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Industry: Senate tax doesn’t move needle North Slope producers tell committee proposal won’t make state projects competitive for investment capital in current price range Kristen Nelson Petroleum News
The Senate Finance Committee got some praise from industry for the work it has put into crafting changes to Alaska’s oil and gas production tax, but oil and gas company executives told the committee April 6 that tax changes in the bill would not make North Slope projects competitive against other opportunities companies have for incremental investment.
Last year the House passed an overall tax reduction proposed by Gov. Sean Parnell, who wants to see investment increased in the state and the trans-Alaska oil pipeline carrying 1 million barrels per day — a considerable increase over present levels of less than 600,000 bpd. The Senate never took up House Bill 110, saying it needed more time to study the tax issue.
The Senate Resources Committee moved the Senate’s version of oil tax change, Senate Bill 192, in March.
The bill has been in Senate Finance since, where it has undergone substantial changes, but the focus remains the same: finding ways to incentivize new production, maintaining taxes on existing production at about the same level at $100 oil and reducing the impact of progressivity at higher oil prices.
Small producer perspective Todd Abbott, president of Pioneer Natural Resources Alaska, which became the state’s first independent North Slope producer in 2008 when Oooguruk came online, told the committee that since the company came to Alaska in 2002 the state has “lost its competitive position compared to the lower-risk high-margin projects that we see across the U.S. that are not burdened by many of the geographical, logistical, climate and financial challenges that are inherently present in Alaska.”
Asked by Senate Finance co-Chair Bert Stedman, R-Sitka, what would move the needle and make Alaska competitive, Abbot said he used to run Pioneer’s corporate finance department and was responsible for looking at the company’s portfolio and making capital allocation recommendations to executive management.
Compared to other properties where Pioneer is spending large amounts of capital, Alaska starts off with disadvantages. “It’s difficult up here; ... the logistics are extraordinarily challenging; and you’ve got to find a larger accumulation and a more productive well than you do in Texas to be economic, even before taxes. And so then when you throw a more onerous tax system on it, it pushes it out further.”
Abbott said he recognized the committee was looking for specific numbers, and said “that’s hard to do because I would tell you that given the risks and given kind of the inherent disadvantages up here in Alaska, you need a tax system that’s even more favorable to industry than what you see down south.”
Non-operator perspective Dale Pittman, who manages ExxonMobil’s production business in Alaska, told the committee he recognizes the hard work they’ve put in and said from listening to the discussions he thinks legislators are beginning to recognize that the state’s current production tax system isn’t designed to incentivize “significant increases in investment” needed to resolve the production decline issue.
But he said ExxonMobil believes the bill will “fall short of really creating the kind of development and investment, significant changes in development and investment, that’s going to be needed by the state.”
He said while the Senate bill “represents a significant shift from ACES particularly at the extremely high commodity levels ... it remains far short of what we believe to be required to double or triple the current annual investment.”
And the fact that the Senate bill tracks ACES on government take levels up through $110 or $125 a barrel commodity prices, “again causes me some concern. As you look forward, it really hasn’t attracted the kind of investment we’d like to see in the state, so I’m not sure how that’s going to change going forward.”
Pittman said he recognized the issue legislators have, of tackling the tax issue while protecting the state’s revenues, but said it’s critical to “strike the right balance between that state take and the ability to attract that investment” needed to ensure the state’s revenues for the long term.
And while new oil is important, he said that in the next five to 10 years the potential for additional production lies in existing fields.
Stedman asked about the leveling off of production at 600,000 bpd, and Pittman said with Alaska’s “very significant” resource potential, he would be amazed if production couldn’t be leveled off in a few years, “with the right fiscal policies, the right investors, the right attitudes and the right cooperation between the producers and the state.”
Oil price issue BP and ConocoPhillips, operators of Kuparuk and Alpine, the state’s largest fields at Prudhoe Bay, told the committee the bill would not encourage investment.
