JUNEAU — Major North Slope producers say legislators are making big strides so far in making Alaska more competitive for new oil investment, but Senate Bill 21, which passed the Senate narrowly March 20, still needs some changes to make the state really attractive.
The tax rate is too high, at 35 percent of net profits, and a “Gross Revenue Exclusion” feature that is a proposed incentive for new oil to be developed in producing fields is too vague and needs more precise wording, the companies told the House Resources Committee in hearings March 26.
Dan Seckers, ExxonMobil’s Alaska tax manager, said he’d like to see Alaska position itself to be more attractive against its competitors to overcome high costs and regulatory barriers that confront Alaska oil development.
“You’ve made significant progress in making Alaska more competitive globally just by eliminating ‘progressivity’ (a formula in the tax that drives up tax rates). If you do nothing else, that is significant,” Seckers said. “We’re bullish on Alaska. We want to invest here. You can make Alaska more competitive, but you need to also make it attractive,” to overcome high costs.
The bill as passed by the Senate does put Alaska “in the middle of the pack” among oil producing regions competing for industry investment, but at the top end of that tier, according to modeling by ConocoPhillips that was presented to the House committee by Bob Heinrich, the company’s vice president for finance, and Scott Jepsen, vice president for external affairs.
ConocoPhillips’ modeling shows the “total government take” under the current oil production tax, called ACES, at more than 75 percent of net profits from production. The version of SB 21 passed by the Senate would lower that to about 65 percent, according to the modeling data presented to the House committee.
If the base tax rate was lowered to 30 percent, a rate considered in the Senate but then raised to 35 percent in the bill finally passed by that body, the government take would be about 62 percent.
That level would position Alaska more in line with other producing nations like Australia, or the Lower 48, the data indicated. In its presentation ConocoPhillips overlaid its data on comparisons of fiscal systems developed by PFC Energy, a consulting firm hired by the Legislature.
Consultants to the Legislature, such as Roger Marks, a former state petroleum economist, have suggested using total government take as a better overall way of comparing fiscal systems than other ways of measuring the effect under tax systems of different nations, such as Internal Rate of Return or Net Present Value of particular projects.
Government take includes all taxes, state and federal, as well as royalty to landowners.
None of the companies appearing before House Resources March 26 would comment on what an appropriate base tax rate might be. The current tax law, ACES, has it set at 25 percent, although the progressivity formula increases the rate as oil prices increase.
Another concern voiced by ConocoPhillips is that SB 21 still retains elements that make it regressive in terms of total tax burden, meaning that the tax burden climbs in lower oil price ranges.
Heinrich told the committee that his company encourages legislators to make the tax effect generally level across all ranges of oil prices, and SB 21 generally achieves that, at about 34 percent producer share of profits (or 66 percent to the state and federal governments), until prices drop to about $92 per barrel.
Below that the current ACES tax actually gives the companies more share of profits because of a 20 percent capital investment tax credit in the current law. This has a major effect on company returns at lower prices. It is taken out of SB 21, however, and replaced by a $5-per-barrel production tax credit. That $5-per-barrel credit doesn’t do enough to offset the loss of the capital investment credit, however, Heinrich said.
At about $60 per barrel prices a minimum gross severance tax that is in both the current ACES law and SB 21 would kick in, driving the industry return down sharply to about 24 percent share of profits (76 percent to the state) if oil prices were to drop to just over $50 per barrel.
Tim Bradner can be reached at email@example.com.