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Parnell’s oil tax bill in House Finance Alaska North Slope producers say House Resources version of bill does make Alaska more competitive, should draw more investment Kristen Nelson Petroleum News
With just days left to its scheduled April 14 adjournment, the Alaska Legislature continued to work on Gov. Sean Parnell’s proposed oil tax changes.
When Petroleum News went to press, Senate Bill 21 was in House Finance, where the committee was working the House Resources version of the bill.
The state’s current oil production tax, Alaska’s Clear and Equitable Share, ACES, attempted to balance a tax rate which grows as oil prices rise (progressivity) with credits on capital expenditures.
But ACES left the state vulnerable to having to pay for credits at a rate which could exceed the tax received at low oil prices.
And those credits were tied to spending.
With production from the North Slope continuing to decline, what both the administration and the Legislature want to incentivize is more production.
SB 21 ties credits to spending rather than to production.
And, administration and legislative consultants agree, it moves Alaska’s tax rate into a more competitive range among comparable oil producing areas.
Companies say competition key Alaska’s major oil and gas producers have testified that ACES makes Alaska project uncompetitive for investment funding. BP, ConocoPhillips and ExxonMobil officials have all told committees that the current production decline rate of some 6 percent a year would not be possible without some level of investment, and while there are projects which would increase production but they aren’t competitive against opportunities available to the companies elsewhere in the world, particularly in the Lower 48 where tight oil development is drawing investment dollars.
Lower 48 opportunities have reversed the flow of investment dollars, formerly out of the U.S., companies and consultants have said, with investment now flowing back.
But investment hasn’t flowed back into Alaska.
As oil prices rose and with opportunities and investment available, Lower 48 production declines flattened or reversed, but that hasn’t happened in Alaska.
Consultants Econ One, for the administration, and PFC Energy, contracted by Legislative Budget & Audit for the Legislature, have identified Alaska’s tax system as out of the range of comparable jurisdictions and a reason why investment in the state hasn’t increased as it has in many other places.
Key aspects of the Resources substitute Mike Pawlowski, advisor to the commissioner of Revenue, reviewed the committee substitute from Resources for House Finance April 6.
The removal of the ACES progressive surcharge remains in the bill.
The base tax rate, 25 percent in the governor’s bill, was increased to 35 percent in the Senate; House Resources reduced that to 33 percent.
As with the governor’s bill, capital credits for the North Slope are eliminated at the end of this year although ACES provisions of a 20 percent capital credit are unchanged for Cook Inlet and Middle Earth, which covers basins in the Interior portion of the state.
However, companies incurring net losses from leases or properties on the North Slope earn a 33 percent credit on those losses under the CS, matching the 33 percent tax rate, an increase over the 25 percent credit provided in ACES. The net operating loss credit is transferable and eligible for refund by the state under the CS. So for companies without production, the state picks up a portion of their costs.
Gross revenue exclusion The gross revenue exclusion, GRE, is geared to increase production. It applies to production from new units (land not in a unit Jan. 2, 2003), new participating areas (those established after Dec. 31, 2011, in a unit formed before Jan. 1, 2003, if that area does not contain a reservoir that had been in a participating area established before Dec. 31, 2011), and a provision modified in House Resources, expansion of participating areas (acreage added to a participating area by the Department of Natural Resources on or after Jan. 1, 2014). For this last category the producer is responsible for demonstrating that production is from acreage added to the participating area.
Twenty percent of the gross value of GRE production is reduced in determining production tax value.
For oil production which qualifies for the GRE, there is a $5 credit per taxable barrel.
For barrels which do not qualify for the GRE, there is a sliding scale credit.
That credit is $8 per barrel at wellhead prices up to $80 per barrel and drops until it reaches zero at wellhead prices above $150 per barrel.
These credits tie incentives to production, not spending.
Per-barrel credits cannot be transferred, carried forward or used to reduce tax liability to less than zero, and the non-GRE credit may not reduce the tax liability to less than the minimum tax.
BP: A ‘game changer’ In testimony before House Finance on April 8, officials with BP, ConocoPhillips and ExxonMobil all said the committee substitute from House Resources was an improvement over ACES.
Damian Bilbao, head of finance for BP in Alaska, said the House Resources CS could work because it balances a high base rate with appropriate credits; requires production to earn credits; doesn’t pick winners and losers; and provides a foundation for future opportunities.
Bilbao told legislators that as BP analyzes and ranks hundreds of projects the question is which are economic. There is an annual review of potential projects to see if circumstances have changed, he said, including whether technology or efficiencies have changed.
Fiscal policy impacts that decision, he said. While projects are prioritized locally, they have to compete for a fixed amount of worldwide investment.
He said that right now a fair number of Alaska projects are not competing because of the state’s fiscal regime and the high cost of doing projects in Alaska.
Bilbao called the CS a “game changer” and “a signal that Alaska is ready to compete for investment.”
Asked how many years it would take for Alaska to know if tax changes resulted in more investment, Bilbao said the first thing that would happen would be more drilling or finding more rigs to drill more, followed by more sizeable capital investments in things like new pads, which lead to more drilling and more oil. The most capital intensive changes would take a few years, he said.
Bilbao couldn’t say for certain about shorter-term changes such as more drilling without knowing the final bill, but said that activity could shift in the next one to two years.
Conoco, Exxon: improvement Scott Jepsen, vice president of external affairs for ConocoPhillips Alaska, used a slide from PFC Energy to show that the CS moves Alaska down to the high end of average compared to other areas where the company invests, and called the CS a “big improvement” over ACES.
Jensen said ConocoPhillips thinks changes in the CS will lead to more capital investment, but said what that would be won’t be known until the company sees the final bill and goes back and looks at its opportunities. Some of those, he said, would have to go clear to the company’s board for approval.
Dan Seckers, ExxonMobil’s Anchorage-based tax counsel, said ExxonMobil believes the CS would make Alaska more competitive, called it a strong improvement over ACES and said that under the CS ExxonMobil would expect investment in Alaska to increase “substantially.”
He said ExxonMobil expects that under the CS industry would reexamine its inventory of North Slope projects.
But, he cautioned, Alaska doesn’t just need to be competitive, it needs to be attractive because the state has obstacles in other areas. In written testimony he noted the high cost of doing business in Alaska, calling it “one of the most expensive places in the world to develop and produce oil and gas,” citing severe arctic conditions, environmental challenges, remote location of the resource and distance to market and restriction of exploration opportunities.
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