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Vol. 12, No. 32 Week of August 12, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

PPT special session set for Oct.18; new oil tax not bringing in what projected, says governor

A special session of the Alaska Legislature to review the state’s new petroleum profits tax, passed last August, has been set for Oct. 18.

Alaska Gov. Sarah Palin said at a press conference Aug. 3 that she has asked legislative leaders to get back to her by Sept. 4 on where they would like to hold the special session. She expressed a preference for holding the session on the state’s road system, rather than at the capitol in Juneau, saying that would allow more Alaskans to participate and to “keep an eye on things.”

Palin noted that she expressed skepticism about PPT in her state-of-the-state address in January “and I committed to revisiting PPT if it seemed to be falling short of expectations.”

“In May the federal indictments of some who pushed hard for PPT were handed down and the overwhelming issue of restoring public trust became paramount.” Both Democrats and Republicans have indicated support for a special session on PPT, she said.

At issue, she said, is whether PPT is “delivering on its promise to the Legislature and the public.” Another issue is whether PPT is “creating an environment conducive to investment and new exploration needed for a successful future.”

The Department of Revenue has completed a status report on PPT implementation and Palin said the report found that “PPT is resulting in far less revenue than had been estimated in the fiscal note” which was prepared in support of the PPT bill last year. “Also exploration companies are getting less value from the credits included in PPT than was expected.”

PPT, Palin said, is “not working as predicted.”

There are also “significant” challenges in administering the PPT, she said, “including greater difficulty in forecasting state revenues, the auditing challenges that are being faced and difficulty describing allowable expenditures in the new regulations.”

Palin said she’s directed Revenue “to prepare a proposal to respond to these deficiencies with PPT — particularly how can we make this fair with our industry partners, how Alaskans can receive appropriate value for these nonrenewable resources so … we can become less dependent upon the federal government in paying our bills” and also encourage “new investment in exploration and development.”

Costs much higher than estimated in fiscal note

Revenue Commissioner Pat Galvin said the status report on PPT found the tax has raised more money than the state would have received under the previous economic limit factor or ELF-based tax on gross production but far less than was projected in the fiscal note which accompanied the bill. He said Revenue has looked at the first returns received in April and has had conversations with taxpayers “to try to better understand some of the numbers that were coming in.”

From information the department has received, operating and capital costs are “significantly different than what was discussed during the legislative session” when PPT was passed.

In a July 25 presentation to Commonwealth North in Anchorage, Galvin said “the costs that were predicted even a year ago when PPT was being discussed in the Legislature did not bear out.” The operating expenditures which are deductions under PPT are “50 percent more than what were predicted,” he said.

The PPT status report compared North Slope production and costs for fiscal year 2008, comparing the fiscal note to House Bill 3001, the version of PPT the Legislature approved last year, with the spring 2007 forecast.

The fiscal note projected 802,000 barrels per day, the spring forecast 764,000 bpd (the fiscal note was prepared prior to the temporary shutdown of half of the Prudhoe Bay field). The fiscal note estimated operating costs at $1.076 billion; Revenue is forecasting $2.16 billion. The fiscal note showed estimated capital costs of $1.052 billion; Revenue estimates $1.9 billion. The total difference in costs is an estimated $2.128 billion in the fiscal note vs. $4.06 billion in Revenue’s spring forecast. The difference in total costs per barrel is $7.27 in the fiscal note vs. $14.56 in the spring forecast.

More than ELF, less than fiscal note projected

“In FY 2008, based on forecasted price and production levels, the PPT is expected to generate about $250 million over that which would have been generated under the ELF system. However, this is more than $800 million less than what was predicted in the PPT fiscal note,” Revenue said in its status report.

Revenue also found that exploration companies new to Alaska may not be able to fully realize the value of PPT credits. Credits can be refunded by the state up to $25 million; companies with credits beyond that would presumably sell them to existing producers, the report said. “In the first year that the PPT has been in place, however, companies holding credit certificates report that there have been few buyers for the certificates, and that those offering to buy them are doing so at large discounts.”

Galvin said those holding credits are “not finding the prices that they had hoped — that the state had hoped — would be achieved for those tax credits in order to give them full value.”

Another point discussed by the Legislature, the crossover oil price where the state receives more revenue under PPT than under ELF, has shifted up from the $26 a barrel predicted in the PPT fiscal note to $48 a barrel. The point at which the progressive surcharge kicks in has also shifted, from a projected $55 a barrel in the PPT fiscal note to more than $60 a barrel.

Revenue also faces significant challenges in implementing PPT. Galvin said the auditing required is more complex than expected and it has been difficult for the state to attract auditor expertise at state pay levels.

PPT is also making it more difficult for the state to predict its revenues. The state has always had to forecast an oil price and a production level, but now it also has to forecast oil field costs. It’s “basically a new feature that’s integrated into our budget forecast with the PPT,” Galvin told Commonwealth North. Since PPT is “based upon the net value of the oil as opposed to the gross value, it means that as costs go up in the production of oil our revenue will go down.” The addition of cost means “we basically have a much more volatile mix of variables in the picture.” As a result, he said, the state’s ability to predict what its revenues will be is “more challenged.”

Revenue expects to have a clear proposal ready for legislators on Sept. 4, Galvin said. A bill reflecting proposed changes would be ready by Oct. 18 when the special session begins, he said.

—Kristen Nelson

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