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Oil tax legislation gets hearing Proponents, opponents argue change in Alaska production tax structure Larry Persily Petroleum News Government Affairs Editor
As expected, proponents of adding a price factor to Alaska’s oil production tax structure told legislators it’s only fair that the state receive more money at high prices, while the industry testified that any increase in taxation would be a disincentive to investment. (See relates article on page A13 of this issue.)
After 90 minutes of testimony, questions and answers, legislators took no action on the bill, which is not expected to move beyond its first committee of referral before the Alaska Legislature adjourns the second week of May.
Almost one-quarter of the 60-member Legislature attended the April 14 hearing, joined by about 10 oil industry lobbyists and company representatives in the audience.
“The system … needs a little bit of a fix,” said Rep. Les Gara, sponsor of House Bill 441 to amend Alaska’s oil production tax formula, known as the Economic Limit Factor or ELF. The state just isn’t receiving its fair share of oil profits at high prices, the Anchorage Democrat told the House Ways and Means Committee.
The ELF is an incentive formula, based on per-well productivity and field size, multiplied against the state’s statutory production tax rate of 15 percent to set the actual rate for every field. Under the formula, 18 of 21 North Slope fields pay less than a 3.5 percent tax rate — yet will produce about 40 percent of the slope’s oil this year.
And 14 of the 21 fields pay less than a 1 percent tax rate.
Production taxes comprise about 30 percent of oil company payments to the state. The rest comes from royalties, corporate income tax and property tax. Legislation adds oil price to tax formula Gara’s bill would raise rates for all fields when oil climbs above $20 per barrel, while reducing each field’s new rate when prices drop below $16. The measure also would set a minimum rate at 5 percent. The current formula includes no price factor.
Under House Bill 441, the state could see an additional $400 million a year when oil is at $30 per barrel or an average of $110 million a year at $22 oil. Below that price, the measure would have little effect on taxes.
“It’s my view that we should not be producing oil that completely escapes (production) taxation,” testified Deborah Vogt, former deputy commissioner at the Department of Revenue 1995-1999 and former state tax attorney on oil and gas issues. “I believe the tax is seriously out of whack.”
On the contrary, said Dan Seckers, chairman of the tax committee for the Alaska Oil and Gas Association. The ELF is working as intended, promoting new development, he said.
Legislators adopted the original ELF 25 years ago, and the amended version 15 years ago, to provide a tax break for smaller, marginal fields and to encourage continued investment in declining, older fields.
This year’s legislation is nothing more than a tax increase and would especially hurt projects planned under the existing tax structure, said Seckers, who works for ExxonMobil. Industry says tax change would hurt Alaska “There’s an assumption in here that an increase in taxes will not decrease production,” said Mark Hanley, of Anadarko Petroleum Corp. “Alaska is competitively challenged,” and any change in taxes will only make it worse, he said.
The third industry official to testify, BP Exploration (Alaska) Inc. tax counsel and former state Revenue Commissioner Tom Williams, told legislators they need to ask how changes in the ELF would affect future investments in the state. The tax is assessed on the wellhead value of the oil, after deducting pipeline and tanker transportation costs, but with no allowance for getting the oil out of the ground, he said.
Alaska’s current Revenue commissioner, Bill Corbus, closed the hearing by stating the governor’s opposition to the bill.
The problem, Gara said, is that declining production from the high-tax Prudhoe Bay field and new production from low- or no-tax fields is severely cutting into state revenues. The average production tax rate for all North Slope production was 13.5 percent in 1993, he said, vs. 7.5 percent this year and about 4 percent projected for 2013.
What that means in dollar terms, assuming oil prices were the same and no change in the ELF, is that the state would receive almost $200 million less in production tax revenues in 2013 than this year. Administration worries about lost investments While not offering specific predictions of lost investment dollars, the Revenue Department analysis of the bill makes clear the administration is worried about the measure’s possible effect on the industry: “It appears to us that any tax increase … may well imperil that investment.”
Regardless of the pro-and-con debate, the formula itself and its consequences can be difficult to predict.
“(ELF) stretches the brains of most of us,” said London-based Graham Kellas, principal consultant on petroleum economics for Wood Mackenzie Ltd. “It’s just a particularly highly complex formula,” said Kellas, who worked on the consulting firm’s 2002 study of oil and gas fiscal structures worldwide.
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