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Committees hear tax initiative analysis
Division of Elections shows qualified signatures exceed required; Legislature’s consultants raise issues of ambiguities in wording Kristen Nelson Petroleum News
In its online petition summary report the state Division of Elections is showing that the number of qualified signatures on the petition for the oil and tax production tax initiative have exceeded the minimum required. If the Legislature adjourns by April 19, the initiative would be on the primary election ballot in August; otherwise it would be on the next scheduled election.
Both the House Resources Committee and the Senate Finance Committee heard presentations on the initiative by IN3NERGY, the Legislature’s consultants, addressing questions raised by the House Speaker and the Senate President and providing an analysis of how the consultants, Rich Ruggiero and Christina Ruggiero, see the initiative for the “Fair Share Act.”
Rich Ruggiero told Senate Finance March 2 that they found enough ambiguity in the initiative that it would likely cause enough uncertainty to give oil companies pause on investment decisions.
Committee discussion There was discussion among senators on the issue of ambiguity in the initiative, with Sen. Bill Wielechowski, D-Anchorage, telling the consultants they should have called the sponsor to ask for clarification and asserting that if the sponsor was to write an op-ed clarifying the initiative’s meaning the Alaska Supreme Court would accept that clarification as the initiative intent.
Sen. Natasha von Imhoff, R-Anchorage, said the initiative is difficult to interpret, that the typical Alaskan would not be calling the initiative sponsor. If the sponsor had wanted to be more clear, he would have been, she said.
There was also considerable discussion around the initiative’s requirement that: “All filings and supporting information provided by each producer to the Department relating to the calculation and payment of the taxes set forth in Sections 3 and 4 shall be a matter of public record.”
Wielechowski said Rich Ruggiero had previously testified to the Legislature in favor of transparency.
Ruggiero agreed, but said in that testimony he was referring to the Norwegian system which provides the total dollars for capital costs. He said he didn’t know of any other regime where the requirement could be interpreted to require information down to the invoice level and possibly including documents from negotiations.
Von Imhoff said if the initiative passed and public disclosure was required down to the invoice level, contracts awarded would be available to folks who in future bidding would know how to undercut Alaska businesses.
Ruggiero said he worked for a service company for a time and making information public down to rate sheets and discounts would have jeopardized that company’s business around the globe. He also noted that the requirement could also include communication back and forth with the Department of Revenue.
Wielechowski again said that this could be cleared up by asking the sponsor what the intent was.
Initiative review Slides accompanying the presentation said a lack of specificity in the initiate makes “it improbable that a common interpretation could be reached” and also noted the goal seems to be increasing production tax revenue in the near term without any provision to “encourage or incentivize investment and production.”
The consultants’ slides said that if the initiative is approved by voters, “there will very likely be an extended period of uncertainty within the petroleum industry as all interested and impacted parties attempt to push their interpretation of what is written.”
Definitions The consultants said that while existing oil and gas tax statutes, in AS 43.55, primarily use “leases and properties,” the initiative describes provisions as applying to “oil produced from fields, units, and nonunitized reservoirs” on the North Slope.
Alaska Oil and Gas Conservation Commission statutes use field as a general area underlain by at least one pool and including the oil or gas reservoir. AS 43.55.900 defines “unit” as a group of tracts or land subject to a cooperative or unit plan of development or operation; existing units on the North Slope can each contain multiple pools and fields.
Since the initiative’s tax increase would apply to production in excess of 40,000 barrels per day in the previous calendar year and cumulative production in excess of 400 million barrels, the consultants said it appears qualification could be from combined production within a unit or from a single field within a unit.
As to nonunitized reservoirs, does that mean a reservoir that crosses unit boundaries, they asked? Or all wells that produce from the same reservoir?
They said it is also unclear if the 40,000 bpd would be an average for the preceding calendar year, or peak production achieved on a single day.
Oil or oil and gas The consultants raised a number of issues which to them were unclear or susceptible of different interpretations.
Among them is the issue of what is being taxed.
There are references both to “taxable oil” and “a barrel of oil.” Taxable oil is oil less royalty barrels, they said, and noted that existing production taxes in AS 43.55 “make explicitly clear” that they are discussing a taxable barrel of oil.
Then there is the issue of oil and gas.
While Section 2 of the initiative says taxes under Section 3 and 4 can only apply to oil, Section 5 states that the taxes in Sections 3 and 4 apply to gas as well. Section 4 only addresses production, which “generically means oil and gas.”
Ruggiero told the committee it was confusing. Does this mean costs from gas are to be separated from costs from oil? Costs are now combined and subtracted from oil revenue to determine taxes.
Monthly tax Ruggiero said the monthly taxes required under the initiative are different than the current monthly installment payments which are part of an annual tax return. Because lease expenditures are not known until after the end of the year, and actual tax returns are due monthly, amended returns would be required for each month.
Under existing law, each company files a single return; under the initiative, each company with an interest in one of the 40,000 bpd, 400 million barrel cumulative fields would have to file separately for that field, multiplying the filings.
Overall changes Asked for a holistic perspective on changes the initiative would make, the consultants said in their slide presentation that the initiative:
“Creates a new tax ringfence for each producer for each producing asset” with production of more than 40,000 bpd and cumulative production of more than 400 million barrel.
The initiative raises the gross minimum tax on gross value at the point of production and creates a new net tax on PTV, production tax value, when realized prices exceed a threshold.
Asked to identify provisions which might affect investment on the North Slope, the consultants noted first that there are no provisions which encourage investment and said ringfencing revenues of the largest fields makes investment more expensive.
The consultants said the initiative “creates a high degree of economic uncertainty and would be viewed as extremely risky given the many possible interpretations.”
Because this uncertainty would take a long time to sort out, the consultants said, it would likely result “in a reluctance to commit funds until statute and regulation are finalized.”
They said the uncertainty would likely slow capital spending, causing “production levels to decline faster than expected.”
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