Alaska Journal of Commerce
A consultant retained by Alaska’s Legislature has recommended the state rein in taxes on oil production to attract industry investment but also to dismantle a complex set of exploration and development incentives that gives away too much, with the state paying as much as 80 percent of the cost of new exploration wells, state lawmakers were told in hearings Thursday.
The Legislature is reviewing the state tax system with hopes of encouraging new investment to slow or reverse a decline in production from the North Slope.
Following several days of joint hearings by the Resources and Finance committees of the state Senate, Pedro van Meurs, a Calgary-based expert on international fiscal systems, suggested the state revise its taxes so the total state take including royalty is no more than 75 percent on existing production and 65 percent on new production.
To encourage heavy oil development the Legislature may have to lower total state take to 45 percent, van Meurs said.
The current tax system has the state taking over 80 percent at high oil prices, which van Meurs said is too high. There is also a disconnect in the incentives in the tax system, he said. The exploration and development tax credit system now in the law is generous in assisting companies in finding oil, but once discoveries are made the production tax burden becomes very high, and is a big disincentive.
“For the large companies who are now producers, there’s no attraction for development any new oil found, so why even explore? They have alternative investment opportunities around the world that are much more attractive,” van Meurs said.
On the other hand the tax credit system is attractive to smaller companies who can enjoy the lower up-front cost with the state picking up most of the expense of drilling.
Another criticism is that Alaska’s existing tax system is too complex, and discourages companies from considering Alaskan projects. Repsol, for example, told van Meurs it had sought assistance in deciphering the Alaska system from four major accounting firms as well as the state revenue department and was never able to get answers for certain questions, he told the legislators.
Repsol went ahead with its Alaska exploration anyway, which is currently under way, but a simplification would make the tax system more transparent, van Meurs said.
Van Meurs’ most substantial criticism, however, was on the way crude oil and natural gas are combined for tax purposes when they are produced together, such as would happen on the North Slope if and when commercial gas production begins.
If gas has a much lower value than oil, as it does today, the effect of a tax on the combined Barrel of Oil Equivalent, which the current tax imposes, would be to sharply reduce the revenues compared with what they would have been if imposed on the oil and gas separately.
“Once you start to produce gas as well as oil you’ll lose billions. If you do a large gas project you could wipe out your revenues. This is the most nonsensical system in the world,” van Meurs said. “Alaska cannot develop its gas resources as long as this is on the books.”
Van Meurs suggested that the state simplify its taxes by removing the progressivity formula that sharply escalates tax rates at higher oil prices, leaving a flat 25 percent tax on net profits which is the base tax rate in the current law.
He would do away with an array of exploration tax credit but leave a basic 20 percent credit on all industry capital investment. To capture more gains from oil price escalation, he would include a 2.2 percent severance tax on gross revenues.
Van Meurs said this basic structure could be adapted with special tax rates for new oil and heavy oil. Natural gas would have its own, separate tax, so that gas production would not dilute oil revenues as would be the case under the current law.