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Independents: SB 21 better than ACES Armstrong’s Kerr tells Senate Finance development puts oil in the pipeline, not exploration; Pioneer says issue competitiveness Kristen Nelson Petroleum News
Is the Resources Committee substitute for Senate Bill 21 a perfect change to Alaska’s current oil and gas production taxation system?
It’s not, three of the smaller players on the North Slope told the Senate Finances Committee March 5, but they all said it’s preferable to what’s in place now — ACES, Alaska’s Clear and Equitable Share.
Todd Abbott, president of Pioneer Natural Resources Alaska, said negatives on the proposed changes include the loss of capital credits, the increased base tax rate and a complicated carry-forward loss calculation.
Those factors, he said, are disadvantages to new entrants.
Pioneer is a net investor in the state, Abbott told legislators, spending more money than it makes in Alaska, and that means benefits under the committee substitute, the CS, don’t come to the company until out in the future. That means near-term costs under the CS have increased, he said, and more important, the long-term benefits haven’t increased enough to offset the near-term costs for Pioneer.
Capital credits have been removed, in response to concerns that if oil prices fall in the future, the state wouldn’t have enough income to pay out on credits.
Abbott said Pioneer favors credits. They directly encourage activity in Alaska, he said, and reduce investor risk. He told legislators that credits create activity by definition — for Pioneer to gain credits the company has to be doing a project. Abbott said he understood legislators’ caution about the cost to the state of credits, but thinks the answer lies in the totality of the fiscal structure. The credits in the existing system are a good thing, he said, while a lot of other things in ACES inhibit growth.
No simplification The proposal does not simplify tax calculations because of the carry-forward loss calculations and does not strongly motivate additional investment, Abbott said.
Proposed changes which Pioneer favors include the elimination of progressivity. That allows producers to share the upside potential and improves competitiveness, he said. Pioneer also finds positive the gross revenue exclusion, or GRE, a tax reduction for new oil, and the extension of the small producer credit.
Abbott said Pioneer recommends targeted credits for new facilities and well-related costs; allowing those targeted credits to be redeemable or transferable; and allowing credits to be taken against any payment to the state.
He said he understood the issues with blanket credits and suggested that allowing credits for new wells would be one way to start with credit changes. But, Abbott said, new facilities are also required to produce new oil, and cited the Nuna prospect Pioneer is working on now.
On the issue of exploration and new oil, Abbott said it isn’t exploration that puts new oil in the line: it’s development. Exploration credits without development credits get you only partway there, he said.
Armstrong: Better than ACES Ed Kerr, vice president land with Denver-based Armstrong Oil & Gas, told legislators that to the extent the state’s tax policy gets better, production will get better.
We’re all trying to get the most equitable deal, he said, but the concern is that nothing happens.
While ACES has provided increased revenue to the state, production decline continues and Alaska isn’t seeing the benefit of investment, Kerr said.
He cited the increase in production in Texas and North Dakota, while Alaska production has declined, and said that something needs to be done in the legacy fields, noting that Armstrong doesn’t “have a horse in that race.” The company operates in Cook Inlet, but not on the North Slope, where its current partner, Repsol, is the operator.
Alaska’s geology is “fantastic,” he said, comparing the state to “the pros” while North Dakota is “a junior-high team.”
Rig count Kerr said Alaska’s rig count — some 14 in all of the state, split half and half between the North Slope and Cook Inlet — is “anemic.” Last year 79 new producing wells were brought online in Alaska, he said, compared to more than 9,000 in Texas, calling it a direct corollary to the rig count.
More drilling is needed, he said, and the current tax system isn’t going to promote that.
Kerr said Armstrong Oil & Gas supports SB 21, although the company doesn’t believe it’s enough, but “if we have to live with it, we’ll take that over ACES,” he said.
The rocks on the North Slope are fantastic, he said, and a lot of companies would like to work there, but the tax policy has got to motivate them.
While ACES is the biggest thing keeping people away, other negative factors are the North Slope climate, the expense of working in the state and regulatory issues.
There is a lot of interest in the state, Kerr said, but if nothing happens on the tax regime, that interest will go away.
The biggest improvement in the CS, he said, is that progressivity is gone.
The explorer Alaska Venture Capital Group, through its operator Brooks Range Petroleum, does not yet have production in the state.
Ken Thompson, AVCG co-owner and investor, reviewed the company’s work at its Mustang development project and its experience in bringing other independents to the state and in raising capital for Alaska work and said the biggest hurdles AVCG has heard keeping others out of Alaska are the complex and high government take of Alaska’s fiscal system, resulting in a flow of capital to Lower 48 projects.
Thompson said positives in the CS include the increase of the carry forward loss credit from 25 percent to 35 percent and interest on unused credits, because it will provide more future cash flow for facilities and drilling in the state.
The extension of the small producers’ credit to 2022 is also a positive.
The elimination of the 20 percent qualified capital credit is a negative for AVCG, Thompson said, and requested that it at least be extended through 2014 to cover Mustang development and drilling. The Mustang project, he noted, was approved when those capital credits existed, requiring less owners’ funding for Mustang.
Elimination of progressivity The elimination of progressivity is positive, Thompson said, as it both simplifies tax calculations and will be “a public relations” plus for the state.
But the increase of the base tax rate from 25 percent to 35 percent was not expected, and when AVCG runs economics, the $5 per barrel credit for produced oil only partially offsets the increase, helping at low oil prices.
The increase in the CS from 20 percent to 30 percent on the GRE should incentivize new oil production and also helps at low oil prices, he said.
Thompson cited as a “huge positive” the removal of the old distance limitations for exploration wells. The improvement allows the credit for exploration wells targeting new oil, regardless of location.
He said that overall the tax changes should help in attracting new capital and leveling oil production.
Proposed changes In addition to eliminating progressivity, the CS from Senate Resources would raise the base tax rate from 25 percent to 35 percent balanced with $5 per taxable barrel allowance for produced oil.
Credits which remain under the proposed changes would only be redeemable against future production.
The goal is to make Alaska more competitive for investment.
ACES, the current production tax system, has resulted in very high production taxes, driven by progressivity — a boon to the state but not to producers.
The elimination of qualified capital credits addresses two concerns: those credits have not stemmed production decline and because of the volume of credits and the fact that they are redeemable by the state, they are a liability of the state which could be difficult to meet should oil prices drop.
Lawmakers have also been concerned about the impact on investment of frequent changes in the state’s fiscal system, and want to put in place a system which will be durable, providing assurance for companies considering investments in the state.
While increased investment — ultimately leading to more production — is a goal fiscal system changes, the short-term result will be lower oil tax revenues.
There appears to be some agreement across party lines that progressivity at high oil prices is too high, but there is not agreement on the short-term decrease in state revenues aimed at long-term increase, or at least flattening, of North Slope production.
Note: Part 1 of this story, reaction of major North Slope producers to the CS for SB 21, appeared in the March 10 issue of Petroleum News.
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