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Vol. 11, No. 14 Week of April 02, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

PPT hearings continue

Alaska oil industry rejects revised tax bill, more amendments expected

Kristen Nelson

Petroleum News

The Alaska House Finance Committee began hearing House Bill 488 March 27. Earlier in the day, House Finance Co-Chair Kevin Meyer, R-Anchorage, said the goal was to have the production profits tax, or PPT, out of the committee by the Legislature’s Easter break, which only allows two and a half weeks, he said.

Finance Co-Chair Mike Chenault, R-Nikiski, said the committee would hear first from the administration and then major producers and independents, followed by public comments. Chenault said he thought Resources “has crafted a pretty good” committee substitute. He said it may need some tweaking and noted that he is particularly interested in Cook Inlet and the effect the bill would have there.

House Speaker John Harris, R-Valdez, said ultimately there will be a debate on the floor of the House, probably on which version of the bill to accept as a working version. Harris said he expected a “multitude of amendments” to be offered on the floor, and said this will probably be “one of those issues where it’s as wide open and free flowing on the floor of the House as you’ve ever seen.” The Republican caucus will not take a position on the tax bill, he said, and the committee chairmen will have to argue for their bills.

Chenault said he didn’t think the bill would make it to the floor before the Easter break. He said he wants a “good, clean committee process” as well as industry and public involvement, and said he wouldn’t sacrifice any of those components to have it done by Easter.

Meyer said the idea was to finish in Finance and pass out a committee substitute so members could take it with them over the Easter break.

Corbus: keep tax at 20%

The Finance hearings began with Commissioner of Revenue Bill Corbus, who commended House Resources for keeping the tax rate at 20 percent in their committee substitute, but said changes from the original bill should be “carefully scrutinized.” He mentioned removal of the transition provisions, changing the effective date to April 1 and introduction of the progressivity factor.

“Let’s not emphasize short-term revenues,” he said, but maximize the state’s income over the long run, and “keep an eye on the real prize, the gas line.”

Corbus predicted that if the tax rate is raised to 25 percent, there will be no gas line. The Senate Resources committee substitute raised the tax to 25 percent (see story in this issue).

At $40 oil under the governor’s 20/20 proposal there would be oil revenues and revenues from the gas line of $2 billion a year for “at least the next 35 years,” Corbus said, a total of about $70 billion, with the life of Prudhoe Bay extended through at least 2050.

With a 25 percent tax there would be no gas line and the life of Prudhoe Bay would be shortened, bringing in some $200 million annually through 2030, for a total of about $5 billion. What do you want, he asked: $70 billion or $5 billion?

Dan Dickinson, former director of the Department of Revenue Tax Division and now a consultant to the governor, said the governor’s proposal contained three big ideas: the current production tax system is broken; the level of investment in Alaska is disturbing; and the state needs to get a fair share of tax revenues when oil prices are high. Those were the focus of the original legislation.

“To make this work, we need to focus on investment,” Dickinson said.

Alaska is practically unique in not imposing a tax penalty for taking dollars earned here out of the state, rather than investing them here. “Dollars will flow to places were a tax incentive to reinvest is in place,” he said.

Decision point for investments

Rep. Ralph Samuels, R-Anchorage, co-chair of House Resources, told House Finance March 28 that Resources was interested in finding a decision point for investments and decided it was probably between $20 and $40 a barrel, so wanted to get well past that before imposing a progressivity tax, which it did at $50 a barrel. There was talk about inflation indexing that, he said, but it was not done. He said he was loathe to put an inflation index in the bill and noted that you could also argue that technology could decrease costs. The $73 million tax exemption in the original bill was changed to a $12 million tax credit, roughly like having the first $60 million on tax holiday, he said.

The Resources CS includes state tax credit repurchase for up to $10 million a year per company. Resources chose not to have a separate tax for heavy oil and did not address concerns about Cook Inlet.

