Friday, March 9, 2012

Senate committee passes a bill to change oil taxes

By Tim Bradner
Alaska Journal of Commerce

A state Senate committee approved proposed changes March 2 to the state’s oil and gas production tax as part of an effort to attract more industry investment in declining North Slope fields.

Senate Bill 192, reported out of the Resources Committee and now in the Senate Finance Committee, is the Senate’s first step in developing its counter-proposal to an oil tax change bill passed by the state House last year, House Bill 110. The Finance Committee is expected to begin work on SB 192 the week of March 12.

“The committee substitute makes significant changes in the state’s oil and gas production tax,” Resources Committee co-chair, Sen. Joe Paskvan, a Democrat from Fairbanks, said.

However, the other committee co-chair, Sen. Tom Wagoner, a Republican from Kenai, opposed the bill and was one of two votes against moving the bill out of committee.

Alaska North Slope fields are declining at 6 percent to 8 percent a year and producers say the state’s high tax rate is an impediment to new investment particularly in existing fields.

State House leaders were critical of the changes in SB 192. In a March 5 briefing by House leaders, Rep. Mike Hawker, R-Anchorage, said the Senate bill does not “move the needle” sufficiently to attract new investment.

“It’s a cosmetic change, and it’s truly a tax giveaway because it gives something without getting anything in return,” meaning a tax reduction granted that is insufficient.

Hawker was also critical that a substantial section of the Senate bill, dealing with the separation, or “de-coupling,” of oil and natural gas taxes, had never been before the Resources Committee for discussion prior to its introduction in the new committee bill.

“This is a bill written by the Senate majority caucus, not by the committee,” Hawker said.

Industry spokesmen, who spoke to an earlier version of SB 192 in hearings March 1, said that without a key change considered but rejected by the Senate Resources Committee Friday the bill, SB 192, doesn’t go far enough.

Damian Bilbao, head of BP’s Alaska finance and new developments group, said that without the inclusion of a tax “bracketing” mechanism the change doesn’t have sufficient financial effect for producers.

The “bracketing” mechanism, working much like the federal income tax’s different tax brackets at different income levels, would apply to brackets of production as the crude oil prices rise rather than having the tax apply to the entire stream of production, which is the case in the current tax law.

In the Resources committee Sen. Lesil McGuire, R- Anchorage, proposed bracketing as an amendment to SB 192, but it was rejected on a 5-2 vote by the committee. Sen. Bert Stedman, R- Sitka and a member of the committee, said bracketing or something similar could be considered in the Finance Committee, where he is co-chair.

North Slope producers and Alaska Gov. Sean Parnell support the bill that passed the state House and is now in the Senate Labor and Commerce Committee, and that does include bracketing of the tax.

Senators say they felt the House bill gives away too much to producers and want to push their own bill. Sens. Bill Wielechowski and Hollis French, two Democrats on the Resources Committee, said the House-passed bill would lower state tax income by $1.8 billion a year. Initial estimates are that the changes in SB 192 would reduce taxes on producers by about $250 million per year.

However, the Department of Revenue has not completed its analysis of the fiscal impact of SB 192, and Senate President Gary Stevens said consultants to the Legislature are continuing their assessment of the impact of the SB 192 changes as the Finance Committee prepares for its review.

SB 192, as approved by the Resources Committee, would change a formula in the production tax, the “progressivity” formula, that sharply increases the tax rate at high oil prices and also caps the tax at 60 percent of net profits. In the current law the cap is at 75 percent.

The change in the progressivity formula would actually work in two stages. The current formula increases the tax rate, which begins at 25 percent of a company’s net profit, by 0.4 percent for every $1 increase of a company’s profit over $30 per barrel.

SB 192 changes this to a 0.35 percent increase up to a cap of 50 percent of profits going to the state in taxes, and then further adjusts the formula to increase at 0.1 percent for every dollar of profit increase up to a cap of 60 percent.

These changes would immediately benefit production from the so-called legacy fields, the large oil fields now in production where the producing companies say more production can be added.

In another change, the Resources Committee bill added a new section to further reduce taxes on new oil produced above a base rate of existing production in the producing fields, and also added a minimum tax based on gross revenues to protect the state if oil prices decline.

The new oil provision allows producing companies, or anyone bringing on new production, an allowance of a $10 per barrel increase to the per-barrel profit level when the progressivity formula kicks in. Thus, if the threshold for existing old oil is $30 per barrel net profit, this provision would make the progressivity apply at $40 per barrel profit for any increased oil produced from the field.

The minimum tax is essentially a reimposition of a severance tax on gross oil revenues, at a rate of 10 percent. Alaska’s production tax was based on gross revenues until 2006 when the change was made to a tax on net revenues.

The difference is essentially that a net revenues tax allows for production expenses to be deducted as well as transportation (pipeline and tanker) costs. Gross revenues allow only the transportation costs.

State economists have explained that the two types of taxes perform differently as oil prices, and the netback values, change. A net revenues tax gains the state more income at higher oil prices than a gross revenues tax, but also loses the state more if prices drop.

In 2007, when lawmakers enacted the current version of the oil tax, the gross revenues tax as an alternative minimum was hotly debated and was in fact included in the tax law but at a much lower rate.

SB 192 increases the rate in the gross revenues alternative tax so that a crude oil market price of about $70 per barrel the alternative tax would bring the state more revenue.

One other change separated the tax on crude oil from natural gas. Under current law the two are joined with the tax imposed on the computed British Thermal Unit value of combined streams of oil and gas when the two are produced together in wells.

Consultants have warned the Legislature that because of the sharply differing values of crude oil and natural gas the combined tax could result in substantial losses of revenues from oil once commercial production of gas begins on the North Slope.