Davis said that when ACES was passed “it wasn’t so much a decision to increase tax on gas as it was to increase tax on oil and defer the discussion and the analysis for gas for when we did it once and did it right.”
Separate calculations a challenge
One thing that did become clear in discussions about separating gas and oil taxes was that with a net tax system it is very challenging to distinguish between oil and gas because you have to allocate costs and distinguish what is associated with gas production and what is associated with oil production, Davis said.
“Our discussion about auditors and needing staff would have been a much bigger one” during ACES if that legislation had separated oil and gas, she said, referring to staffing needs for auditors in both the Department of Revenue and the Department of Natural Resources to administer the net production tax first passed as PPT in 2006 and amended by ACES in 2007.
She said coming up with ways to allocate costs to oil and gas separately would be an administrative hurdle for the state and would be costly. It would also be a serious hurdle for industry: “It’s a huge nightmare for them to have to come up with ways to allocate costs as well.”
State in middle of pack Administration consultants provided information on other tax-and-royalty regimes and found “nearly all of the taxes in the tax-and-royalty regimes are based on net income. The net structures automatically accommodate changes or differences in the costs of development and the costs of transportation.” And, with some exceptions for marginal projects, other tax-and-royalty regimes “are essentially identical when applied to oil and gas,” Davis said.
Compared to major tax-and-royalty regimes, Alaska’s tax rate places it in “the bottom of the top third,” she said.
The real concern, however, is how competitive is a regime. And what makes a regime competitive?
What oil companies ask, Davis said, isn’t what is the government’s take, but “how much money can I make there?”
That’s because the tax rate is only part of the picture.
To know if the gas tax is right, the state needs to compare geology, costs, transportation and overall how Alaska stacks up in fiscal terms internationally, she said.
Banks: economics of gas vary The economics for gas are different than those for oil; and gas economics vary even on Alaska’s North Slope, said Kevin Banks, acting director of the Division of Oil and Gas.
At Prudhoe Bay the reservoir “is pretty well understood,” he said. The field is developed and infrastructure is in place. Some investment will be required for gas, but reservoir and reserves risks are “relatively low.” And, because the gas pipeline will begin at Prudhoe Bay, Prudhoe gas will have the highest netback value because transportation eats up much of the market value of gas, and other fields will need to move through pipelines just to reach the main line, with additional tariffs.
Point Thomson is a different reservoir — and risk situation — than Prudhoe Bay, Banks said. Although exploratory wells have been drilled and “we have a fairly good idea about the extent of the reservoir … we don’t know everything that we need to know” and there will be challenges in development of the field.
Point Thomson is a high-pressure reservoir and equipment will be expensive. Also, “none of the wells that have been drilled in Point Thomson have flowed,” so there are questions about “how the reservoir will perform” under different production techniques.
For undiscovered resources there are more questions. Anadarko Petroleum is drilling at known gas prospects, Banks said, but the earlier drilling and tests were done so long ago that Anadarko “needs to apply more modern drilling techniques and tests to access the potential.”
Exploration is expensive. Banks said he’s heard as much as $40 million for an exploration well and then more drilling is required to prove up the prospect “and we’re into the hundreds of millions of dollars at that point.”
Even then, there could be a decision not to proceed to the next step, which would be full development.
The state’s net tax system is an incentive for explorers, he said, but exploration discoveries also require transportation to Prudhoe Bay, which “means that the netback value will be lower than it is at Prudhoe Bay” because there are more tariffs to pay.
Benefit to selling both Davis said “under ACES, with the tax that we have in place … there is a huge — and I’ll say potentially huge — incentive for owners of gas to get going and sell their gas at the same time they’re selling their oil.”
The benefit lies in the progressivity surcharge, she said.
The greatly increased state revenues under ACES come primarily from the progressivity surcharge, Davis said, with only about $200 million attributable to the increase in the base tax rate from 22.5 percent to 25 percent. “The real mover was in fact progressivity, which also should tell us that essentially we’re agreeing that we take more of the pie at higher oil prices, but we’re also willing to take less of the pie at … lower oil prices.”
The way the tax works, she said, is you deduct costs and “if your gravy is more than $30” then the state is taking a larger share. “If the gravy is less than $30 … you’re home free: you have no progressivity then.”
Progressivity taxes on the margin, Banks said, which “is determined on an average basis,” an average barrel of oil equivalent. Because the “price of gas is so much lower than the price of oil on an energy basis … you’ve effectively reduced the tax rate for oil by adding gas.”
The example Davis showed included a range of prices, with Prudhoe production estimated at 300,000 barrels per day at the time of a major gas sale.
At $90 per barrel for oil and $6 per thousand cubic feet of natural gas, the progressivity surcharge on oil-only taxes would be $1.2 billion a year, but would drop to $234 million a year on oil and gas sales combined.
At an oil price of $60 and a gas price of $6, the progressivity surcharge drops to $175 million for oil and to zero for oil and gas.
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