On to the floor: Senate Finance moves production tax, SB 192 {Alaska}

As the Alaska Legislature moves toward an April 15 adjournment, a bill basically two years in the making is finally moving to its first floor vote.

Senate Bill 192 began life in the Senate Resources Committee earlier this session after the Senate refused to consider the governor’s tax change bill, House Bill 110, which the House passed last year.

Senators said at the time that they needed more information before making any changes to the production tax system initially crafted as the Petroleum Profits Tax, or PPT, in 2006 under Gov. Frank Murkowski, and then rewritten in 2007 as ACES or Alaska’s Clear and Equitable Share, under Gov. Sarah Palin.

Senators began working with consultants last summer and work on the bill began in Senate Resources in February with hearings. The bill which came out of Senate Resources in early March had its first hearing in Senate Finance March 13 and has been on the committee’s agenda pretty continuously since then.

Senate Finance substantially reworked the Resources bill, passing it out April 11. It was expected on the Senate Floor April 12, as this issue of Petroleum News was going to press.

According to highlights from the Senate Bipartisan Working Group, the bill addresses excessive progressivity at high oil prices, freezes the state/industry split of profit above $120 a barrel and creates a framework for incentivizing new oil production of changing progressivity from net to gross. The bill creates three levels of progressivity: for existing production; increased production in existing fields; and new field production. It also decouples oil and gas taxes, reduces marginal tax rates and limits state contribution to exploration to a flat 65 percent. A 10 percent tax floor for legacy fields is included in the bill, as is a petroleum information management system in the Department of Revenue. Changes to the bill — the committee adopted version Y on April 11 — included increasing the trigger for incremental production to $75 from $60; extending reduced tax rates for new production from seven years to 10; and increasing the trigger for when progressivity kicks in to $90 from $60.

Gov. Sean Parnell told the Associated Press April 11 that he will call legislators back for a special session to make sure the House has time to evaluate a Senate oil tax bill. Parnell told AP he also wants action on an in-state gas pipeline bill, as well as on operating and capital budgets and full funding for his performance scholarship program. He said if those items are not completed by the end of session, they could be part of a special session.

The governor told AP that if there is a special session he would prefer that it be “sooner rather than latter,” between the end of session and June, but said if the Senate bill is “completely different than anything anybody in the House has ever seen,” then lawmakers may need some time out of session to gather more information.

“The Senate has run out the clock after two years — two legislative years — and for me to then jam the House into a session on a completely new proposition and expect them to finish it in 30 days could be a bit ambitious unless it’s something like what they’ve seen before,” Parnell told AP.

Janak Mayer, manager in the upstream and gas practice at PFC Energy, and the manager for the Alaska Legislature work, told Senate Finance April 11 that based on available data from the Department of Natural Resources, estimated decline rates for the major producers based on 2007 and 2010 data would be 7.2 percent for BP, 6.6 percent for ConocoPhillips and 4.4 percent for ExxonMobil. Mayer noted that the bill requires use of 2008 and 2011 data, but 2011 data is not yet available. These calculations would be the basis for determining the incremental production which qualified for a reduced tax rate; the numbers would be recalculated each year.

Mayer illustrated how changes to rates adopted in the April 11 version of the bill would encourage development of additional oil. He said expensive new developments under ACES are very challenged economically and wouldn’t meet hurdle rates for development. By extending the tax-break period out to 10 years and raising the trigger point for progressivity to kick in to $90, the economics get noticeably better, he said, but possibly not good enough to surpass a company’s hurdle rate for capital, much less to be competitive against other opportunities the company may have.

The Legislative Budget & Audit Committee contracted with PFC Energy for analysis on oil tax issues; Pedro van Meurs also did work for the Senate over the summer and early in this session. When Senate Finance heard industry reaction to the bill April 6, Finance co-Chair Lyman Hoffman, D-Bethel, disputed assertions by ConocoPhillips Alaska that changes would be required for Alaska’s tax system to provide incentives for investment over a broad range of prices.

Hoffman noted that consultants have said there are no problems with ACES at oil prices of $100 or $110, which is why senators worked on fixing ACES at the high end, north of $100 and $110. Are our consultants wrong, he asked?

Scott Jepsen, ConocoPhillips Alaska vice president of External Affairs, noted that “the consultants aren’t investing any money. The producers are the ones that are looking at the opportunities that we have in the Lower 48 and other places and around the world,” and in comparison, “... Alaska does not have the same attractiveness for that incremental capital investment as we see in other places.”

