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House Resources begins hearing SB 21 North Slope producers say removing progressivity positive, question whether bill makes Alaska attractive enough; others want credits Kristen Nelson Petroleum News
Legislation to reduce Alaska’s production oil tax as passed by the Senate, a Finance Committee substitute for Senate Bill 21, is getting mixed industry reviews in House Resources.
The North Slope’s large producers, BP, ConocoPhillips and ExxonMobil, praised elimination of progressivity, but questioned whether the bill goes far enough to make Alaska as attractive for investment as the state could be.
Pioneer Natural Resources Alaska, an independent North Slope producer, and explorer Brooks Range Petroleum Corp., told the committee that the elimination of credits in the bill made financing projects more difficult for them.
ExxonMobil Dan Seckers, ExxonMobil tax counsel based in Anchorage, said it was up to legislators to decide if it’s time for Alaska to make a change in the state’s tax system, calling it a tough task facing them.
The committee substitute passed by the Senate makes “significant, significant” steps in improving Alaska’s fiscal system and making the state more competitive, Seckers said, citing elimination of progressivity as representing a significant change to Exxon.
He also said the gross revenue exclusion, or GRE, is significant, but said ExxonMobil believes it’s “critically important” for the state to stimulate investment and investment needs to include legacy fields.
Seckers said that as a tax practitioner the language describing the GRE is not clear to him, which makes him nervous; it could work, but as drafted, he said, it’s not clear whether it would apply to legacy fields.
While the CS makes Alaska more competitive, does it make it attractive enough compared to your competition, he asked, citing the high cost, remoteness and distance to market in Alaska compared to the competition.
He also said that ExxonMobil believes the 35 percent base rate in the CS is too high.
ConocoPhillips Bob Heinrich, ConocoPhillips Alaska vice president of finance, said ConocoPhillips has advocated for the elimination of progressivity, and the CS accomplishes that as well as providing a flatter tax rate across a broad range of prices.
But below $60 a barrel the gross minimum tax kicks in and eventually producers would pay taxes in spite of negative cash flow; below a $91 a barrel price the tax is an increase to producers, he said.
The 35/5 proposal in the CS would put Alaska at the high end of the middle of the pack of its competitors, Heinrich said, while a 30 percent base rate with $5 per barrel credit would put the state at the center of the pack, with 62 percent government take compared to 65 percent with 35/5.
He also cited problems with the GRE and said that from a rigorous reservoir engineering point of view it might be difficult to convince the state that any oil from legacy fields was new oil qualifying for the GRE. Heinrich proposed changes making production from any new well meeting existing criteria for qualified capital credits under ACES qualified for the GRE.
Scott Jepsen, ConocoPhillips Alaska vice president of external affairs, said the state would probably see more investment with the CS as it stands, but not as much as the state could get with further changes to its tax system.
BP Damian Bilbao, head of finance for BP Exploration (Alaska) called the CS a step change and a signal to investors that Alaska was serious about attracting investment. Elimination of progressivity is a “game changer” putting Alaska back in the game of competing for investment, he said.
The GRE could have a positive impact on economics, Bilbao said, but only if it applies to legacy fields, which he called the most reliable source of new oil.
He said the base rate of 35 percent is a challenge for all players below a $100 a barrel oil price, and noted that the 2010 price averaged $80 a barrel. Bilbao also said more certainty is needed on the criteria for GRE.
Brooks Range, Pioneer Ken Thompson of Brooks Range Petroleum Corp. and its parent company AVCG LLC, called the elimination of progressivity positive, but said the increase in the base rate to 35 percent was a negative and suggested a compromise of 30 percent.
The sunset of the small producers’ credits in 2016 was a negative, he said, as was elimination of the QCE, the qualified capital expenditure credits under the current system, ACES or Alaska’s Clear and Equitable Share. Thompson said BRPC’s current project, Mustang, was sanctioned assuming QCE credits, and requested extension of those credits at least through the end of 2016 for at least small producers.
He also said elimination of exploration incentive credits was a “huge negative” for explorers, and suggested including it for small companies with a limit of $25 million per year per company.
Pat Foley, manager of land and government affairs for Pioneer Natural Resources Alaska, said positives of the CS included elimination of progressivity, the GRE, loss carry-forward monetization and the $5 per barrel credit, but said loss of capital credits and the increased base tax rate were both negatives, telling legislators that credits foster new production and directly encourage activity in the state.
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