The elimination of progressivity would be a good first step to reforming Alaskaís oil and gas taxation system, but reducing the base rate of 25 percent or credits are needed to counter the high cost of developing resources in the state.
That was the message the Legislatureís Resource committees heard from independent and major oil and gas companies Feb. 18 and 20 in hearings on Gov. Sean Parnellís proposed oil tax changes.
The governor has proposed eliminating progressivity, which increases the tax rate as the price of oil increases, along with changes to the existing credit system and the addition of the gross revenue exclusion for barrels of oil from new fields or new participating areas within existing fields.
Progressivity was introduced in changes made to Alaskaís oil and gas taxation system in 2006. The previous taxation system was on the gross and is typically referred to as ELF because it contained an economic limit factor, designed to prevent overtaxing fields which were at the end of economic production. While the goal was to prevent early shutdown due to taxation, in application it resulted in very low to no production tax on healthy fields.
The 2006 Petroleum Profits Tax, PPT, effective for North Slope oil fields, was a tax on net profits. It added credits and had a 22.5 percent base tax rate, with progressivity increasing the rate at 0.2 percent per $1 over $40 net, a 20 percent capital credit and a maximum rate of 50 percent.
PPT was amended in 2007 under Alaskaís Clear and Equitable Share, ACES, which has a 25 percent base net tax rate and progressivity increasing the tax rate at 0.4 percent per $1 over $30 net, 0.1 percent per $1 over $92.50 net and a maximum rate of 75 percent.
State revenues have grown dramatically under ACES: about $20 billion in additional revenues since it took effect, compared to projected revenues under the old gross system.
The fight for changeResponding to producers who said ACES made projects in the state noncompetitive with other options available, and steadily declining North Slope oil production, Parnell began an effort to change the North Slope production tax system in the 2011-12 legislative session. A bill was passed by the House it failed in the Senate.
For changes proposed in this yearís Legislature, the governor set out four principles: changes must be fair to Alaskans; they must encourage new oil production; must be simple and restore balance; and must be durable and long-term.
The administrationís proposed changes, in House Bill 72 and Senate Bill 21, are being worked jointly by the Department of Revenue and the Department of Natural Resources, with consulting assistance from economist Barry Pulliam, a managing director with consulting firm Econ One.
In presentations on the bills Pulliam said the biggest changes in the governorís proposal are elimination of progressivity, capital credits and the state purchase of credits from losses. The GRE, gross revenue exclusion, would eliminate 20 percent of new oil from production taxes. Carry-forward losses could only be applied against production, eliminating upfront payouts from the state and focusing on the governorís goal of increasing production by making investment in oil projects in Alaska more competitive with opportunities available in similar areas in the Lower 48 and abroad.
Who supports what?The Alaska Oil and Gas Association, a trade association including producers, explorers, refiners and the trans-Alaska oil pipeline, supports elimination of progressivity but does not support repeal of qualified capital expenditure credits, AOGA Executive Director Kara Moriarty told legislators. AOGA supports extension of the small-producer tax credit and also recommends extending exploration credits.
AOGA opposes changes to the loss-carry forward credit which would bar transferability, requiring the credits to be taken against production.
The proposed GRE, gross revenue exclusion, which would reduce taxes on new production, does not apply to existing fields, and Moriarty said it misses 80-90 percent of potential production, which would come from existing fields.
AOGA also proposes changes not included in the administration bill, including allowing the Department of Revenue the option to rely on joint-interest billings. Currently, Moriarty said, the department audits each participant separately for its share of the same pool of expenses instead of doing one audit of the expenses of a joint venture, which are found in joint-interest billings.
The producersConocoPhillips Alaska, not a member of AOGA, had similar concerns, favoring elimination of progressivity, but telling legislators the changes donít contain sufficient investment incentives for legacy fields to offset the stateís high cost environment and donít encourage investment at lower prices.
ExxonMobil told legislators that elimination of progressivity is a positive step, but said the base tax rate, 25 percent, is too high. Exxon called two aspects of ACES, the qualified capital expenditure credits and credits toward future production and infrastructure, positive, and recommended they be retained.
