Providing coverage of Alaska and northern Canada's oil and gas industry
March 2012

Vol. 17, No. 10 Week of March 04, 2012

Senate Resources Committee working details of oil tax bill

The Alaska Legislature’s Senate Resources Committee has been listening to testimony and reviewing modeling on impacts of the state’s current production tax, Alaska’s Clear and Equitable Share or ACES, vs. a committee substitute and amendments proposed by committee members.

The Senate Bipartisan Working Majority has rejected House Bill 110, the bill proposed by the governor and passed by the House, and is working on its own bill, currently in the Resources Committee.

Among other things, the bill being considered in the committee reduces the progressivity rate in ACES and caps the maximum production rate at 60 percent.

Gov. Sean Parnell continues to support HB 110, and said in a March 1 press availability that companies have committed to $5 billion in additional investment over three years with HB 110. Senate Bill 192 does not have that guarantee, the governor said, adding that he is looking for ideas that move the needle on production.

Groups oppose Senate bill

Representatives of the Alaska Oil and Gas Association, the Resource Development Council and the Alaska Support Industry Alliance all told Senate Resources Feb. 28 that they do not support CSSB 192.

Kara Moriarty, executive director of the Alaska Oil and Gas Association, or AOGA, said the committee substitute proposes to make “slight changes” in ACES’ progressivity, and said it does not address the need for bracketing.

Under ACES, progressivity increases taxes as the price of oil increases, and the higher rate applies to all taxable barrels. Moriarty said AOGA believes the lack of bracketing is one of “the most egregious” aspects of ACES.

She said the committee substitute does not create a business climate where rewards are commensurate with risk.

AOGA believes the governor’s tax change proposal, House Bill 110, is a good first step.

Sen. Bill Wielechowski, D-Anchorage, asked what other steps would be necessary.

Moriarty said AOGA testified in 2006 and 2007 that the base tax rate is too high, and still believes that. She said comprehensive change to the tax structure is needed.

Cook Inlet model

Moriarty cited Cook Inlet as an example of where bold and meaningful tax reforms seem to have been successful.

Sen. Bert Stedman, R-Sitka, co-chair of the Senate Finance Committee, which will hear the tax change bill next, said while the Cook Inlet model might satisfy AOGA, from the perspective of the state’s treasury, Cook Inlet is broken on the opposite side from the North Slope — there are huge capital credits due in Cook Inlet and “virtually nothing” on the other side for revenue.

The state treasury, he said, is running negative in Cook Inlet.

Moriarty said AOGA was not advocating the Cook Inlet model, but just saying the changes in Cook Inlet did spur production.

Sense of urgency

Rick Rogers, executive director of the Resource Development Council, said there is a sense of urgency and a broad base of support from RDC’s members for meaningful change to the state’s production tax, and said some of the strongest proponents of change are non oil and gas members of the organization.

RDC believes ACES is retarding development, he said, and that Alaska is on the edge of a fiscal cliff.

Pedro van Meurs said tax changes are very difficult at this time because of political attitudes in Alaska, Rogers said. He told the committee that RDC hopes leadership can overcome the political difficulties so that the state doesn’t compromise its future because of a short-term populist view.

He said RDC is interested in production tax changes that result in meaningful investments by the private sector.

Stedman said there is a lot of concern about the steepness of progressivity, but with the state paying substantial upfront costs the state has substantial risk. He said he doesn’t think it’s fair to request that one end of the scale be lowered, while leaving the state exposed at the other end.”

Rogers said those issues need to be looked at as a package and said he wasn’t prepared to comment on individual items. He said the state needs to find a sweet spot, a balance, and RDC doesn’t believe that balance has been found.

New development economics tougher

PFC Energy has been analyzing ACES and proposed changes for Senate Resources and Janak Mayer, manager of the firm’s upstream and gas practice, and Jerry Kepes, a partner in PFC Energy and head of the upstream and gas practice, told the committee Feb. 29 that ACES appears to make economics harder on new developments than on legacy fields.

Mayer said it costs more for marginal additional production on the North Slope than for existing fields, but those marginal developments are needed to replace barrels lost through decline in the state’s older fields, and “the economics (for new developments) look in many ways even harder” than for existing fields.

Kepes said there are profitable forms of investment on the North Slope in existing fields, but when you get away from established infrastructure and have to drill more challenging wells or invest in new infrastructure, “these things suddenly start costing much, much more money and when that’s the case you start seeing much more challenged economics.”

He said that to PFC Energy, ACES “looks like a fiscal system designed to get maximum out of a harvest area.”

“So it does one thing very well and other things not so well,” he said.

—Kristen Nelson

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