Senate committee works over its version of oil tax revamp

A new version of a bill revamping the state’s oil production tax developed by the Senate Finance Committee in Juneau seems to hit the main targets of reducing the state tax on all oil to a range competitive with other producing regions, providing special incentives for new oil, and simplifying the tax, members of the committee say.

The new version of Senate Bill 21 was presented to the committee March 12, and the committee continued working on it through March 13. The Department of Revenue was presenting the financial impacts of the new version March 13, which amount to about $1 billion per year in state revenue reduction for fiscal year 2014, the budget year beginning July 1.

Committee co-chair Sen. Kevin Meyer, R-Anchorage, said he and several senators worked through the weekend — when many legislators had taken a break to attend Energy Council meetings in Washington, D.C. — to nail down major concepts in the new version.

“Overall, we made very few changes to the Senate Resources committee bill, and I want to compliment Sen. (Cathy) Giessel (R-Anchorage) for her work as chairman of that committee. We did tweak the bill, however, and turned some of the knobs differently,” Meyer said.

Sen. Anna Fairclough, R-Eagle River, said one of her objectives is to simplify the tax law. The new bill does that by eliminating the progressivity formula in the current law, a change that had been made by the Resources Committee, on which Fairclough also sits, but has been retained in the Finance Committee bill.

“Also, the changes we made in the tax credits requires the investments to be made in Alaska. If Alaska is to have ‘skin in the game’ by investing (in new development with tax credits) we want to make sure the money stays here,” Fairclough said.

The change Fairclough referred to is a new requirement that exploration companies “cashing out” tax credits under a Net Loss Carryforward provision — in other words, by having the state write a check — must demonstrate that the companies will reinvest that amount in new work in the year the money is received.

If that can’t be shown the company can still benefit from the Net Loss Carryforward but can only do so by crediting it against tax liability from new production.

Other changes in the new Senate bill include increasing the base tax rate under the state’s net profits-type production tax from 25 percent to 30 percent, retaining a $5-per-barrel tax credit applied to all production that was a part of the Senate Resources committee bill, liberalizing provisions of tax credits aimed solely at explorers, which are now restrictive, and including an altered “Gross Revenue Exclusion” incentive for new oil that was a part of Gov. Sean Parnell’s original proposal.

Meyer said that in the weekend work sessions he initially favored retaining some form of “targeted” capital investment tax credit, such as one aimed at new well work, but grew concerned about the financial liabilities.

“The hit on the treasury form the capital tax credits could be huge, so we opted to stick with incentives for new oil with the GRE,” or Gross Revenue Exclusion, he said.

The GRE would allow a certain amount of “new oil” to be produced that would be essentially tax free. In the latest Senate bill it is 20 percent of the new production tax free for 10 years.

There has been some debate over the capital investment tax credits. Current law allows a 20 percent investment tax credit for all capital expenditures by industry. The governor’s original bill removed this, based on concerns that the flat 20 percent tax credit had no connection to stimulating new production and that tax credits targeted at certain activities are more effective.

Secondly, Parnell was concerned about the growing financial liability of the accumulated tax credits, which will total about $1 billion in fiscal year 2014.

However, independent companies like Pioneer Natural Resources argued that the tax credits were very helpful in helping firms overcome the high cost hurdles of developing new projects, and larger producers — ConocoPhillips for example — argued that the capital tax credits help soften the regressive nature of the current tax under certain lower price conditions.

The Resources Committee, however, did not choose to re-insert the capital investment tax credit and substituted it with the $5-per-barrel tax credit for production.

Extensive modeling by consultants showed the Resources Committee that a combination of changes including the per-barrel tax credit and a higher base tax rate would have the effect of leveling the tax rates over several ranges of oil prices, high and low.

Having the tax effect to be level, and competitive, over a range of prices is important to the industry. The principal defect of the current tax law, industry argues, is that the progressivity formula drives the state tax to very high levels at higher oil prices including current prices.

The governor’s original bill solved that by eliminating progressivity, but its elimination of the capital investment tax credit had the effect of increasing industry taxes at the other end of the lower prices of the spectrum.

The Senate Resources bill, with its changes, didn’t solve the problem at the low end of prices, but the new Senate Finance bill appears to have now accomplished that, according to modeling done by PFC Energy, the Legislature’s main consultant.

A goal of the committee, to reduce “total government take” to a range competitive with other regions, at about 60 percent, appears to be achieved across the range of oil prices from $60 a barrel to $160 a barrel. The work was done and presented to the Finance Committee in Juneau March 12 by Janak Mayer, PFC Energy’s Upstream Manager.

Total government take including all payments, state and federal, is about 74 percent under the current state tax.

Achieving an even tax effect across price ranges is important to industry when new investments are planned because there is always uncertainty over what will happen to oil prices in the future.

One element of uncertainty that remains in the new bill is just how the new Gross Revenue Exclusion, or GRE, will work in the big producing fields of the North Slope. The bill has clear parameters on when “new oil” will be eligible for the GRE tax reduction outside the producing fields but a complication is that the bulk of new oil yet to be developed is actually within the present oilfields, heavy oil for example.

The Senate bill now contains language that would essentially leave it to the Division of Oil and Gas to certify “new oil” within the existing fields that wouldn’t be developed without the tax reduction. Just how this will be done has to be worked out, however.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.