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Senate Finance tweaking production tax Progressivity to be levied on gross production less royalty, not on net; goal to hold state’s take constant at $100 barrel crude oil Kristen Nelson Petroleum News
After weeks of work, Senate Finance put a committee substitute for Senate Bill 192, the bill to change Alaska’s oil and gas production tax, on the table April 3. As Petroleum News went to press April 5, the committee was continuing to work on the bill, with industry testimony scheduled April 6.
Senate Finance co-Chair Bert Stedman, R-Sitka, said at a Senate Bipartisan Working Group press availability after the committee substitute came out that among the things still being worked was the issue of incentivizing incremental production from the legacy fields.
He said the bill could be out by April 7 or 8 — over the weekend and Senate President Gary Stevens said a Senate floor session would be based on when the bill moves out of the Finance Committee.
At the House Majority press availability April 2, House Speaker Mike Chenault, R-Nikiski, said he thought the Senate president had good intentions when he said the House would have the bill with a month left in the session, which ends April 15. Chenault said it’s “very unlikely” the House will pass an oil tax bill before April 15 and said he wouldn’t push to get a bill out just so the House could go home.
He said that once it gets the bill the House will take its time, making sure the bill would actually accomplish what it says it does. Chenault said “if that takes a week fine — if it takes six weeks that’s OK, too.”
Rep. Craig Johnson, R-Anchorage, House Rules chair, said that if the bill that comes from the Senate isn’t fixable, the House would have the choice of just not acting on it.
He said the Senate has come up with some good ideas and if the bill spurs investment and puts oil in the pipeline he’d be willing to look at it, but he said it’s been some five years since the Legislature passed the present production tax, ACES, Alaska’s Clear and Equitable Share, and said he was concerned that if something substantial isn’t passed there could be another five years of production decline before the Legislature takes another look.
“But I don’t want to pass something bad; I’d rather not pass anything than pass something bad,” Johnson said.
What’s on the table? The Senate Finance committee substitute for Senate Bill 192 is a structural change in the state’s existing production tax. It removes progressivity from the net tax portion of the tax with the base rate, 25 percent, remaining the same and adds a progressive severance tax which would be levied on gross production (the amount of oil produced, less royalties, times the price). Progressivity would be levied solely on oil and the bill would use a progressivity structure similar to that under the current system.
In testimony April 4, Janak Mayer, a manager in the upstream and gas practice of PFC Energy and manager of PFC’s consulting work for the Legislature, said the proposed progressive severance tax would start at $60 gross value at point of production, GVPP, and have progressivity of 0.27 percent beginning at the $60 GVPP threshold. At $120 GVPP a tax rate of 16.2 percent is reached and at that point progressivity would be reduced to 0.03 percent.
Progressivity would be capped at 20 percent.
Benefits of progressivity on gross The benefits in assessing progressivity on the gross, rather than the net, are tied to what Mayer has described as difficulties in the existing fiscal structure.
The first involves natural gas, which under ACES is wrapped into the progressivity calculation along with crude oil on a Btu basis, despite the substantial price difference between crude oil and natural gas. If a major gas sale occurs, the lower value of natural gas would substantially dilute the value of oil under ACES as it stands.
The Legislature tried to address this issue in 2010 by decoupling oil and natural gas but Gov. Sean Parnell vetoed the bill, calling it a tax increase.
The Senate Resources version of SB 192 included a provision for decoupling under the existing ACES structure, but that would have required splitting costs between oil and gas production, which Mayer said would have created a high degree of administrative burden and also limited the state’s ability to audit returns effectively.
By removing progressivity from the net tax assessed under ACES, progressivity can be applied only to crude oil, eliminating the need for separating costs.
A second problem with progressivity under ACES is that at high prices the high level of tax credits offered by the state can produce excessive levels of state support for some spending, with effective after-tax government support for exploration reaching above 100 percent at very high oil price levels. With progressivity on the gross, rather than the net, the effective after-tax government support for exploration would be flat at 65 percent, Mayer said.
The other difficulty with ACES is that options to incentivize new production are limited and complex.
Under a severance tax on the gross, he said, incentives can be provided to new production simply by eliminating or lowering the progressive severance tax.
Price of oil When ACES was passed the price of oil was much lower and modeling for ACES was done with a base case of $60 a barrel, Mayer said in a March presentation to Senate Finance.
The impact of progressivity at prices seen recently of more than $100 a barrel was not analyzed in 2007 and there has been considerable discussion by industry that the share of revenue the state takes at higher prices makes the state’s tax rate uncompetitive, a factor hurting investment.
While the bill is still in flux, a revenue comparison presented April 4 estimated for fiscal year 2013 showed that at $100 oil, ACES would bring in $3.228 billion, compared to $1.987 billion under House Bill 110, the governor’s proposal which the House passed last year, and $3.177 billion under the Finance Committee substitute for SB 192.
‘Work in progress’ Asked at the April 3 press availability whether the committee substitute being discussed in Senate Finance represented a caucus position, Stedman said that was a “work in progress” with 16 caucus members, and 16 different views. “We’re working on that,” he said. The 16-member majority caucus includes all 10 Democratic members of the Senate and six of the Senate’s Republicans. All seven of the Finance Committee members are in the majority — two are Republicans and five are Democrats.
In committee discussions April 4, Finance co-Chair Lyman Hoffman, D-Bethel, expressed concern about how much money the proposal moved from the state to industry at high oil prices, and Sen. Johnny Ellis, D-Anchorage, the Senate Rules chair, asked for confirmation that the goal was to preserve the level of revenue to the state at $100 a barrel oil.
Stedman said level revenue at $100 a barrel was the goal, and said he would be working with PFC Energy later on adjustments to meet that goal.
Sen. Lesil McGuire, R-Anchorage, said she would like to see more done in the bill to incentivize new production.
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