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Vol. 17, No. 12 Week of March 18, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Upping the ante

Armstrong puts plans with Repsol at $9 billion, if oil taxes change

Kristen Nelson

Petroleum News

The major producers on Alaska’s North Slope have said that with meaningful changes in the state’s oil and gas production tax there are some $5 billion in projects which could become economic. Projects discussed by BP Exploration (Alaska) and ConocoPhillips Alaska are in the major producing fields, Prudhoe Bay and Kuparuk.

What about $9 billion in projects on currently undeveloped state land if the state makes meaningful changes in production tax on lands not currently producing?

That was the carrot Bill Armstrong, president of Armstrong Oil & Gas and 70 & 148 LLC, held out to legislators in a March 12 letter.

He said that “meaningful tax reform for non-productive lands” in the state, either as proposed by consultant Pedro van Meurs or as included in House Bill 110, the proposal Gov. Sean Parnell put on the table last year, could result in the expenditure of some $9 billion by Repsol E&P USA Inc. and Armstrong on North Slope acreage the companies are developing.

Armstrong told legislators that it’s typical for large and profitable fields to be found first, just as Prudhoe Bay and Kuparuk were on the North Slope.

But major oil companies tend to move on when they believe there are no remaining large and profitable fields, and smaller independent companies step in to develop smaller, more challenged fields, he said.

Smaller North Slope fields

Armstrong said Armstrong Oil & Gas, through various subsidiaries, “has been at the forefront of the movement to find and develop these smaller fields” on the North Slope and was “the generator of the last two successful developments” on the Slope — Oooguruk and Nikaitchuq.

The company brought in Pioneer Natural Resources USA Inc. as a partner in Oooguruk and ENI Petroleum Exploration Inc. which developed Nikaitchuq.

Armstrong said Oooguruk and Nikaitchuq were sanctioned prior to the state’s current production tax, Alaska’s Clear and Equitable Share or ACES, “and most likely would not have been approved for development had ACES been in place.”

“Alaska with its current tax structure is unintentionally preventing the smaller fields on the North Slope from being developed, thus an amendment to the ACES tax structure on non-productive lands is desperately needed,” he said.

Armstrong said that based on the geologic success of Oooguruk and Nikaitchuq, the company “doubled its efforts on the North Slope generating dozens of fresh ideas for potential fields,” and recruited Repsol to join its efforts.

(Repsol is doing exploratory drilling this winter.)

“The single greatest risk to our partnership moving forward in the development of multiple new oil fields on the North Slope (and for that matter, the greatest deterrent to all other potential new entrants to the North Slope) is the Legislature not passing tax reform on non-producing lands.”

With meaningful tax reform, he said, activities by Armstrong and Repsol could result in expenditure of some $9 billion.

House Bill 110

The governor’s proposal, HB 110, passed the House last year but didn’t move in the Senate, with senators in the majority caucus saying they needed more information about how ACES was working before making changes.

HB 110 is based on the premise that high taxes in Alaska make the state uncompetitive in attracting capital investment, and booming oil development and investment elsewhere in the world and in the Lower 48 driven by high oil prices are frequently cited by proponents of a reduction in the state’s production tax.

Progressivity, which increases the percentage of profits going to the state as oil prices increase, has been mentioned by senators as a feature of ACES that should be considered for change, and a reduction in the progressivity slope is a feature of Senate Bill 192, which was crafted in Senate Resources and is now in Senate Finance.

A major production tax rewrite was passed by the Legislature in 2006, changing the basis for taxation from gross to net. The ACES rewrite was introduced by the Palin administration in 2007 as a reaction to a bribery scandal tied to the passage of the 2006 tax bill resulting in the arrests of several legislators. Before ACES passed, the Legislature increased the progressivity rate.

The Parnell administration continues to argue that without meaningful tax change, such as that proposed in HB 110, investment — and production — will continue to decline on the North Slope.

There has been considerable public support through pro-development groups for a reduction in the state’s oil tax.

On the opposing side, some legislators argue that nothing is wrong with ACES.

Sen. Hollis French, D-Anchorage, has maintained that ACES is not broken and should be protected. On March 13 he rolled out results of a poll conducted by the Hayes Research Group that found only 30 percent of Alaskans in a 501-person survey thought oil taxes were too high, compared to 22 percent who thought they were too low and 28 percent who thought they were about right; 20 percent were undecided.

French said the poll, conducted March 5 and 6, had a margin of error of 4.38 percent.

With 50 percent saying taxes were too low or about right, French said it tells him “that Alaskans are not backing Governor Parnell’s oil tax bill.”

Current hearings

Senate Finance Committee co-Chair Bert Stedman, R-Sitka, said March 13 at a Senate Bipartisan Working Group press availability that the oil tax was a complicated issue with tremendous importance and said it would take longer than a week, probably longer than two weeks, to work through the process in Senate Finance.

