As the Alaska Legislature moves toward an April 15 adjournment, a bill basically two years in the making is finally moving to its first floor vote.
Senate Bill 192 began life in the Senate Resources Committee earlier this session after the Senate refused to consider the governor’s tax change bill, House Bill 110, which the House passed last year.
Senators said at the time that they needed more information before making any changes to the production tax system initially crafted as the Petroleum Profits Tax, or PPT, in 2006 under Gov. Frank Murkowski, and then rewritten in 2007 as ACES or Alaska’s Clear and Equitable Share, under Gov. Sarah Palin.
Senators began working with consultants last summer and work on the bill began in Senate Resources in February with hearings. The bill which came out of Senate Resources in early March had its first hearing in Senate Finance March 13 and has been on the committee’s agenda pretty continuously since then.
Senate Finance substantially reworked the Resources bill, passing it out April 11. It was expected on the Senate Floor April 12, as this issue of Petroleum News was going to press.
What the bill doesAccording to highlights from the Senate Bipartisan Working Group, the bill addresses excessive progressivity at high oil prices, freezes the state/industry split of profit above $120 a barrel and creates a framework for incentivizing new oil production of changing progressivity from net to gross. The bill creates three levels of progressivity: for existing production; increased production in existing fields; and new field production. It also decouples oil and gas taxes, reduces marginal tax rates and limits state contribution to exploration to a flat 65 percent. A 10 percent tax floor for legacy fields is included in the bill, as is a petroleum information management system in the Department of Revenue.
Changes to the bill — the committee adopted version Y on April 11 — included increasing the trigger for incremental production to $75 from $60; extending reduced tax rates for new production from seven years to 10; and increasing the trigger for when progressivity kicks in to $90 from $60.
Special session likelyGov. Sean Parnell told the Associated Press April 11 that he will call legislators back for a special session to make sure the House has time to evaluate a Senate oil tax bill.
Parnell told AP he also wants action on an in-state gas pipeline bill, as well as on operating and capital budgets and full funding for his performance scholarship program. He said if those items are not completed by the end of session, they could be part of a special session.
The governor told AP that if there is a special session he would prefer that it be “sooner rather than latter,” between the end of session and June, but said if the Senate bill is “completely different than anything anybody in the House has ever seen,” then lawmakers may need some time out of session to gather more information.
“The Senate has run out the clock after two years — two legislative years — and for me to then jam the House into a session on a completely new proposition and expect them to finish it in 30 days could be a bit ambitious unless it’s something like what they’ve seen before,” Parnell told AP.
Changed ratesJanak Mayer, manager in the upstream and gas practice at PFC Energy, and the manager for the Alaska Legislature work, told Senate Finance April 11 that based on available data from the Department of Natural Resources, estimated decline rates for the major producers based on 2007 and 2010 data would be 7.2 percent for BP, 6.6 percent for ConocoPhillips and 4.4 percent for ExxonMobil. Mayer noted that the bill requires use of 2008 and 2011 data, but 2011 data is not yet available.
These calculations would be the basis for determining the incremental production which qualified for a reduced tax rate; the numbers would be recalculated each year.
Mayer illustrated how changes to rates adopted in the April 11 version of the bill would encourage development of additional oil. He said expensive new developments under ACES are very challenged economically and wouldn’t meet hurdle rates for development. By extending the tax-break period out to 10 years and raising the trigger point for progressivity to kick in to $90, the economics get noticeably better, he said, but possibly not good enough to surpass a company’s hurdle rate for capital, much less to be competitive against other opportunities the company may have.
The adviceThe Legislative Budget & Audit Committee contracted with PFC Energy for analysis on oil tax issues; Pedro van Meurs also did work for the Senate over the summer and early in this session.
When Senate Finance heard industry reaction to the bill April 6, Finance co-Chair Lyman Hoffman, D-Bethel, disputed assertions by ConocoPhillips Alaska that changes would be required for Alaska’s tax system to provide incentives for investment over a broad range of prices.
Hoffman noted that consultants have said there are no problems with ACES at oil prices of $100 or $110, which is why senators worked on fixing ACES at the high end, north of $100 and $110. Are our consultants wrong, he asked?
Scott Jepsen, ConocoPhillips Alaska vice president of External Affairs, noted that “the consultants aren’t investing any money. The producers are the ones that are looking at the opportunities that we have in the Lower 48 and other places and around the world,” and in comparison, “... Alaska does not have the same attractiveness for that incremental capital investment as we see in other places.”
At an April 9 hearing, Mayer told the committee he noted that in a number of discussions with industry he’d heard remarks that “the committee’s consultants had suggested either that ACES was pretty good at $100 a barrel, that it was north of that where the problem lay, or perhaps around a particular level of government take for instance the 75 percent of government take was a desirable level to achieve.”
While the committee may have been told that by other consultants, “It’s not something that PFC has ever said either in formal testimony or in other interactions,” Mayer said.
BenchmarkingReferring to a slide benchmarking Alaska tax rates against other fiscal regimes, he said what PFC has said is at $100 per barrel ranges, government take under ACES is in the mid-70 percent, “and that is very, very high by OECD standards, second only to Norway and certainly in particular much higher than the levels of government take we see elsewhere in the Lower 48 which are the places in particular Alaska at the moment is competing with for investment capital.”
Lower 48 states have significantly lower costs in many cases than Alaska, he said, “and that only enhances their competitiveness compared to Alaska.”
Norway is different than Alaska because it has an active national oil company and also participates in equity through another vehicle, “and is far more able to ensure constant ongoing investments in its oil venture through those vehicles than a state that doesn’t have those things has,” Mayer said.
He said PFC has said that “particularly for new investments, where costs are very high and projects are economically challenged, there needs to be significant movements in government take to enable those to occur and be incentivized.”
That can be done by reducing overall government take as HB 110 does, or by reducing government take in more targeted ways.
An overall reduction is simpler, he said, but “the cost of that simplicity is that one has to move a lot of cash across the table in order to incentivize the new production because one is also providing a lot of benefit for activity that is currently economic under the current system.”
To avoid benefit to activity that is already economic, “one has to find a way of specifically incentivizing new projects, incremental production from existing fields and to do that one encounters some of the complexities that we’ve been discussing over the course of the last two weeks.”
The Associated Press contributed to this story.