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Vol. 16, No. 4 Week of January 23, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Tax cap proposed

Parnell wants ACES’ base rate reduced for production from new fields

Kristen Nelson

Petroleum News

Alaska Gov. Sean Parnell wants to see more drilling in Alaska.

He says since policies of the federal government are blocking exploration and development on the almost two-thirds of land in the state which the federal government controls, that drilling must be on state lands.

North Slope drilling has been focused at Prudhoe Bay and Kuparuk — the governor wants to see significant exploration south of those fields and east of Prudhoe Bay.

He wants more investment by the oil and gas industry in the state, more jobs for Alaskans and more production.

And he believes the way to do that is “to improve the investment climate and to create more jobs to fuel that economic growth that we all need here.”

That was the message Jan. 17 when the governor rolled out proposed changes to ACES, Alaska’s Clear and Equitable Share, the tax bill passed in 2007 when Sarah Palin was governor and Parnell was lieutenant governor.

Not a complete overhaul

Parnell said he is not proposing a complete overhaul of the tax system.

“ACES has been effective at situating the state financially for the long haul.”

But with declining oil production, “we need to do more than just grow the state’s savings’ account. It’s not about growing our government; it’s about growing our economy,” Parnell said.

Progressivity would be changed to an income-tax-like bracket approach and a tax cap of 50 percent put in place for currently producing fields.

For fields outside existing units or not in production, the base tax would be lowered to 15 percent and capped at 40 percent.

The bill “increases tax credits for in-field development to spur immediate investment,” Parnell said, and allows capital credits to be used in one year instead of forcing companies to spread them out over two years.

“With the reduced flow of oil coming down the pipeline, it’s clear that in order to continue realizing the financial benefits the state has seen, we have got to grow the pie, rather than try to cut a bigger slice for government of a shrinking pie,” he said.

Companies expected at table

For this bill to get any traction in Juneau, “Alaskans — businesses, owners, employees — are going to need to step to the table and speak to the jobs that will be created,” the governor said.

“The industry itself has got to make a compelling case for competitiveness.”

Parnell said he’s been speaking with company representatives, and has told them he isn’t interested in exchanging lower taxes for nothing.

“This is about creating jobs for Alaskans.”

He said he is asking the oil industry to tell legislators and the public “whether these changes make our economy more competitive and whether they will create more jobs for Alaskans.”

Independents active in the state jumped on the bandwagon immediately — see sidebar to this story.

The Alaska Oil and Gas Association, representing producers, refiners and pipeline companies in the state, said it was encouraged by the bill.

“Alaskans are very concerned about the decline in oil production, and taxes are too high to encourage new exploration. We are pleased that the Governor seems to recognize this and his bill looks to be a great first step in improving Alaska’s investment climate,” AOGA Deputy Director Kara Moriarty told Petroleum News in a Jan. 19 e-mail.

“It is imperative that the Legislature pass meaningful changes this year. The longer we prolong a change in taxes, the longer it will take for recovery to take place,” she said.

ExxonMobil spokesman David Eglinton told Petroleum News in a Jan. 19 e-mail: “ExxonMobil is pleased to see that the Administration recognizes the need for a material change to Alaska’s oil production tax system. We are encouraged by Governor Parnell’s efforts to reform ACES.”

ConocoPhillips had a concern about timing.

“We are encouraged that Governor Parnell and members of House leadership recognize the need to improve the investment climate in Alaska,” a spokesperson said in a Jan. 19 e-mail. “We are still reviewing the specifics of the Governor’s proposal and believe the mechanisms outlined are a step in the right direction, though we are concerned with the timing of the proposed improvements.”

Revenue impact indeterminate

A fiscal note from the Department of Revenue said the revenue impact of the bill is indeterminate, but went on to list revenue reductions beginning in fiscal year 2013 with a reduction in revenue of $382 million and increasing steadily to a reduction of $1.423 billion in FY 2017.

Provisions in the bill have different effective dates. The provision eliminating the requirement that credits be taken over two years is effective Jan. 1, 2012, as is the provision extending in-field credits to the North Slope.

The institution of brackets in the tax calculation, the cap on the production tax and the separate taxing provisions for fields outside of units that are not yet in production have effective dates of Jan. 1, 2013.

A Jan. 18 status report to the Legislature from the Department of Revenue on the impact of tax changes said state revenues under the Petroleum Profits Tax, passed in 2006, and ACES, passed in 2007, exceeded the amount the state would have collected under the previous gross tax, commonly referred to as ELF, the economic limit factor.

While the production tax rate under ACES may be as high as 75 percent, the department said, tax rates in the last four years “were much lower than the maximum rate.”

“Investment in the form of capital expenditures has increased in each of the four fiscal years since implementation of the net profits tax, however, it is unclear how much of the capital expenditures were drilling or well-related and how much were maintenance or facilities-related,” the department said.

The Revenue report said that because there have been multiple changes in the state’s tax laws in recent years, “drawing any conclusion about their effect on Alaska’s investment climate is difficult. However, what is clear is that production continues to decline. The state should continue to monitor its competitiveness with other oil and gas jurisdictions worldwide and be prepared to change its tax structure as needed.”

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Independents praise bill

Five independent oil and gas companies that hold 1.1 million acres of leases on Alaska’s North Slope have come out in favor of Gov. Sean Parnell’s new bill that amends the state’s oil and gas production tax.

The companies applauding the tax changes announced by the governor Jan. 17 are 70 & 148, a subsidiary of Armstrong Oil and Gas; Brooks Range Petroleum Corp., the operating arm of the Kansas-based AVCG; GMT Exploration Co.; Great Bear Petroleum; and Savant Alaska.

In a written statement to Petroleum News, the independents said the governor’s bill “addresses the fundamental concerns of all companies that would like to explore for and develop reserves on the North Slope.”

“As the North Slope represents over 85 percent of the state’s revenue, it is imperative that the State of Alaska recognize and address the fundamental issues that have created the continuing decline of the North Slope’s production,” the independents said.

The governor’s proposal, they said, “will assist all oil companies on the North Slope.”

More importantly, it will “guide companies to find and produce oil reserves that would not otherwise be developed.”

The governor’s proposed legislation, which is designed to increase Alaska’s competitiveness as a petroleum province, “demonstrates to the oil industry that Alaska is truly ready to usher in a new wave of exploration and development that will not only address the decline of the TAPS pipeline,” but create good jobs for Alaskans.

The five independents said they are looking forward to working with the Parnell administration to “pass this bill and put Alaskans to work.”

Mark Landt of Renaissance Alaska told Petroleum News in an e-mail that Renaissance “also strongly endorses the Governor’s proposed changes to ACES. We believe these changes will put the North Slope and specifically Umiat on a more competitive basis with other oil and gas provinces and will allow us to attract development capital.”

—Kay Cashman