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Van Meurs critical of ACES, HB 110 Global oil expert outlines flaws in current production tax, says governor’s bill won’t fix problems; finds ANS gas noncompetitive Stefan Milkowski For Petroleum News
When state lawmakers resume discussions of oil and gas policy this winter, they’ll have one tool they didn’t have last year — a suite of reports by global oil expert Pedro van Meurs.
Van Meurs, who advised former Gov. Frank Murkowski, is compiling six hefty reports on oil and gas jurisdictions around the world with help from PFC Energy and Rodgers Oil & Gas Consulting. Alaska is discussed in the third report, which covers oil and gas jurisdictions in the Arctic. The sixth report, a summary report, is due out early next year.
The Legislative Budget and Audit Committee purchased the reports, along with a database compiled by the energy research firm Wood Mackenzie, in late 2010. The Van Meurs Corp. has granted limited-time access to its reports to news organizations, including Petroleum News.
Van Meurs finds ACES,
HB 110 flawed Van Meurs is critical both of the current tax, dubbed Alaska’s Clear and Equitable Share, and of Gov. Sean Parnell’s proposal to fix it.
Van Meurs describes Alaska as one of a few Arctic jurisdictions that combine high taxes with generous incentives. (Other jurisdictions tax at a lower rate, but offer less support up front.) Among the 37 Arctic oil tax regimes van Meurs considers, Alaska is grouped in the middle, given three stars out of five in terms of attractiveness from an investor standpoint.
But van Meurs contends that Alaska’s system is too extreme. The highly progressive tax limits companies’ returns at high oil prices and, combined with high tax credits, can result in state support for developments nearing or even exceeding 100 percent, giving companies little incentive to reduce costs.
Despite the generous credits, van Meurs argues that Alaska doesn’t do enough to incentivize the two commodities that could boost state revenues and ensure a long-term future for the North Slope: heavy oil and natural gas.
He adds that setting the progressivity surcharge based on the combined price of oil and gas (on a barrel-of-oil equivalent basis) will likely result in paltry or even negative incremental revenue for the state when North Slope gas is developed. Van Meurs advocates separating the tax on gas from that on oil — “decoupling” — but adds that the tax rate for gas would then have to be reduced.
Van Meurs writes that Gov. Sean Parnell’s HB 110, a modified version of which passed the House last session, and HB 17 by Rep. Mike Hawker, would indeed increase returns for producers, but would not address the flaws in the current tax.
The governor’s proposal to offer a lower rate for new fields could actually be counterproductive because it would force those developments to be taxed separately — to be “ringfenced” — while other developments can be written off existing production elsewhere in the state.
DOR defends plans Deputy Commissioner of Revenue Bruce Tangeman agreed with much of van Meurs’ analysis in an interview Oct. 26. He agreed that additional incentives might be needed for natural gas and heavy oil, and that taxes on gas and oil should probably be separated. “I think he makes a convincing argument,” Tangeman said of decoupling.
But Tangeman also defended the governor’s legislation. He said HB 110 was meant as an immediate fix for an immediate problem, and he disagreed with van Meurs’ claim that Alaska’s credits are excessive, saying tax credits have successfully generated interest in Alaska.
“We’re reevaluating everything, taking the van Meurs report into account, plus Wood Mackenzie and anybody else,” Tangeman said. “But I think the goal of HB 110 is still sound.”
Tangeman, Chief Economist Cherie Nienhuis, and three other DOR officials attended a five-day workshop put on by van Meurs earlier in October in Houston. Tangeman said the state has more information than ever before and has done additional economic modeling.
Lawmakers offer mixed response Rep. Mike Hawker, chair of the Legislative Budget and Audit Committee, also agreed with van Meurs’ big-picture analysis and criticism of HB 110 and HB 17. “My bill was never intended to be a global fix,” Hawker said.
Hawker agreed that lawmakers should address gas taxes now, but he said they state should wait on heavy oil to get a better sense of what incentives are needed.
Sen. Bill Wielechowski, a critic of tax changes, argued Alaska’s tax credits have worked “exactly as planned,” and questioned van Meurs’ call for heavy oil incentives. He said ACES, as a profits-based tax, was designed to support projects with wide-ranging economic profiles — lower per-barrel profits result in a lower tax rate. “His position on heavy oil is pretty baffling to me,” Wielechowski said.
Senate Finance Co-chair Bert Stedman agreed with van Meurs that the state should reconsider its credits. He said he personally supports tax changes, but that some of his colleagues don’t. “You can’t get the votes until you do the analysis and understand what you’re doing,” he said.
Van Meurs brainstorms gas project Van Meurs’ Arctic report contains an analysis of natural gas projects on the North Slope and on the Yamal Peninsula in Russia, which van Meurs presents as Alaska’s competitor for the East Asian gas market.
The Alaska project is so handicapped compared to Yamal that Alaska would have to offer a long-term tax holiday or completely waive royalties to make it competitive, he writes. Alternatively, developers could use ice-breaking liquefied natural gas tankers to move gas off the slope, van Meurs proposes, acknowledging that he knows little about the technology.
Lawmakers seemed receptive to the idea. “With what’s happening on the North Slope, (in the) Beaufort and Chukchi, I don’t think it’s an unreasonable suggestion,” said Wielechowski.
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