Uncertainty remains on tax change effects
The oil tax bill now moving in the Legislature puts Alaska in the middle of the pack of oil producing regions in terms of “government take” of net profits and should bring new industry investment quickly, consultants to the Legislature say.
But it’s a gamble because there are no guarantees.
Senate Bill 21, debated by the Senate March 20, would lower total government tax on oil production profits — state taxes, royalties, and federal taxes — to about 60 percent to 62 percent, down from 74 percent under the current tax.
The gamble is that if the Legislature passes the bill and there is no response from industry, the price tag to the state treasury is hefty: $3.95 billion to $6.33 billion over six years, the amount depending on oil prices.
However, that could be offset by gains in oil production if there is even a modest response from industry, estimates by the Department of Revenue indicate. In a fiscal note developed for the latest version of SB 21, the department said that four new drill rigs working in the existing fields could add enough new oil to erase the cost of the tax by Fiscal Year 2015 at $100 per barrel oil prices.
If the response was more vigorous, and including a new well pad project in an existing field, along with the four rigs working, and including a separate new 50-million-barrel small field similar to the new Mustang field now planned for development by Brooks Range Petroleum, the state would be making more money under the new tax by FY 2015 and by FY 2018 would be $700 million per year over revenues under the current law.
Two consultants, Barry Pulliam of Econ One, a Los Angeles-based firm working for the Department of Revenue, and Anchorage-based petroleum economist Roger Marks, working for the Legislature, agreed with the department’s estimates.
New production totaling about 90,000 barrels per day would make up the loss of revenue within six years, Pulliam told the Senate Finance Committee March 14.
What is troubling legislators, however, is that the three major North Slope producers say the tax change isn’t enough to really move the needle for them.
ConocoPhillips, BP and ExxonMobil told the Senate Finance Committee, also on March 14, that the top tax rate in the latest bill, 35 percent of net profits, is too high.
This brought a scolding from Sen. Anna Fairclough, R-Eagle River, a member of the Finance Committee, who said the companies overstated the effect of the base tax rate, in her opinion.
When a $5-per-barrel production tax credit that is also in the bill is figured in the effective tax rate is well below 35 percent, she said.
Pulliam, of EconOne, said including the per-barrel production tax credit brings the effective tax rate to 28 percent, on average.
The major companies’ reluctance to make commitments has given the opponents of the tax change a lot of ammunition, however.
Rep. Les Gara, D-Anchorage, a critic of the tax bill, quoted Sen. Kevin Meyer, R-Anchorage, calling SB 21 a “crapshoot” to the Juneau Empire because the companies are promising no new production.
In press release, Gara also quoted Bob Heinrich, ConocoPhillips’ vice president for finance, in telling the Senate Finance Committee, “at this point we are not in a place where we could say how much we would do differently if this bill passed.”
BP’s Damian Bilbao and ExxonMobil’s Dan Seckers made similar comments to the committee.
“It still fails to move the bar,” Bilbao said.
Seckers, of ExxonMobil, said the new bill, “does not make Alaska more attractive” than competitors and that it’s not good enough to be in the middle of the pack.
“Alaska needs to make itself as attractive as possible,” to offset other disadvantages, mainly high costs,” Seckers said.
However, “anything is better than ACES (the current law) and the new bill is a significant improvement,” over that, Seckers said.
As it emerged from the Senate Finance Committee, SB 21 makes several changes that deal with previous objections from the industry, mainly the effects of the tax across a range of oil prices.
Meyer, who chaired the Finance committee sessions, gave credit for heavy-lifting to the Senate Resources committee, chaired by Sen. Cathy Giessel, R-Anchorage, which had previously worked on the bill.
Meyer said the Finance committee tweaked the bill developed in the Resources committee but kept its essential elements.
Those include the $5-per-barrel tax credit on all oil production, which is intended to replace the 20 percent capital investment tax credit in the current law, a higher base tax rate, increased from 25 percent currently to 35 percent, and liberalization of tax incentives for exploring companies so they are more effective.
An important part of the proposed bill is a provision to lower tax rates on new oil, both from new fields and new projects in existing fields, but the latest version of the bill requires the companies to demonstrate to the state that “new oil” in existing fields is really new.
Most important is the elimination of a “progressivity” formula in the current tax law that drives up taxes to very high levels as oil values, mainly a factor of price, are increased.
The latest version of the bill also eliminates progressivity.
The mixture of all components of the new bill accomplishes one important objective in that it levels the effect of the tax across a range of oil prices, high and low.
This is important to the companies because new projects must be seen to remain reasonably profitable whether oil prices go up or down.
The current state tax has taxes to high at higher prices, like today’s, while the governor’s original bill reversed that, lowering taxes at high prices but increasing them at lower prices.
Modeling done by the consultants, EconOne for the revenue department and Roger Marks and PFC Energy, another firm working for the Legislature, allowed lawmakers to develop the mix of tools in the tax to accomplish that leveling.
Tim Bradner can be reached at [email protected].