He said there is a lot of work to be done on the bill, and said Senate Finance reserves the right to change everything under the title.

Senate President Gary Stevens said it’s important that the process be done right, but said he believes the Senate could get through the bill in the time left and noted that the House would be watching what the Senate does.

Stevens originally proposed getting the bill to the House with a month remaining in the session. With the Legislature set to adjourn April 15, that schedule has already been missed.

House Majority Leader Alan Austerman, R-Kodiak, said March 12 in a House Majority press availability that the House caucus won’t discuss what to do about an oil tax bill until they see what the Senate passes. He said he expects what comes out of Senate Finance won’t be the same as what came out of Senate Resources.

Austerman said the House will feel pressure to pass something this year and said he didn’t know if the Legislature will stay past 90 days. Rep. Bill Thomas, R-Haines, co-chair of House Finance, said if the bill coming out of the Senate isn’t something the House can live with, the Legislature could chose to deal with it next year.

The Resources version

SB 192, as passed by Senate Resources, reduces the rate and cap of progressivity, rewards increased production, establishes a gross minimum tax, separates oil and natural gas for purposes of calculating progressivity (decoupling) and creates an oil information system based in the Alaska Oil and Gas Conservation Commission.

In an overview of the Resources Committee bill for Senate Finance, Resources co-Chair Joe Paskvan, D-Fairbanks, noted that in January 2011, when Parnell introduced HB 110, a status report on ACES by the Department of Revenue cited increasing investment under ACES — although the report noted that it was unclear how much of that capital was for drilling as opposed to maintenance or facilities.

In a January 2010 ACES status report, then-Commissioner of Revenue Pat Galvin, who headed the team that worked on ACES under former-Gov. Sarah Palin, said “ACES successfully allowed the state to share in the benefits of high oil prices while accommodating fluctuations in production costs and oil prices.”

Galvin also said: “Since ACES passed the legislature, overall spending on oil and gas activities on the North Slope has increased,” but said oil taxes are only one factor in many — such as “world oil prices, geologic potential, access to land, resources and markets, costs of infrastructure and support services, and the legal and regulatory framework” — influencing investment decisions.

Administration comments

The Department of Revenue did an initial presentation on SB 192 to Senate Finance March 14.

Revenue Commissioner Bryan Butcher told the committee the department does not believe the changes in the progressivity surcharge in SB 192 are enough to change investment climate in the state. He also said that the proposed allowances for increased production added complexity to the tax structure, already complicated compared to others. He noted that Pedro van Meurs talked about conversations with Repsol and the number of people that company had focused on trying to understand the Alaska tax system. Butcher said Repsol has been going back and forth with the Department of Revenue for several months, trying to understand the state’s tax structure.

Butcher said the complexity of the state’s tax system is something Revenue hears about all the time: it’s a hurdle Alaska has to deal with, he said.

SB 192 includes a gross minimum tax and Butcher said that would be a disincentive to investment in Prudhoe Bay and Kuparuk.

The bill also contains a petroleum information system, which would be developed by the Alaska Oil and Gas Conservation Commission. Butcher said he would defer to AOGCC on that, but said the commission is not in favor of it, believing it to be cost prohibitive and a diversion from what the commission perceives its mission to be.

Stedman said AOGCC would be before the committee March 16 and said the commission may not be the appropriate place to locate information.

On decoupling, separating oil and gas for progressivity calculation, Butcher said the administration’s position is the same as it was when the Legislature passed a decoupling bill in 2010 (which the governor vetoed). He said the governor has very serious concerns with the language as proposed and said Revenue was working on language to decouple and be more revenue neutral.

Existing v. incremental production

Stedman noted that consultants have told legislators that no changes are needed on taxes on existing production, just on incremental production.

Butcher said the department disagrees with Pedro van Meurs on that aspect and believes the current tax structure is too high for both current and new production.

Stedman said he expects the committee will separate current production and incremental production — that over the current 6 percent decline rate.

HB 110 brackets progressivity and Butcher said virtually every other jurisdiction brackets, so Alaska is an outlier in that respect. Lack of bracketing is the reason we see a higher marginal tax rate, he said.

Stedman noted that if bracketing was included, something else would need to change to keep the net to the state the same, noting that the issue on the table is splitting profit oil.

Deputy Revenue Commissioner Bruce Tangeman said the goal of HB 110 was not to keep things the same. The administration believes the pendulum swung out too far with ACES. The goal of HB 110 was not to be revenue neutral but to increase production, he said. Stedman noted that progressivity was introduced to keep the percentage share going to the state from declining as oil prices increased; progressivity was used to neutralize regressive aspects of the state’s tax system.

Now the system is aggressive; the discussion is whether it’s too much, he said.

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