BP Exploration (Alaska) supported the repeal of progressivity, said the change in credits would harm some producers and recommended extension of the GRE to include new production in legacy fields.
On the issue of the complexity of ACES, Tom Williams, the companyís senior royalty and tax counsel, provided legislators with examples of how difficult it is to model results from proposed investments under the stateís existing tax system. He also illustrated the impact of the monthly calculation of production tax value, based upon changing oil prices. For the same total production tax value, at flat production rates, but with wildly fluctuating oil prices (comparable to monthly oil price changes in 2008, Williams said), the progressivity tax was 51 percent higher under the changing-price scenario than under the flat price, because progressivity is figured on a monthly basis.
Bill Armstrongís takeSmaller companies working in the state ó whether producers or explorers ó told legislators they favored changes to ACES, citing high taxes and the impact of those taxes when they look to bring in outside companies as partners.
Bill Armstrong, president of Denver-based Armstrong Oil & Gas, told legislators his company has been working in the state for 12-13 years, attracted by the resource opportunity. He said the company has identified prospects and brought partners to the state, partners like Pioneer Natural Resources which now has production at Oooguruk, and Eni which has production at Nikaitchuq. The companyís most recent partner, Repsol, is exploring on the North Slope, while with another set of partners the company is producing gas on the Kenai Peninsula in Southcentral Alaska.
Armstrong said that because Alaska is expensive the company needs partners and what they hear when looking for partners is that while Alaskaís resource base is recognized, the state isnít perceived as a good place to do business.
People who arenít here donít come because of ACES, Armstrong said.
He cited the few rigs running in Alaska compared to the number of rigs elsewhere, and called it ďanemicĒ and ďpathetic.Ē
Armstrong said the governorís proposal isnít perfect and needs to be tweaked, but said he was a supporter.
Oil and gas companies are out there to make money, Armstrong said, and said they are voting with their feet, indicating that while Alaska is a great place to find oil, itís not a great place to make money.
Brooks Range caught in changeBart Armfield, chief operating officer of Brooks Range Petroleum Corp., said the company came to Alaska in 2000 when oil prices were very low and they struggled to break even with Lower 48 prices.
What brought them to Alaska, he said, were big reserves and high production rates ó and, in 2000, an acceptable cost of doing business in the state. But that was under ELF.
The world-class reserve base Alaska has to offer isnít the advantage it was then, he said, with high oil prices and technology advancements opening up opportunities in the Lower 48.
Armfield said itís very difficult to find companies interested in coming to Alaska. Brooks Range has been here 12 years and has yet to make a revenue stream, he said.
Credits under the present system have helped keep them going, he said, even though the company doesnít qualify for exploration incentive credits because it is working prospects which arenít far enough out to qualify.
He said Brooks Range supports elimination of progressivity but changes in credits are a problem, as credits have helped keep the company going.
On the gross revenue exclusion, Armfield said that because of its constraints it would not be applicable to areas the company is working which have been part of units in the past.
Pioneer in productionPat Foley, land and external affairs manager for Pioneer Natural Resources Alaska, said the company came to Alaska in partnership with Armstrong Oil & Gas and when it put Oooguruk into production became the first independent operator on the North Slope.
But the stateís tax system has changed, he said, noting that the company came to the state under ELF and Oooguruk development was approved under ELF.
PPT as proposed would have been a modest increase over ELF for Pioneer, Foley said, but as enacted with progressivity it was much worse.
The tax system in the state needs to be favorable and stable, he said.
He said the elimination of progressivity was a positive of the governorís proposal, as was the extension of the small producer credit, gross revenue exclusion and escalating the loss-carry-forward credit.
But, he said, the proposal disadvantages smaller new projects. The loss of capital credits is a disadvantage, as is the complicated carried-forward-loss calculation.
Foley said the lack of GRE for legacy fields was a disadvantage.
And, he said, as the company works to prove up its Nuna project, the Alaska development must compete for limited capital against low-risk, fast-cycle projects in the Lower 48.