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Tax credits based on spend, taxes on price Legislative committees hear admin overview on oil tax credits, enalytica analysis, small producers, explorers on value of credits Kristen Nelson Petroleum News
A joint meeting of Alaska’s House and Senate Resources committees, held in Kenai June 17, heard an overview on oil and gas tax credits from the Alaska Department of Revenue, an analysis by consultants enalytica and views from some of the state’s smaller producers and explorers on the role of credits in attracting investment.
Revenue Commissioner Randy Hoffbeck told legislators the administration did not take a position on tax credits this year because it did not want to get into a debate on the issue. He said credits are an integral part of the financing and economics of projects and said the administration would not have unilaterally tried to reduce credits. Going forward, he said, the administration will engage in a discussion on the best way to look at credits, but, he said, it would not be proper just to cut them off.
Ken Alpert, director of Revenue’s Tax Division, gave legislators an overview of tax credits, and said since the 2007 transition into the PPT oil and gas tax system, some $7.4 billion in credits have been used, $4.3 billion against tax liability by those with production and $2.2 billion in refunded credits by new producers and explorers developing new fields.
On the current state deficit, Alpert said the main reason for the deficit is that the price of oil is half what it was. He said taxes go down faster than prices when you’re taxing on net profits. Alpert also said the state is not losing money on oil, the state’s cash flow issues are the result of policy - credits are fixed and tied to spending, he said, while taxes are tied to price.
Weaker fundamentals Janak Mayer and Nikos Tsafos of enalytica, analysts contracted by the Legislative Budget and Audit Committee, analyzed oil prices and government vs. producer take based on prices.
Tsafos said the oil price drop was due to weaker fundamentals: U.S. production has grown over the past five years and that growth was initially offset by unplanned outages elsewhere in the world caused by events such as civil war in Libya and sanctions on Iran.
But in 2014, he said, some worldwide production began to come back on, while U.S. production continued to boom, and expectations for worldwide demand started to drop. And OPEC decided to let the market show what the price should be, at what price do American producers start to go bankrupt?
Low oil prices are creating a response in activity in the U.S., Tsafos said, with the rig count dropping, but production hasn’t crashed because not all rigs or wells are equal - you can cut 20-30-40 percent of rigs and only have a minor impact on production, because those cuts are on the most marginal projects.
Impact on state The big picture for state revenues and credits, Mayer said, is that a drop in the West Coast price for North Slope crude from $107 per barrel to $67 is a 37 percent decline in average price, but because net value falls more sharply when price falls, that 37 percent decline in oil price produces a 63 percent decline in total revenues.
Comparing $107 per barrel oil with $67 per barrel, Mayer said under the current tax system at $107 per barrel government take (state and federal) is 68 percent, while at $67 oil, government take is 88 percent. Producer value is $19.20 per barrel at $107 oil and $2.40 per barrel at $67 oil, he said.
Comparing the state’s tax systems under ACES and Senate Bill 21, the current system, government take is roughly the same at $107 oil - 69 percent under ACES and 68 percent under SB 21.
But, Mayer said, at $67 per barrel, government take under ACES would have been only 76 percent, while under SB 21 it is 88 percent.
He said the analysis is based on figures from Revenue’s spring forecast: starting with an oil price and identifying the cost of transport, operating and capital costs, royalty, property tax, production tax and state and revenue corporate income tax.
On the credits issue, Cook Inlet and North Slope are very different, Mayer said: Cook Inlet receives approximately 50 percent of credits for purchase, but generates only 5 percent of revenue. In Cook Inlet the production tax is essentially ELF - low, a fixed rate on gas and generally no tax on most oil production - but with significant credits.
Value of credits Legislators heard the value of credits from two producers and one company working on a production project.
Pat Foley of Caelus Energy Alaska told the committees that Caelus, a privately held independent exploration and production company, was attracted to Alaska by the SB 21 tax regime. The company acquired Pioneer Alaska’s producing Oooguruk field on the North Slope and has expanded that field with development at Nuna, acquired additional North Slope acreage from the state and is just closing on acquisition of a 75 percent interest in NordAq Alaska acreage in Smith Bay (see story on page 1).
Benjamin Johnson of BlueCrest Energy, a privately owned company developing the Cosmopolitan field in Cook Inlet, said projects in Alaska must compete for investment with opportunities in other areas, and told legislators that continuation of tax credits could be a good investment. At Cosmopolitan, he said, BlueCrest’s projected future tax credits would be some $190 million through 2019, some 35 percent of total spending at Cosmopolitan during that time, while state royalties for oil and gas produced from Cosmopolitan would be more than $600 million at a $65 per barrel average oil price.
John Barnes of Hilcorp Alaska said the company’s goal is to get Alaska costs competitive with what it costs Hilcorp in the Lower 48. The company has achieved that in Cook Inlet, he said, and its goal is to do that on the North Slope. Hilcorp began operations in Cook Inlet in 2012 and in 2014 became operator at the Endicott, Milne Point and Northstar fields on the North Slope.
Hilcorp’s investment in Cook Inlet since it acquired fields there has been more than a billion dollars, Barnes said, some $330 million a year invested - compared to some $80 million a year invested by the previous operators.
He said the state has to decide if it wants a tax structure that works against investment.
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