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Vol. 11, No. 13 Week of March 26, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Resources kills clawback

House Finance to start on governor’s production profits tax bill in late March

Kristen Nelson

Petroleum News

House Resources began hearing House Bill 488, the governor’s proposed production profits tax, the PPT, on Feb. 21. On March 17 the committee voted out an amended committee substitute. The PPT would replace the state’s severance tax on oil and gas. The present tax, with its economic limit factor, the ELF, has not captured profits for the state at high oil prices. The state receives the most oil and gas revenues from royalties, which are set in lease terms. Royalties, along with property taxes and state corporate income tax — and the present severance tax — are regressive: they take a greater proportion of profits at low oil prices than at high. The Murkowski administration has promoted the PPT as progressive, taking a larger proportion at high oil prices and a smaller proportion at low prices.

Resources co-Chair Ralph Samuels, R-Anchorage, said at a press briefing after the vote that he thought the biggest change the committee made to the bill was the addition of a progressivity element in addition to the 20 percent PPT on net profits. The progressivity added in the committee substitute kicks in at a West Texas Intermediate price of $50 a barrel and imposes a 0.3 percent tax on the gross.

The committee also voted 5-4 (with Samuels and co-Chair Jay Ramras, R-Fairbanks, among the dissenters) to remove the transition provisions, what has been called the clawback, which would have allowed companies to take tax credits for investments made in recent years.

Samuels said the committee’s biggest accomplishment was the work it did in educating everyone on Alaska’s production tax system.

Ramras called it a four-week investment seminar on Alaska’s resource wealth and said he believed the committee moved the debate away from the administration’s emphasis on a 20 percent tax and a 20 percent credit. People heard this described as 20/20, Ramras said, and mistakenly believed it was a wash for the companies.

The PPT has both a 20 percent tax rate on net profits and a 20 percent credit against the gross for investments.

The committee amended the CS by removing gas from the progressivity portion of the bill.

Rep. Kurt Olson, R-Kenai, said in a statement that the amendment “helps to protect production in the inlet by holding the tax rate steady by removing gas from the progressivity portion of the bill.” The impact of the PPT on Cook Inlet is a concern. The basin has declining oil production and gas production which isn’t being replaced rapidly enough to support all existing uses.

Ramras said he believed gas should be taxed progressively, along with oil, but said he was supporting the amendment because he was hesitant to see oil and gas progressivity tied together in the same formula, since prices of the commodities are affected by different events. He said he would like to see gas progressivity tied to an appropriate gas indicator such as Henry Hub.

Rep. Paul Seaton, R-Homer, said he supported the amendment but wanted to look at progressivity on gas and understood that Samuels was going to ask Econ One Research for information on how a gas progressivity provision might be structured. That information would be forwarded to Finance, the bill’s next committee of referral.

Transitions dropped from bill

The committee also voted in favor of an amendment by Rep. Mary Kapsner, D-Bethel, to drop transition provisions from the bill.

The current severance tax on production is a tax on the wellhead value of oil and gas — the gross profits — while the proposed production profits tax or PPT is a tax on net profits. The transition provisions allowed companies to charge Alaska investments over the last five years off against taxes in the future. The administration had estimated the value to companies at about $1 billion.

The committee had already reduced the transition provision from investments over the last five years to investments over the last three, and spread the recovery over more years, substantially reducing the value of the provision.

Kapsner had just lost on an amendment to make the effective date of the tax Jan. 1, rather than the April 1 date in the committee substitute. Making the tax retroactive to Jan. 1 was described in the discussion as unfair.

Kapsner said the transition provision was also a retroactivity issue.

Rep. Harry Crawford, D-Anchorage, said the state has under collected taxes for a number of years, with the companies making profits in which the state should have shared. The state needs to raise its taxes to be in the range of international government take, he said.

Seaton said he did not believe that the transition provision would influence decisions going forward, investments which the Legislature hopes to increase with the PPT, and said he intended to vote in favor of it.

Samuels and Ramras both voted against this amendment, which passed 5 to 4.

Most agreed on change to net profits

Crawford cast the only dissenting vote when the bill was moved out of committee.

