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Committee says ACES could be factor Senate TAPS throughput passes governor’s oil tax bill on, along with conclusions, recommendations; Democrats introduce own bill Kristen Nelson Petroleum News
The ACES production tax structure “has likely contributed to advancing the decline of oil production” from Alaska’s North Slope and to reduction in throughput in the trans-Alaska oil pipeline.
That was one of the findings of the first committee to hear the governor’s proposed oil tax change bill, the Senate Special Committee on TAPS Throughput. The committee passed along a letter of intent as it sent Senate Bill 21 on to the Senate Resources Committee on Feb. 7.
While the committee’s minority member, Sen. Berta Gardner, D-Anchorage, proposed amendments, none were adopted.
Feb. 11, the same day House Resources and Senate Resources started their hearings on the governor’s bill, House and Senate Democrats introduced their own oil tax bill. While a notable feature of the governor’s bill is the elimination of the progressivity feature of ACES, Alaska’s Clear and Equitable Share, the state’s existing production tax, the Democratic tax change bill retains progressivity, although capping state take at 55 percent (ACES sets the cap at 75 percent).
The House version of the Democrats’ tax bill, House Bill 111, goes to the Resources and Finance committees; the Senate version, SB 50, goes to the TAPS Throughput, Resources and Finance committees.
Letter of intent The letter of intent from the Senate Special Committee on TAPS Throughput, signed by co-chairs Sens. Peter Micciche and Mike Dunleavy, said the committee arrived at several key findings in evaluating the bill.
The state has little control over many factors impacting state revenues, “including the price of North Slope oil. Total government take through oil taxation is the only lever under the control of the people of Alaska,” the letter said.
“The ACES tax structure has likely contributed to advancing the decline of oil production and throughput in TAPS, primarily due to a lack of competitiveness with other OECD (Organization for Economic Cooperation and Development) producing regions.”
Because increased production was a primary objective of the credits in ACES, those “credits should have been more specifically directed toward projects resulting in production and less toward general spending,” the letter said.
“Specific incentives and a competitive oil tax regime in Alaska will likely result in additional production-related spending.”
The letter noted “a direct correlation” in other OECD producing regions between “production-related spending and increased production” and said the state’s spending policies have “an adverse effect on the business climate and willingness to invest in the State of Alaska.” State policies, the letter said, “must deliver the clear message to the business community that Alaska will not continue taxing to fund unsustainable levels of government spending.”
‘Adequate platform’ The letter was not a wholehearted endorsement of the governor’s bill, calling it “an adequate platform from which a respectful dialogue can begin,” but recommending a number of areas for changes.
First the letter recommended evaluation of a way to provide “a guarantee of investment in Alaska and a further incentive for stemming production decline” from North Slope leases “by fixing the amount of production used in determining the reasonable transportation costs to determine transportation deduction costs for pipelines and gas treatment plants” so producers receive a benefit for increased oil throughput “but incur a corresponding limitation on deductions due to throughput declines” occurring after Dec. 31, 2015.
The letter also recommended expanding the gross revenue exclusion to legacy areas, specifically expansions of existing participating areas, increasing recovery in existing participating areas and participating areas that contain oil with an API gravity of 20 degrees or less.
The gross revenue exclusion exempts 20 percent of production from new fields from taxation.
Specific production-related credits allowed under ACES should be evaluated for inclusion in the bill “as a direct incentive for costs that deliver production,” the letter said, but credits should be charged against actual production, eliminating the current “negative revenue liability to the state.”
Other recommendations The letter also recommended other areas for inclusion in SB 21, noting those are not related to throughput: incentives for Alaska hire and Alaska purchase; incentives for unconventional and heavy oil; a production credit system for provision of propane fuels to rural Alaska; and evaluating “progressivity as a tool to level the proportion of take for Alaskans across the various oil price environments.”
The letter said the committee’s minority member requested that several considerations be passed along: evaluation of a time limit for the 20 percent gross revenue exclusion; evaluating removing the net operating loss provision in the bill; evaluating adding a 10 percent minimum gross tax; and considering bracketing progressivity at varying rates as the price of oil varies.
Tax, leasing changes The Democrats’ tax proposal targets new production, but also requires the Department of Natural Resources to require a minimum work commitment as part of its leasing program.
The new leasing provisions would require “a company desiring to bid on leases to provide a plan of development. The Department of Natural Resources must review each plan and determine if it will develop the state’s resources in the best interest of the state before ‘qualifying’ the company to bid on a lease,” according to the sectional analysis of the bills. “The plan of development shall be included within the lease terms. DNR shall determine each year whether the lease is being developed in the best interest of the state.”
The bill also requires DNR to perform an economic analysis every five years “to determine whether the proposed development is in the best interest of the state,” and whether the lessee is in compliance with the lease terms. “DNR is empowered to enforce lease terms including imposing penalties for noncompliance,” the analysis says.
An annual report to the Legislature is required, identifying leases out of compliance, and the actions taken by the commissioner to remedy such noncompliance.
Time limits The Democratic bill would limit the 20 percent gross revenue, GRE, exclusion for oil from new units to seven years.
It creates a 10 percent GRE for oil from new participating areas, with a five-year limit; provides a 10 percent GRE for all heavy oil produced; and provides a GRE of 10 percent for production in an existing unit above the level of 2012 production.
AIDEA, the Alaska Industrial Development and Export Authority, is authorized “to acquire an interest in an oil project as necessary to provide working or venture capital,” “to acquire an interest in a lease if they have determined that the leaseholder has been unable to obtain private financing,” adds oilfield development to the definition of project in AIDEA statutes; and authorizes AIDEA to make loans for “constructing or improving an oil processing facility on the North Slope,” limited to small producers and new units and with loan terms not to exceed the prime rate plus 1 percent.
The bill provides an incentive for heavy oil research and development by creating a heavy oil research and development tax credit of 20 percent “limited to in-state expenditures targeting Alaska heavy oil” and capped at $10 million per year per producer.
The bill also requires that information be provided by producers in order to claim capital or exploration credits, with descriptions “in some detail” of the nature and location of expenditures; the Legislature would receive an annual report on the disclosures.
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