At an April 9 hearing, Mayer told the committee he noted that in a number of discussions with industry he’d heard remarks that “the committee’s consultants had suggested either that ACES was pretty good at $100 a barrel, that it was north of that where the problem lay, or perhaps around a particular level of government take for instance the 75 percent of government take was a desirable level to achieve.”

While the committee may have been told that by other consultants, “It’s not something that PFC has ever said either in formal testimony or in other interactions,” Mayer said.

Referring to a slide benchmarking Alaska tax rates against other fiscal regimes, he said what PFC has said is at $100 per barrel ranges, government take under ACES is in the mid-70 percent, “and that is very, very high by OECD standards, second only to Norway and certainly in particular much higher than the levels of government take we see elsewhere in the Lower 48 which are the places in particular Alaska at the moment is competing with for investment capital.”

Lower 48 states have significantly lower costs in many cases than Alaska, he said, “and that only enhances their competitiveness compared to Alaska.”

Norway is different than Alaska because it has an active national oil company and also participates in equity through another vehicle, “and is far more able to ensure constant ongoing investments in its oil venture through those vehicles than a state that doesn’t have those things has,” Mayer said.

He said PFC has said that “particularly for new investments, where costs are very high and projects are economically challenged, there needs to be significant movements in government take to enable those to occur and be incentivized.”

That can be done by reducing overall government take as HB 110 does, or by reducing government take in more targeted ways.

An overall reduction is simpler, he said, but “the cost of that simplicity is that one has to move a lot of cash across the table in order to incentivize the new production because one is also providing a lot of benefit for activity that is currently economic under the current system.”

To avoid benefit to activity that is already economic, “one has to find a way of specifically incentivizing new projects, incremental production from existing fields and to do that one encounters some of the complexities that we’ve been discussing over the course of the last two weeks.”

Revenue opposes information system

The administration does not support Senate Bill 192, believing it does not do enough to incentivize production, but also has another concern.

A petroleum information management system, or PIMS, was a feature of the bill crafted in Senate Resources, housed at the Alaska Oil and Gas Conservation Commission.

AOGCC objected, saying housing PIMS would interfere with its primary mission, and in Senate Finance PIMS was moved to the Department of Revenue.

Revenue Commissioner Bryan Butcher told Senate Finance April 6 that the department has been overwhelmed with regulatory changes required by the two new oil taxes the Legislature has enacted recently, Petroleum Profits Tax in 2006 and Alaska’s Clear and Equitable Share in 2007.

Butcher said the department was just digging out from the work of implementing regulations for the tax changes and beginning work on a $35 million tax system. PIMS “would likely cost millions of dollars,” compete with the core mission of Revenue’s Tax Division to assess and collect taxes and likely delay completion of core duties, he said.

Much of the information to be included in PIMS is already gathered by various departments, Butcher said, and most of what Revenue gathers is confidential. He said millions of data elements would have to be manually uploaded and a determination would have to be made as to confidentiality.

He projected that PIMS could delay implementation of the tax revenue management system and said PIMS wouldn’t be a wise use of state resources.

In addition Revenue, information for the system would be provided by the Department of Natural Resources and the Alaska Oil and Gas Conservation Commission.

In fiscal notes on the bill, all agencies indicated additional staffing would be required for PIMS: one contract position at AOGCC; eight positions in DNR’s Division of Oil and Gas; and four positions in Revenue.

Based on the comments I saw in your post, it looks like the difference between Parnell/AK House and the Senate may be large enough to require some bit of time looking into the differences before a Special Session would actually be called.

Again not to be argumentative, but I can't resist one comment from your article posted here by Kay Cashman (who I pay a lot of attention to):

Referring to a slide benchmarking Alaska tax rates against other fiscal regimes, he said what PFC has said is at $100 per barrel ranges, government take under ACES is in the mid-70 percent, [emphasis mine] “and that is very, very high by OECD standards, second only to Norway and certainly in particular much higher than the levels of government take we see elsewhere in the Lower 48 which are the places in particular Alaska at the moment is competing with for investment capital.”

Too bad Mayer doesn't break that down. You and I both know ACES is only one component of that assuming the 70% is even true, which I doubt. Mayer certainly wanted to leave the impression that it was only because of ACES, which is disingenuous. Another example of why Alaskans aren't getting an honest discussion of the problems up there.