Damian Bilbao, head of finance, development and resources for BP Exploration (Alaska), said the version of the bill the company had seen was a tax increase that would cause the company to re-evaluate existing activity; that it was not a meaningful change and would not lead to more investment; was likely to create misalignment between producers which would slow or stop activity; and in the long term created more disincentive than ACES.
SB 192 is aimed at reducing progressivity at price levels above $100, but Bilbao said that BP looks at a lower price range in its planning and in that lower price range the bill is a tax increase.
He said he couldn’t be specific about the range of prices, but a slide he presented appeared to indicate that price range was between $70 and $120 a barrel, and he told the committee he didn’t disagree with the $70 to $90 price range the Department of Revenue had discussed.
Tom Williams, senior tax and royalty counsel for BP, said “if you’re looking at $65 to $125 oil in your planning scenario then you’re seeing this as a tax increase.” He noted that while $125 is only a little above where oil price is currently, futures posted for West Texas Intermediate in 2013 are at $85.
While oil spikes may occur, Williams said that’s generally over a three or four week period, “but basically, since the time of Abraham Lincoln, we are at the highest price levels that it’s been in real terms.”
Misalignment a concern Because the bill incentivizes additional production based on a decline curve by operator, Bilbao said it was likely that it could cause misalignment between producers, because each producer will have a different target rate for oil production at a reduced tax for additional production.
The companies don’t always agree when project decisions are being made, Bilbao said, and “with this type of misalignment it adds an additional layer of complexity,” particularly in short-term projects, where producers are targeting different project which could provide tax relief.
He said SB 192 also “effectively creates an incentive around short-term production increase” because it encourages finding a way to get above the target every year.
With the resources available, “if I have to decide between investing, putting those resources, those people to work on projects that give me that rate in 10 years or giving me that rate in one or two years, I now have an incentive to shift those resources to the short-term.”
Using the structure under SB 192, Bilbao said BP recommended dropping the base rate from 25 percent to 22.5 percent, reducing the minimum tax to 5 percent with a base rate in place until $80 (the bill proposed $60) and progressivity kicking in at 0.2 percent, maxing at 10 percent at $130 per barrel and then declining to 0.1 percent and maxing out at 15 percent at $180 a barrel oil.
Asked about the dollar volumes of those changes, Bilbao said it would approximate House Bill 110. He said that as BP has told legislators, “whether it’s HB 110 or a different vehicle, it’s that level of impact that’s going to shift the needle on additional investment,” and is what would be required to incentivize needed capital.
Base rate still too high ConocoPhillips representatives also told the committee that the base rate was still too high under SB 192, and said new oil incentives were insufficient to offset that high base tax rate. The company said the floor represented a tax increase at low prices, and while it said indexing in the bill was a positive step, it said the bill wouldn’t improve the investment climate.
Scott Jepsen, vice president of external affairs for ConocoPhillips Alaska, said the company sees “no real change from ACES” in the version of SB 192 the committee had on the table April 6.
He said when ConocoPhillips looks at the proposed bill, “we really don’t believe that it’s sufficient to move the needle if you will to create the kind of capital investment climate that we need to see on the North Slope to significantly attract more capital for North Slope projects.”
ConocoPhillips is the operator at Kuparuk, and Stedman asked what kind of incremental investment it would take to stop decline and increase production at Kuparuk.
Jepsen said he believes “it’s technologically feasible to offset the decline at Kuparuk,” but said he didn’t have a figure for the amount of capital that would take.
He said that under ACES, the company hasn’t devoted resources to developing projects at Kuparuk. He said geologists, geophysicists, engineers and drillers working the field “tell (us) we’re opportunity rich in Kuparuk,” but said “we don’t have the kind of investment climate up here that allows us to bring those incremental dollars in. Consequently, we don’t push ahead trying to find a great deal more opportunities up here; we’re just focusing on the opportunities that we have in hand.”
And Jepsen said ConocoPhillips would like to see a different tax environment, like that under HB 110, “that is homogenized; it doesn’t try to differentiate between projects.”
He urged the committee not “to disturb the system by trying to create favorite children for investments. I think you’re much better off to have a ... level playing field for investment decision making.”
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