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Senate Resources hears progressivity Alaska’s rate high compared to other taxing regimes; presentations nearly done, committee ready to prepare bill, but late in schedule Kristen Nelson Petroleum News
The Alaska Legislature’s Senate Resources Committee has been hearing testimony on the state’s oil and gas production tax system for most of February and as this issue of the paper went to press was ready to start discussing changes to the tax, which producers on the North Slope have said is too high to attract needed levels of investment.
But Senate President Gary Stevens noted Feb. 22 in a Senate Bipartisan Working Group press availability that his proposal to get the bill to the House a month before this legislative session ends in mid-April was based on moving the bill out of Senate Resources Feb. 22. His new goal, he said, was to get the bill out of Resources before members leave for the Energy Council March 8.
The committee has been hearing from consultants, the administration and major North Slope operators, and plans to begin discussing amendments Feb. 24.
Revisions to the state’s production tax began under Gov. Frank Murkowski and continued under Gov. Sarah Palin.
Last year Gov. Sean Parnell introduced a bill reducing production taxes. That bill passed the House, but the Senate did not take it up, citing a need for more information. The Senate is not hearing the governor’s bill, House Bill 110, but instead is working on its own bill, Senate Bill 192, introduced Feb. 8 in what was called a barebones version.
The governor’s bill proposed a number of changes in the existing production tax system, Alaska’s Clear and Equitable Share or ACES. Senators said last year that the bill made too many reductions, and appear focused on the progressivity aspect of ACES, which results in government taking a larger share of profits as oil prices rise.
Progressivity change Consultants from PFC Energy presented an overview to Senate Resources of progressive fiscal systems and how ACES compares with international rates Feb. 16-17.
Janak Mayer, manager of PFC Energy’s upstream and gas group and the project manager for the firm’s work for the Legislature, said the progressivity in ACES makes the government take the second-highest in developed countries, the Organization for Economic Cooperation and Development, or OECD, at $100 oil prices, second only to Norway. At $140 oil prices, government take in Alaska is about equal with Norway.
Higher government takes are typically found in jurisdictions with production sharing contracts rather than those with tax and royalty regimes, which is what Alaska has.
Reducing the hissing Mayer shared a favorite quotation on taxation, dating from 1619:
“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing,” according to Jean Baptiste Colbert, economist and minister of finance under Louis XIV of France.
In modern language that translates to efficiency and competitiveness, Mayer said. The level of taxation should not distort investment choices or prevent marginal investments that would otherwise have been made. And the level of taxation should remain competitive.
The first, he said, is internal — how the tax falls on a producer and what it looks like at different price and cost factors, and whether it will distort investment opportunities.
Competitiveness, on the other hand, requires looking outside and benchmarking the tax against others, Mayer said.
He said that at the appropriate intersection of efficiency and competitiveness the taxation regime does not distort investment and rates are internationally competitive, given the fundamental attractiveness of the opportunity.
Internal rate of return PFC Energy had been asked to discuss various ways in which companies rank opportunities.
Tony Reinsch, a senior director with PFC Energy’s upstream and gas group, described methods companies use to evaluate and rank projects.
Asked by Resources co-Chair Joe Paskvan, D-Fairbanks, it there was a decision metric favored for resource owners, Reinsch said he would argue internal rate of return or IRR is most appropriate for companies because it gives a relative ranking across a company’s portfolio.
But for resource owners, IRR may be of less interest than net present value or NPV (all net cash flows from the project discounted to the present) because NPV shows how much value would be created from a project.
Sen. Bill Wielechowski, D-Anchorage, asked which of these is most readily available to the state or the resource owner.
That varies by country and regulatory structure, Reinsch said, and commented that in some of the least developed jurisdictions IRR is increasingly the standard for regulation and approval. These are production sharing regimes, he said, and producers are required to provide IRR for review by third-party entities who will review the work provided by the company.
Reinsch said this occurs in jurisdictions with minimal government structure where oil and gas development is just beginning and jurisdictions are advised by agencies such as the World Bank.
Mayer said some of the least developed jurisdictions frequently have strong national oil companies where discussions around fiscal terms are handled by the national oil company.
IRR considered Sen. Bert Stedman, R-Sitka, and co-Chair of Senate Finances, which gets the oil tax bill next, noted that in initial discussions of progressivity under the Murkowski administration legislators contemplated doing it on a rate of return basis, believing that would be fairer than oil price, but couldn’t get the information.
He asked how IRR would be implemented in an aging oil field.
Reinsch said IRR is much easier to apply going forward, and more often used in production sharing contract regimes than in tax and royalty regimes.
Stedman asked if they were aware of any regimes where industry felt taxes were too high and asked government to look at IRR and Mayer said he was not aware of industry seeking out IRR evaluation.
Progressive v. regressive ACES is a progressive system — government take increases as the price of oil increases.
Before the tax changes under Murkowski, Alaska had a regressive system — as prices increase, government take decreases as a percentage.
PFC ranked jurisdictions based on how progressive or regressive they were, and found that at $100 oil, Alaska was the most progressive of the OECD regimes ranked, seventh from the top, while at $140 oil Alaska was fifth from the top, following Turkmenistan, Thailand, Equatorial Guinea and Colombia.
On average government take — a measure of regime competitiveness — Alaska ranked behind only Norway among OECD countries at $100 oil and was about equal with Norway at $140 oil.
Stedman noted the previous regressive system and said the Legislature’s goal in the Murkowski administration changes was to put Alaska in the middle of the chart.
Mayer said the initial tax proposed by the Murkowski administration — as opposed to that passed by the Legislature — was very neutral, with progressivity almost exactly enough to counter the regressive nature of royalty.
Similarly with ACES, the legislation proposed by the Palin administration was more neutral, less progressive, than ACES as passed by the Legislature.
How complicated Pedro van Meurs told the committee earlier in February that one problem with ACES is its complexity. He described a company looking at investing to Alaska which tried — and failed — to get any of four major accounting firms to analyze the impact ACES would have on their investment.
Asked by Resources co-Chair Tom Wagoner, R-Kenai, if PFC Energy, which has been studying ACES, could give a potential investor a detailed description of the system, Mayer said it is a “very complex system” and said he would want several weeks to sit down with an oil company and model it all out.
Van Meurs recommended a complete rewrite of Alaska’s production tax system to dramatically simplify it so that prospective investors can readily grasp the system and make investment decisions.
PFC is building what Mayer described as “quite a complex model” of ACES and North Slope assets so that legislators can see the economics of ACES and proposed changes. He said that work had started and will continue over the next several weeks.
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