|
ACES on the hot seat in House Resources Administration, consultant, speak in favor of tax changes; North Slope majors argue present system deterring investment in Alaska Kristen Nelson Petroleum News
The administration and the North Slope producers agree that a change is needed in Alaska’s oil and gas production tax. The House Resources Committee heard from both at Feb. 11 and Feb. 16 hearings; independent operators are scheduled Feb. 18.
The issue as framed on Feb. 11 by Rich Ruggiero, senior adviser to Gaffney, Cline & Associates, an oil and gas consultant firm, is whether the state is in harvest mode — needing to get its fair share — or in growth mode, needing to encourage investment.
A Department of Revenue fiscal note with House Bill 110, the governor’s proposed changes to ACES, shows that the state would collect $5.234 billion less over a five-year period beginning in fiscal year 2013 when provisions of the bill take effect.
In return for lower taxes in the short term, the state expects to get more investment in North Slope oil and gas production, leading to more oil and more state revenue over the long term.
Alaska’s production tax system was changed in 2006 and again in 2007 and the major North Slope producers have contended since before passage of the changes that the state takes too much of their profits at high oil prices, reducing the amount the companies have to invest in the state and making Alaska projects less competitive with other investment opportunities the companies have.
Ruggiero compared a downside case, based on the existing tax under ACES, Alaska’s Clear and Equitable Share, with an upside case where in response to reduced taxes there is more investment in existing fields and new discoveries.
In the downside case under ACES, between 2011 and the mid 2020s, the state would take in $95 billion (or $110 billion between 2011 and the late 2020s), with the trans-Alaska oil pipeline shutting down sometime in the 2020s because of lack of oil due to lack of investment.
In the upside case, under HB 110, the state takes in $210 billion between 2011 and 2050.
Ruggiero said that in the upside case existing fields have slower decline because of investment plus new fields are discovered, “regular investments keep facilities in order so we keep a vibrant industry running through 2050.”
What if no new investment One concern expressed by legislators is what if the state lowers its production tax rate and there is no more investment.
Ruggiero said that if the changes in HB 110 are made, but there is still no new investment, a minimum production level would still be reached where the pipeline would stop running, but the downside is $75 billion to $90 billion (a loss of $20 billion in each case), while the upside, he said, is still $210 billion.
That could happen, he said, “because the lever that you pull or the levers that you pull within that fiscal system change were not the right ones to actually get the investment coming here to the state.”
But lowered revenues due to tax changes where there is no new investment also assumes that legislators sit on their hands when lowered taxes do not result in more investment, he said.
Ruggiero also said that the widely touted 87 percent marginal rate in the current tax system isn’t the only aspect of Alaska’s tax system, which needs to be viewed as a whole. The immediate deduction of capital expenditures, for example, has high economic impact and is favorable, as are the investment credits which have a moderate to high economic impact and the ability of independents to convert credits to cash, which could have a huge economic impact for smaller companies.
Lack of information Ruggiero told the committee he thinks legislators are “handicapped as a body in trying to make informed decisions when you aren’t informed about what’s going on.”
The Department of Revenue can’t help there, neither can consultants, he said.
“The only people that can help you there are the producers.”
He said that compared to many other prolific hydrocarbon-producing regimes in the world, “the state really has a lack of data transparency from the producing community.”
Revenue Commissioner Bryan Butcher said that by statute the state receives capital expenditures from the companies and can evaluate those expenditures to determine whether they are legitimate, “but there’s no breakdown required by law to specify exactly what that’s going for,” whether it’s capital being spent on an existing facility or for exploratory work.
Asked if a change could be required in regulations, Butcher said he suspected it would have to be a change in statute.
Ruggiero said “other countries actually publish data — you can go to the Web and find it; you don’t even have to ask the question.” Available data ranges from number of wells drilled, how much capex was spent on wells vs. infrastructure, plans going forward for each field and in some cases infrastructure is only, and “we can find out everyday what the capacity is and what’s available as unused capacity.”
Industry supports HB 110 On Feb. 16 the committee heard from industry.
Alaska Oil and Gas Association Executive Director Marilyn Crockett compared 2005 production forecasts for 2010 with actual production, and 2005 forecasts for 2015 production with 2010 forecasts.
2010 volumes are significantly below the 2005 forecast; and 2010 forecasts are lower for 2015 than those from 2005.
The state has been considerably off in its forecasts — and production has continued to decline, Crockett said. Forecasts depend on projects being economic when decisions are made to move ahead, she said, and those project economics can change.
AOGA supports HB 110, Crockett said, but is concerned about staggered implementation dates, believing that a tax change is an immediate issue.
Ken Sheffield, president of Pioneer Natural Resources Alaska, said Pioneer supports HB 110. He said the company’s challenge is finding the next opportunity to grow its business. Once a waterflood test proves up, the company has the opportunity to expand its Oooguruk project offshore the the North Slope to produce the Torok accumulation. But a half a billion dollars for Torok would have to compete for funding against other opportunities the company has in the Lower 48 in fiscal regimes where the tax burden is not so high, Sheffield said.
Wendy King, vice president of external affairs for ConocoPhillips Alaska, said Conoco agrees with the governor’s view that HB 110 would make Alaska more competitive and result in more jobs and more production.
“We see more potential” in Alaska, she said.
King said progressivity is the biggest problem with ACES and said fiscal improvements in HB 110 would affect the production decline rate.
The effective date is a problem, she said, because progressivity is not changed until 2013 in the bill, which slows the impact.
Claire Fitzpatrick, chief financial officer for BP (Exploration) Alaska, noted that U.S. production is growing, but Alaska production is not, and said BP thinks HB 110 is a step in the right direction. BP has technical issues with the bill which she said she would address in a letter to the company.
Dale Pittman, Alaska production manager for ExxonMobil, said Exxon believes changes in Alaska’s production tax since 2005 have had a negative impact on business activity in Alaska and on the overall investment climate in the state.
“Alaska’s current production taxes are simply too high to stimulate the additional investment required to fully develop Alaska’s oil and gas resources,” he said.
| 