He said March 16 in committee discussion that he believed the state was putting all its eggs in the basket of high oil prices with a net profits tax. Crawford said he believed the net profits tax wouldn’t protect the state at low prices. In 1986-89 battles over what to do about taxes legislators decided to give up some of the high end of oil prices to protect the state at the low end.

He said he believed the Legislature could have fixed the existing system with a graduated severance tax. Crawford is concerned that accountants can find a creative way to get out from under a net profits tax.

Our foundation is rotten with a net profits tax, he said: “The whole concept is a pig and we’re putting perfume on the pig.”

Seaton proposed an amendment to change the trigger for the progressivity portion of the tax from $50 to $45. The amendment was defeated, with both Ramras and Samuels arguing the importance of settling on a tax that would not deter future investment.

Ramras said getting more oil in the pipeline was his highest priority and making sure that the economics were there to produce the last barrel of oil, rather than just the next barrel of oil, came second, with a new tax paradigm his third priority. He said Jim Bowles, president of ConocoPhillips Alaska, visited with committee members and talked about the partnerships in the North Slope’s legacy fields, and how investment opportunities had to meet the investment profiles of all three major companies in order to be funded.

There is an enormous amount of oil left in small fields on the North Slope, many within legacy fields controlled by all three producers, Ramras said, and he wants to make sure that Alaska gets the last barrel of oil possible — as well as a gas line — as North Slope production gradually changes from today’s 100 percent oil to a blend of oil and gas and ultimately to largely natural gas.

Samuels said he’s concerned about the tradeoff where projects start to fall off the bubble for investment. He said he didn’t believe all of the numbers of any of the economists — the Legislature’s, the administration’s or the oil companies’ — but didn’t want to leave any money on the table. If investment declines, he said, and productivity declines, it hurts the entire state.

The companies won’t say what their decision-making point is, he said, noting that he wouldn’t disclose that information in his own business.

Assuming that companies base their decision making on prices in the $30s and $40s, the goal with the progressivity element in the committee substitute was to get as far away as possible from that decision-making area, Samuels said.

If the tax is too high, he said, the companies won’t leave — they have too much invested in the state. But they can take some of those projects that are on the bubble and not spend that money.

And while production won’t “drop like a rock” it will begin to decline, he said.

Once the oil is gone you wish you’d taxed it more, Samuels said, but if the tax is too high there is the risk some oil will never get developed.

Next stop: Finance

The bill goes next to House Finance and then to House Rules.

Finance is busy with the fast track supplemental and the operating budget and Finance co-Chair Mike Chenault, R-Nikiski, said March 20 that the committee may not take up HB 488 until as late as March 29, when the House is expected to finish with the operating budget on the floor.

Chenault said he wasn’t sure how many members of House Finance got to sit in with House Resources or listen to that testimony, so the Finance plan is to start with the governor’s original proposal and what the intent of that bill was and then roll in what Resources did and get a consensus of Finance members as to whether that is the way to go and what other options Finance has.

Chenault couldn’t say when Finance would finish with the bill, or even if it would get out of the committee before the Legislature’s Easter recess in mid-April.

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Heavy oil not in bill

Rep. Ralph Samuels, R-Anchorage, co-chair of House Resources, told committee members March 17 after the bill was voted out of committee that he regretted that there weren’t heavy oil provisions in the bill.

Rep. Norm Rokeberg, R-Anchorage, chairman of House Rules, the bill’s last stop before it hits the House floor, told reporters March 20 that he is working on a standalone bill that would dovetail with the production profits tax and would be directed at heavy or challenged oil production on the North Slope.

He said the bill would dovetail with the PPT and provide additional tax credits for heavy oil recovery, particularly new technology such as CO2 flooding and thermal or steam flooding of heavy oil deposits. The 20 billion barrels of heavy oil on the North Slope is the future of Alaska in terms of maintaining flow through the pipeline, he said.

Rokeberg said he didn’t want such a bill to get wrapped in a bill that might be adopted by reference for the gas line.

He said he wants to see discussion on additional credits for frontier oil and challenged oil, heavy oil and perhaps carbonate areas like Lisburne and possible Liberty.

—Kristen Nelson