Industry reps voice concerns over proposed oil tax bill
Oil industry players made their pitch to the House Resources Committee against further oil tax changes in the last days of February, which included direct criticisms of the Legislature’s new oil and gas policy consultant.
Alaska Oil and Gas Association CEO Kara Moriarty said in testimony that she found the characterization by Castle Gap Advisors Managing Partner Rich Ruggiero that industry advocates rely on predictable rhetoric to oppose potential tax increases to be “insulting,” while noting of late most governments have offered incentives as oil and gas prices have remained low.
In his introductory presentation to the committee Feb. 20 Ruggiero, a longtime industry engineer turned consultant who was employed by Gov. Sarah Palin’s administration during the development of the since-repealed ACES tax policy, said oil company representatives “routinely deploy the top three detractor themes” that increased government take upsets financial stability, makes a regime less competitive in attracting investment and will put jobs at risk.
Suffice to say the introduction did not go over well with minority caucus Republicans on the committee who are continuously working to poke holes in the oil tax bill. House Bill 111 was proposed by the Resource co-chairs and Anchorage Democrats, Reps. Geran Tarr and Andy Josephson.
ConocoPhillips Alaska Vice President of External Affairs Scott Jepsen said the simple message is repeated by the industry because it has merit.
“We say it because it’s true. Tax policy does matter; tax policy does affect all of these things,” Jepsen said of the less stable, less competitive, less jobs mantra.
In testimony Feb. 27, Ruggiero reiterated statements mostly lost in political bluster the first time he presented that the oil industry is in a constant state of change, which includes regular tax changes by governments worldwide.
He again noted Alaska would be an outlier to reduce incentives and increase taxes for a second consecutive year when oil prices are relatively low.
Jepsen, and nearly all of the half-dozen or so industry representatives, urged the committee to not prioritize short-term, deficit-reducing revenue over the long-term overall economic benefits to the state a prospering oil industry can provide.
“The Legislature has an unenviable task and we understand that a discussion around oil taxes was to be expected,” BP Commercial Vice President Damian Bilbao said to the committee. “However, it is critical that in this oil price environment changes to Alaska’s oil taxes and polices are conducted with a scalpel and not a hatchet.”
House Majority members have insisted additional cuts to the state’s oil and gas tax credit system this year be a part of a comprehensive fiscal plan to resolve the roughly $3 billion ongoing budget deficit.
HB 111 would accomplish that by eliminating future cashable credits to small North Slope operators after House Bill 247 killed cashable Cook Inlet credits last year.
However, HB 111 also aims to increase taxes during times of low prices by raising the minimum production tax from 4 percent to 5 percent; assuring deductible tax credits cannot offset a minimum tax liability; and reducing the current $8 per barrel credit for oil from legacy fields to $5 at prices below $80 per barrel.
The per barrel credit, which tails off as prices increase, is the roundabout way the state adds progressivity to its underlying 35 percent profits tax.
Producers argue increasing the minimum tax while reducing the “old oil” per barrel credit makes the progressive net tax doubly regressive at current $50 to $60 per barrel oil prices.
HB 111’s benefit to the state — or detriment to industry — would ramp up to approach nearly $200 million per year by 2022, according to Department of Revenue calculations.
Pat Foley, a vice president of Alaska for Caelus Energy said HB 111 would raise the oil price needed to justify turning the company’s prospects into producing developments by $5 to $7 per barrel.
As a small producer with big potential, HB 111 could uniquely impact Caelus if it were enacted as proposed.
A provision to lower the production cut-off from 50,000 barrels per day to 15,000 barrels per day, above which companies are not eligible for cashable, or refundable, credits would mean Caelus would likely not be afforded up-front support for its very large and publicized Smith Bay discovery.
The company estimates the remote western Slope find could produce more than 200,000 barrels per day once fully built out, but Foley said he is confident it will take at least $10 billion of investment to get to peak production.
He also attempted to alleviate fears that under the currently available 35 percent net operating loss, or NOL, tax credits Caelus would obligate the state to more than $3.5 billion in refundable NOLs for developing Smith Bay.
Rather, getting to initial production would require expenses in the $3 billion to $4 billion range, Foley said. That would in concept and under current law keep the state’s total NOL reimbursement under $1.5 billion, as startup of Smith Bay would immediately push Caelus above the current 50,000 barrel per day threshold, he added.
Josephson asked how confident the state should be in getting its return on its Smith Bay NOL investment if the tax structure is kept as it is. He also compared the state’s ever-growing cashable tax credit liability — expected to approach a total of $1 billion in about a year — to other large obligations on the state’s balance sheet such as employee pensions and school bond debts.
Caelus estimates Smith Bay would generate more than $34 billion in total revenue for the State of Alaska over the life of the field.
“When Smith Bay becomes a reality, when a commitment is made to spend up to $10 billion, it will be with a very, very, very high assurance that everybody’s going to prosper and get their money back,” Foley responded, noting last year’s HB 247 limits the state’s annual credit payment to a real value of $61 million to any one company.
Foley added that alternative state aid in the form of low-interest loans or royalty modifications could be helpful as well in response to questions from Rep. Justin Parish, D-Juneau.
Tarr and Josephson have emphasized they are not committed to the current version of HB 111 and given the breadth and detail of industry input the Resource leaders have sought, changes to several provisions could come before it is sent out of the committee.
Elwood Brehmer can be reached at email@example.com.