You and I both know ACES is only one component of that assuming the 70% is even true, which I doubt.

- - - - -

I agree it is only one component. That number also includes Royalties, Corporate Petroleum Income Tax, Petroleum Property Tax, and Federal Taxes.

That was one of the problem with Alaska taxes is there are too many levels of special taxes on the petroleum industry, not paid by other industries. I don’t consider Royalties in that category, those make sense in selling minerals.

In my opinion, the focus on ACES is all these other taxes already existed, when ACES was put in place adding to the burden. When it was sold to the public in Alaska, it was advertised as only changing 22.5% to 25%. The media and supporting politicians gave little talk to the steep climbing rate once oil was above $30; in my opinion, living in Alaska at the time, it was dishonest in the way it was sold to the population. So, ACES was the last one added, it should be the one scaled back.

An honest discussion would go to why the oil companies aren't investing in Alaska no matter what the tax system is, as my analysis of 9 years of ConocoPhillips Alaska financials clearly shows. They've been pocketing large profits under all 3 tax schemes even though their capital investment is up modestly under ACES.

Wake me when that happens...LOL. Otherwise, good post. I'll defer to others at this point who may want to chime in.

Edit: BTW, Kay Cashman gave me the idea to really dig into the CP numbers when, in 2009, she wrote an article explaining that Alaska was a great place to make money in the oil business based on CP's outstanding performance in 1Q 2009 under ACES. I expanded her analysis to include CP's performance under all 3 tax schemes.

http://www.petroleumnews.com/pntruncate/936617849.shtml

would go to why the oil companies aren't investing in Alaska no matter what the tax system is

Really? It doesn't matter what the tax penalty is? The companies should just be happy to pay it and go on?

as my analysis of 9 years of ConocoPhillips Alaska financials clearly shows

What has the production rate done in that time period? You are comparing a time period where the major investment for the capital cost to build infrastructure was already spent and only operations and maintenance was the expense. If they are not investing dollars to replace declining production, then they don't have a long-term future.

The oil business requires significant capital investment before you get a return. Those dollars don't happen in the same year or the following.

would go to why the oil companies aren't investing in Alaska no matter what the tax system is

Really? It doesn't matter what the tax penalty is? The companies should just be happy to pay it and go on?

as my analysis of 9 years of ConocoPhillips Alaska financials clearly shows

What has the production rate done in that time period? You are comparing a time period where the major investment for the capital cost to build infrastructure was already spent and mostly operations and maintenance was the expense. If they are not investing dollars to replace declining production, then they don't have a long-term future.

The oil business requires significant capital investment before you get a return. Those dollars don't happen in the same year or the following.

I'm responding now because nobody else chimed in.

It doesn't matter what the tax penalty is? The companies should just be happy to pay it and go on?

I didn't say that. I'll say my words. You say yours. OK? I said that lack of investment in Alaska has been going on far longer than ACES has been on the scene, covering all 3 tax systems. That is a fact. I've further stated that capital investments are up modestly in Alaska under ACES. That, too, is a fact. I've also stated that CP's profitability in Alaska has been strong under no matter what the tax system is. That is also a fact.

You, OTOH, continue to pin all the problems on ACES and Palin. You've been making that case for a long time. You've also asserted, as you did yesterday, that the effective governmental take was 85% at current price levels. I assumed you were talking about Alaska since it dovetails on some of yours and Paul Jenkins' numbers that have floated around here, which is a crock. When you clarified your remarks, you went to a 48% number for Alaska's take. Now in this article today, you say 70+% for the total governmental take. You're a moving target.

As for the 48%, I disagreed with it and pointed to CP's effective Alaska tax rate of 31.2% in 2011 on an avg. price of $105.95. I realize that doesn't include royalties to the state. That's kinda murky from my research. The AK Dept. of Revenue says that the majority of fields are charged at a 12.5% rate but then says that only a fraction of the oil is charged royalties. They further compound the problem by lumping oil royalties in with rents in their revenue summary. I don't know how to figure that all out. Do you?

