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Majors, smaller companies oppose bill Producers, as well as developers of new projects, call HB 247 bad tax policy, view it as tax increase promoted as tax credit reform KRISTEN NELSON Petroleum News
Industry testimony before the House Resources Committee in late February and early March was no surprise - companies producing oil and gas in Alaska along with those developing projects and exploring for oil all oppose the changes proposed by the Walker administration in House Bill 247.
Testifiers from the state’s major producers, BP, ConocoPhillips and ExxonMobil, characterized the bill as a tax increase. Smaller producers and companies working to develop production in the state said credits provided in the present tax system help them bridge the gap before production.
Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, the industry trade association, led off the testimony, emphasizing the importance of jobs the industry provides in the state, both direct and indirect, and the state revenue and local property tax the industry pays. She also reviewed the number of oil and gas tax policy changes Alaska has seen - five in the last decade from aggregated ELF in 2005 through the Petroleum Production Tax in 2006, Alaska’s Clear and Equitable Share in 2007, the Cook Inlet Recovery Act in 2010, and Senate Bill 21 in 2014.
Costs are two times higher than inflation, she said, and with current low oil prices companies have negative cash flow.
Specific concerns with HB 247, Moriarty said, include the increase in the minimum tax from 4 percent to 5 percent; the loss of value of net operating loss credits; the limits on credits which she said would discourage investments by smaller companies; increase in interest rates; waiver of confidentiality provisions; and what she called a disguised tax increase through change of the application of gross value at the point of production.
Independent view Bill Armstrong, president of Armstrong Oil and Gas, said the Pikka prospect his company is developing on the North Slope between Alpine and Kuparuk would add production to the trans-Alaska oil pipeline, but stressed that the state needs to get wells drilled. Every single field on the North Slope was found by accident, he said, by wells put down to test for things other than the producing reservoirs discovered.
Armstrong left the state after ACES was enacted because you couldn’t make money under that tax policy, he said, and Senate Bill 21 finally made Alaska competitive with the Lower 48.
He said the big issue is the 35 percent net operating loss credit because it enables his company to weather the time between drilling wells and getting production on line.
Reducing the annual per-company limit on the NOL to $25 million, as proposed in HB 247, would be “a crushing blow” to any company in the position Armstrong is, he said.
Armstrong said the NOL credit provides a massive return on investment to the state. He said he understands the state is running a fiscal deficit, but said Alaska is a petro state and all petro states are suffering from low oil prices, but have rainy day funds to allow them to weather a year or two of low prices.
Small producer Pat Foley, senior vice president for Caelus, a company producing at Oooguruk and drilling exploration wells at Smith Bay, said its Nuna development is stalled waiting for price improvement.
When the governor vetoed $200 million in oil tax credits last year it sent a “shockwave through lenders,” Foley said. Caelus has a major financial backer, but other equity providers are watching to see what happens, were spooked by the change or simply backed out.
And those credits, he said, are not free money - they have to be earned through work.
Foley said the goal of HB 247 appears to be generating revenue and reducing the state’s obligation to pay out credits. He said he thinks that policy is shortsighted because it will result in less investment and less production going forward.
The Nuna project is “on the bubble,” Foley said, with some price stabilization needed and confidence that the fiscal regime is not going to change.
He said life-cycle benefits to the state would be $1.75 billion, against a potential of less than $250 million in future NOL credits from the state.
Large producers Paul Rusch, ConocoPhillips Alaska’s vice president of finance, told the committee ConocoPhillips operated at a loss last year in excess of $100 million in Alaska.
The increase in the minimum tax from 4 percent to 5 percent would be a 25 percent tax increase when industry is in a negative cash flow position, he said, with the hard minimum tax floor representing a potential tax increase when oil prices are low.
Various changes proposed in HB 247 result in a tax increase, Rusch said, including the increase in the interest rate for under and over payment of taxes, the monthly accounting for production tax credits vs. the current yearly approach, the NOL calculations.
He also noted that the increase in the interest rate on taxes due applies a punitive rate when payments are made in good faith and on time.
BP Exploration (Alaska)’s Joe Reese, the company’s senior managing tax counsel, told the committee the company currently has a negative cash flow, spending more money than it is taking in, and is looking at a 13 percent reduction in force and working with partners at Prudhoe Bay to right size there.
He said at current prices BP receives no production tax credits from the state, nor does Prudhoe Bay production attract oil production tax credits.
The change in the minimum production tax from 4 percent to 5 percent would be a 25 percent increase for BP, as BP currently pays at the top end of the tax, he said.
He said BP views the interest rate increase as a material change. The current law sets interest at 3 percent above the federal funds rate, calculated on simple basis, while the proposed change would set the rate at 7 percent above the federal funds rate, compounded quarterly. BP is also concerned about changes in the confidentiality provisions, he said, viewing that as a slippery slope because the bill proposes expansion beyond aggregate to individual disclosure. Reese said BP believes that is a state and federal constitutional issue and believes it is not possible to partially waive taxpayer confidentiality.
Dan Seckers, tax counsel for ExxonMobil, said the company views HB 247 as a “very troubling piece of legislation.”
He characterized it as a “significant tax increase” on the oil and gas industry, with the increase in the minimum tax representing an increase of at least 25 percent on gross income for the North Slope industry.
The requirement that the gross value at the point of production be zero sounds harmless, he said, but the provision is just another tax increase and would penalize investors who make prior year investments.
The bill has been couched as a tax credit reform bill, Seckers said, but has nothing to do with reform.
Overall, ExxonMobil views HB 247 as a bad bill which wouldn’t do anything to make Alaska’s investment climate better.
He said ExxonMobil believes enacting HB 247 would reduce Alaska’s global effectiveness and competitiveness, would force companies to reevaluate new and existing investment decisions and signal that Alaska’s policy is to raise taxes when oil prices are high and when they are low, even when companies are losing money.
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