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Vol. 18, No. 10 Week of March 10, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Senate Finance hears major producers on oil tax changes

Petroleum News

As the Alaska Senate’s Finance Committee began its consideration of the Resources Committee’s substitute for the governor’s oil tax bill members voiced concerns ranging from how best to make Alaska competitive enough to attract more investment, resulting in more production in the long term, to the cost to the state’s treasury in the short term.

The current production tax system, ACES (Alaska’s Clear and Equitable Share) — with the tax rate geared to progressivity driven by high oil prices — has resulted in very high production taxes.

Changes as proposed under Senate Bill 21, either the original or the committee substitute that came out of Resources, would result in less revenue in the short term.

Another concern voiced by lawmakers was the impact on investment of frequent changes in the state’s oil tax system. On the subject of new oil, exploration vs. development was an issue — at what point does new oil enter the pipeline and how the tax system can best encourage more barrels.

The proposed tax change eliminates progressivity and the goal has been to flatten the state’s oil tax take across a range of prices, a difficult proposition since royalty is a fixed percentage and thus regressive, with the state taking a higher portion at lower prices.

On March 5 the committee heard industry’s views on the proposed changes.

AOGA responds

Kara Moriarty, executive director of the Alaska Oil and Gas Association, led off industry testimony on the committee substitute, telling legislators that her testimony reflected the unanimous views of AOGA members, who represent large and small oil and gas companies, refiners and the pipeline.

AOGA endorses the elimination of progressivity.

Progressivity has the single most negative impact on investment and brings extraordinary complexity to the tax, she said.

The Resources Committee CS increased the base tax rate from 25 percent to 35 percent and Moriarty said AOGA does not endorse that increase, having argued in the past that the existing 25 percent base rate was too high.

Qualified capital expenditure credits are eliminated under the tax change proposal, and AOGA does not support that repeal, she said.

While elimination of progressivity is an improvement, elimination of the QCE “claws back” the improvement in the investment environment and likely creates “winners and losers” because each producer’s costs are different.

While the $5 per barrel tax credit is a benefit, Moriarty said AOGA is not certain the benefit offsets other burdens.

Moriarty also said that while AOGA supports the proposed manufacturing credit, it does not support the competitiveness review board. She said AOGA believes it would be burdensome to industry and the certainly required for investment would be placed at risk with each annual report of the board, potentially recommending changes in the state’s fiscal system. She also said there are confidentiality concerns about the board.

Moriarty said the state can’t control the high costs of working in Alaska and the distance to market, but taxes and regulations are things the state can control.

The biggest current impediment to investment is the tax structure and AOGA doesn’t believe the bill in its current form will be enough to change investment, she said.

BP’s take

BP Exploration Alaska’s director of finance, Damien Bilbao, told the committee the CS was a good step forward but said it presents opportunities to improve further.

The base rate is too high, he said, and the gross revenue exclusion, or GRE, which excludes a portion of new oil from taxes, doesn’t apply to legacy fields. At Prudhoe Bay, with more than 12 billion barrels produced, BP has “line of sight” to producing 2 billion more barrels, he said.

Bilbao said that after Alaska’s tax increases, the state no longer attracted additional investment as oil prices rose, and as the price increased and Lower 48 and worldwide investment increased, the spend in Alaska remained flat. He compared BP’s rig count in Alaska of 11 per year in 2007 with five to six a year after ACES, and said that reflected a direct impact on activity levels as a result of policy.

Alaska has a rich resource base and the talent to develop that base, he said, but is not competitive for investment because of the policy in place. If the policy is corrected, you will see investment, Bilbao said.

ExxonMobil sees progress

Dan Seckers, ExxonMobil tax counsel based in Anchorage, called the CS significant progress toward making Alaska more competitive and said ExxonMobil supports the elimination of progressivity and believes that change alone will make Alaska more competitive by fixing what he called one of the most crippling aspects of ACES.

GRE, tying incentives to production, is a novel approach, Seckers said, but won’t apply to legacy fields where resources are known. Increasing investment to keep legacy fields strong is as important as investment in new fields, he said.

ExxonMobil agrees with AOGA’s concerns about the $5 credit, he said, believing it may not be enough to offset the increased base rate.

He said he wanted to underscore two of the concerns listed by AOGA: That the base rate is too high and tax credits are important as they help with present value and offset costs over a wide range of prices.

Exxon remains very bullish on Alaska, he said, is moving ahead with Point Thomson and is the largest leaseholder at Prudhoe Bay. While the company isn’t doing wildcat exploration, exploration continues in and around legacy fields to increase recovery. Even a small increase at Prudhoe, he said, would dwarf any new discovery.

He called Alaska’s frequent changes in tax policy troubling. Exxon values stability and he noted this is the third year Alaska’s fiscal policy has been examined. Exxon hopes legislators will conclude that Alaska is not competitive and will develop a tax policy which will be balanced over a wide range of prices, Seckers said.

Conoco appreciates work on ACES

Scott Jepsen, vice president of external affairs for ConocoPhillips Alaska, said resources remaining in North Slope legacy fields are challenged, require complex, high-cost wells and targets are smaller, including fault blocks, oil on the flank of the fields and satellites and viscous oil. Because fields are mature, facilities are handling about three times as much water as oil.

A “significant” tax structure, remote location, harsh winter weather and limited access because of fragile surfaces in summer, all add to the challenges Jepsen said.

But, he said, significant resources remain, particularly in legacy fields.

Bob Heinrich, ConocoPhillips Alaska vice president of finance, told the committee ConocoPhillips appreciates the work done on ACES and believes the elimination of progressivity makes Alaska more competitive at higher prices. The CS also creates a flatter tax rate over a broad range of prices, he said, but because the base rate is too high the tax is an increase at lower prices. And the GRE will have a minimal impact on legacy fields.

The CS, Heinrich said, puts Alaska in the middle of the pack, which isn’t enough, given the challenges in Alaska.

And the CS is a tax increase relative to ACES at lower prices, in the $60 to $90 range, because of the elimination of credits. The $5 credit is not enough to offset the 35 percent base rate.

Jepsen said if the point of the GRE is to significantly increase investment and production, ConocoPhillips thinks it’s missing the point, which is that the greatest resource potential lies in legacy fields, where probably none of the remaining oil would qualify for the GRE.

He said ConocoPhillips thinks the Legislature should consider something that applies to both new and legacy fields.

The elimination of progressivity is positive, he said, and makes Alaska more attractive for investment at prices of more than $100 a barrel.

Jepsen said ConocoPhillips would like to see the base tax rate reduced and the creation of incentives for new and legacy fields.

ConocoPhillips’ chairman said in late February that if the investment climate in Alaska were to change, the company would invest more money in the state, Jepsen said.

In the short term adding more rigs could happen most quickly, he said, and some infrastructure projects could look more attractive in the longer term.

—Kristen Nelson

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