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House Resources hears industry view on further oil tax credit changes
The 2017 oil tax debate is underway in the state Legislature, sparking yet another year of uncertainty for a petroleum industry already battered by low crude oil prices.
Things got underway with two days of hearings in the House Resources Committee the week of Jan. 30. The committee, chaired by Anchorage Democrats Reps. Geran Tarr and Andy Josephson, wanted to review performance of two recent changes in the state’s petroleum tax code, both hotly contested.
These were Senate Bill 21, passed in 2013, and House Bill 247, passed last year. The intent is to set the stage for an effort at new changes this year, arguably to complete unfinished business from the HB 247 changes last year but also, possibly, to hike the production tax rate.
SB 21 repealed a previous tax law put in place in 2008, an action that unleased substantial new investment on the Slope. HB 247 did surgery on a complex program of state oil and gas incentive tax credits, essentially winding down much of the program because of its costs.
The effort this year, however, is likely to focus on narrowing a provision that allows tax credits from net operating losses on the North Slope to be carried forward to future years, as well as an increase in the minimum production tax from 4 percent to 5 percent of gross revenues.
Caelus views “If something like that were to become law our projects will never happen,” Pat Foley, senior vice president for Caelus Energy, told the House committee Feb. 1. Caelus is developing projects that could add 225,000 barrels per day to North Slope production possibly as early as 2023, Foley said.
Foley’s company was one of several firms making presentations to the committee. Their message was that SB 21 is working well and HB 247, passed last spring, is still fresh on the books. Lawmakers were asked not to tinker yet again.
Net operating tax loss tax credits for Cook Inlet were eliminated by HB 247 along with other tax credits, but the “NOL” credits were left intact for the North Slope and if unused in one tax year are allowed to be carried forward to future years.
The loss carry forward provision is common in net profits-type tax systems.
The issue isn’t so important to the large Slope producers because with oil prices rising they are unlikely to incur operating losses. But they are important to companies like Caelus that are exploring, have made discoveries, but are not yet producing.
Caelus hopes to restart work on its “Nuna” project near the producing Oooguruk field, which Caelus operates - Nuna was paused due to low oil prices - as well as to pursue a large, new offshore discovery at Smith Bay, in state waters off the National Petroleum Reserve-Alaska.
Nuna could be producing 25,000 barrels per day by 2018, Foley said, and Smith Bay might produce as much as 200,000 barrels per day by 2023.
Marginal economics The ability to carry forward the tax credits, as well as up-front cash payments for some tax credits (Caelus is eligible for those) if the state funds are available, is essential to the economics of both projects, which are marginal.
Foley told the committee the tax credits are a good investment for the state. Nuna will generate an estimated $2.2 billion in total state revenues over its life, and if state tax credits total $150 million, a calculation that assumes a $70 oil price, the state will get a return of 16 or 17 times its investment over the long term, Foley said.
The return on Smith Bay could be huge - $28 billion paid to the state over the life of the project, he said. The project would also create a $6 billion payroll for workers, according to estimates. Smith Bay could have 1.8 billion to 2.5 billion barrels of recoverable oil. “It would be a new field the size of the Kuparuk River field,” he said.
Caelus is also bullish about two exploration targets identified in a 350,000-acre block of leases on the eastern North Slope, and hopes to test the prospects. “The North Slope has a wonderful petroleum system, and the opportunities to make major discoveries far exceed opportunities anywhere else,” Foley said.
The challenges, however, include high costs, the remoteness of new Slope discoveries - Smith Bay will require a 125-mile pipeline - challenging reservoir conditions, and the constant, it seems, uncertainties of yearly tax changes by the state.
It’s possible that new tax changes could get legs in the state House, which is controlled this year by a coalition of Democrats and a handful of dissident Republicans. It could be a messy fight even in the House, though, because the majority has only 22 votes out of the 40-member chamber, a narrow margin.
House minority Republicans, who control 18 votes, are likely to oppose changing taxes again. If the minority can coax two supporting votes from the majority, which is always possible, a 20-20 split in the House would defeat a bill.
The initiative also seems dead on arrival in the state Senate, which is still controlled by Republicans.
- TIM BRADNER
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