Samuels said concerns Finance may not have heard are the risk associated with switching to a net profit tax — the risk of cost recovery as opposed to ELF — and exposure on purchase of credits.

He noted that the transitional provision — the proposal that recent capital investment could be written off against future taxes — was stripped out in an amendment.

BP: a number of concerns

Steve Marshall, president of BP Exploration (Alaska), told House Finance March 29 that the company has a “number of concerns” about how discussions on the tax bill are proceeding, and thinks the bill is “moving in the wrong direction” with the “lure of short-term revenues” hurting the potential of long-term production.

The common interest the state and industry have is production, more barrels, and the common enemy is the inevitable natural decline of fields, he said, and investment is needed to offset decline.

He disagreed with consultants who have told legislators that higher taxes won’t hurt investment. Marshall said the big challenge he faces every year is competing for investment for Alaska projects. “What’s contemplated will make my job harder,” he said.

Within BP, Marshall said, Alaska is the one place that has a business plan that goes out 50 years, from light oil to heavy oil and gas.

But that plan requires getting money for capital projects each year, he said, and the tax rate is a significant part of the economic analysis that all projects undergo. “Investments at higher tax rates are less competitive,” he said, making it harder to attract capital.

Asked by Finance Co-Chair Kevin Meyer, R-Anchorage, what would happen if the tax rate was set too high and the Legislature reduced the rate a few years down the road in face of reduced investment, Marshall said it is “very hard to restore production” when momentum is lost in offsetting decline. Over time, as oil prices have gone up and down, so has investment. The company has been trying to sustain a more stable level of activity, he said, because that is more efficient. Industry is struggling to keep decline at 6 percent, vs. a natural decline rate of 15 percent, he said, and projects it would take twice the slope-wide annual current investment rate of $1-$1.5 billion to reduce the decline rate to the 3 percent decline the Department of Revenue shows in its forecasts.

Meyer asked about the importance to the tax credit provision of the bill and Marshall said production was the most important thing in providing revenues: “Growing the pie will always be better than a bigger slice of the pie,” he said, and the “tax rate will always trump incentives.”

BP has an effective tax rate of 5.5 percent under the current production tax, and would have a 13 percent effective rate under the production profits tax. “No amount of incentives can offset a significant amount of tax increase,” Marshall said.

BP’s focus on known oil and gas

Rep. Mike Hawker, R-Anchorage, asked for BP’s opinion on the state’s revenue forecast, which includes large discoveries on the North Slope every few years.

Angus Walker, BP Exploration (Alaska)’s commercial vice president, said BP has based its assumptions on 17 billion barrels of known oil and how to get the investment to develop it. He said BP does not agree with the state that Alpine-sized fields will be found and brought online every few years. Walker said it is the opinion of experts that with the exception of the Arctic National Wildlife Refuge remaining North Slope fields are likely to be smaller. BP is projecting multiple repetitive investments in existing fields, he said, rather than new discoveries.

Walker noted that comparing the marginal tax rates of the top 10 oil producing states in the United States Alaska at 56 percent has one of the highest tax rates; with the 20 percent production profits tax the rate would go to 61 percent and be the highest in the U.S., while with the second progressivity feature in the Resources CS the tax rate would be 71 percent.

He suggested that legislators look at Alberta, which is attracting investment in heavy oil with an effective rate of 39 percent until projects pay out, at which time the rate reverts to 54 percent.

Marshall said one thing that isn’t addressed in tax comparisons is geology. In Norway, he said, it may take 10 wells to liberate a highly energized 100 million barrel reservoir, while 100 wells might be required in Alaska. One of the important things to factor into a fiscal regime, he said, is whether the fiscal regime matches prospectivity.

Walker said BP made it clear in its testimony to the House and Senate Resources that it believes the right tax rate for Alaska is less than the 20 percent proposed by the governor. BP agreed not to oppose the governor’s proposal, he said, because it is a stepping stone to gas. He said BP believes “a lower rate would make you more competitive,” and opposes the plan in the Resources CS.

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