Amanda Coyne, who you dismiss (BTW she hates Palin, too), calculates the total AK take, including royalties, at 39%. From looking at the ACES effective tax rate curve at $100 oil, it looks like she just added the 12.5% average royalty number to the ACES effective rate at $100 to come up with the 39% total take number as compared to ND's 33%. Whether she's precisely right or not on royalties, that's a far more real comparison of the actual competitive situation between AK and ND than you or the oil companies have been making to Alaskans. And yes, obviously there are other factors involved than taxes, possibly disadvantageous to Alaska

As for your overall remarks in the post I'm responding to, everybody understands that production is declining up there and nobody likes taxes. I know I don't. That said, I hope you agree that Alaska deserves a return on their state-owned resources that would continue to help wean them off federal dollars.

The oil companies want a $10B tax giveback in return for a guarantee of...nothing. They've talked about a $5B investment in return for the $10B but I've seen nothing from them that they would agree to put that number in the bill as a guarantee. Put it in the bill and you might be surprised at my reaction. Don't hold your breath waiting for that guarantee to happen. Their attitude is, show me the money and we'll do good things. If Alaskans want to buy into that again, good luck to them.

In terms of honest discussion, I'd like to hear further from the oil companies on what the $5B would go for, if they're willing to guarantee that investment (they aren't). For instance, some have said that taking TAPS back north of 1,000,000 barrels/day would require a major $ investment to upgrade the aging equipment. Is this true? If it is, I don't know why they're not making that case more vigorously. I think that would make their case stronger that Alaskans need to contribute to that. The bottom line, though, is the question of just how is the industry going to increase the flow of oil. If they're going to hit up Alaskans while pumping federally-owned oil through the pipeline (say ANWR), I say screw that. Hit up the feds for the money. They're the real problem in Alaska, anyway.

As for the 48%, I disagreed with it

The state records all the money they collect. We can debate if the Royalty oil should be counted in the baseline which would lower the percentage, but I don't see how you can make that argument. I don't know why you would claim any other source would be more complete than the State for what they collect themselves.

hat the effective governmental take was 85% at current price levels. I assumed you were talking about Alaska since it dovetails on some of yours and Paul Jenkins' numbers that have floated around here, which is a crock. When you clarified your remarks, you went to a 48% number for Alaska's take. Now in this article today, you say 70+% for the total governmental take. You're a moving target.

Two points, it is a moving target because the system Alaska uses constantly changes with price. One based near $100 and one at $120 give different percentages. But both of those are not the total average, they are the incremental take at that price. That means, for each additional dollar, that percentage is taken; not of the total dollars made at that point. It shows why it can be economic to stay where they are, but not economic to try and do more.

The oil companies want a $10B tax giveback in return for a guarantee of...nothing.

Try a $1B return of the tax level. How can it be $10B when they don't pay that in total now. What did the state give in return when they raised the rate by a billion back then?

It appears enough people agree that it is too high and needs to be fixed. It will now carry out into the special session.

http://www.adn.com/2012/04/15/2424739/key-legislation-bogs-down-in-sessions.html

We can debate if the Royalty oil should be counted in the baseline which would lower the percentage, but I don't see how you can make that argument.

Once again, I've never said that royalties shouldn't be included in this debate. It does tend to confuse the issue with Alaskans, though, who are being asked to consider only taxes, not royalties. The oil companies know that Alaskans won't agree to touch royalties because then we're talking about the Permanent Fund.

In my ConocoPhillips analysis of concrete numbers, I'm forced to exclude royalties because they don't report them.

In your 48% number, you use the discounted price of oil after transportation costs. Alaska uses the ANS WC number in all their discussion and calculations about taxes, $94.49 for the time period you cite. Also, it's 4 fiscal quarters against the calendar data I'm using. I don't care that you're using that price ($87.32), but it makes it more difficult to compare Alaska's net-revenue system against gross value-based systems. It's already difficult enough with most companies operating on a calendar year.

What's the total state take including royalties in TX and LA? I haven't looked at that since I'm starting to lose interest in all this. I probably ought to, though. Might be very interesting.

Alaska seems hell-bent on another one-sided bargain with the Big 3. The Corrupt Bastards Club will soon be rejoicing. The most profitable place in the world for the oil companies and bought-and-paid-for politicians may soon get another huge chunk of $ so they can chase opportunities outside the U.S., where the FEDS have made it very unattractive to make bets despite the huge resources available.

In 2007 under Murkowski's PPT, CP paid taxes at a rate of 21.9% at $69.75/barrel. In 2010 under Palin's ACES, CP paid at a rate of 22.5% at $78.61/barrel. Yet I've never heard a peep out of you or the Big 3 complaining about PPT. That's...odd. LOLOL.

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