Friday, January 18, 2013

Production focus; Governor proposes end of progressivity, changes in capital, exploration credits

Kristen Nelson
Petroleum News

As expected, Alaska Gov. Sean Parnell has submitted a production tax bill to the Alaska Legislature. The proposal, focused on increasing production on the North Slope, eliminates progressivity to encourage investment and makes substantial changes in the credits currently offered — eliminating some and making others redeemable only against production.

Department of Revenue scenarios in the fiscal note accompanying the bill indicate that at currently forecast production rates and at oil prices of $100 a barrel and above the state would see reduced revenues from the elimination of progressivity, which gives the state an increasingly larger portion of the net value of oil as oil prices rise.

Revenue’s fall forecast is based on $108.67 per barrel for fiscal year 2013, and $109.61 per barrel for FY 2014, with prices above $100 a barrel forecast through 2022.

The results from the tax changes would be different at lower oil prices.

At $90 a barrel state general fund revenues would increase from fiscal years 2014 through 2018 and be flat in FY 2019.

Revenue ran scenarios with increased production and the state does better at $90 a barrel with more production; potential revenue losses at increased volumes and at higher oil prices vary.

While at currently forecast production state revenues drop with the elimination of progressivity, the result from limitation of credits for qualified capital expenditures on the North Slope is positive to the state, ranging from a low of $300 million in the state’s favor in FY 2014 to a high of $700 million in the state’s favor in FY 2015.

At prices and production in Revenue’s fall 2012 fall forecast, the total fiscal impact to the state is negative, ranging from a low of $550 million in FY 2015 to a high of $1.025 billion in FY 2017.

Downside protection for Alaska

ACES, Alaska’s Clear and Equitable Share, the state’s current production tax, was enacted in 2007; it raised taxes compared to the previous tax increase, the Petroleum Profits Tax, passed in 2006.

Credits offered under ACES were intended to encourage investment in the state, while the progressivity feature was intended to give the state a larger share of profits when oil prices were high. The “high” prices evaluated when ACES was discussed in 2007 were lower than prices have been in recent years.

Parnell summarized the new proposal in his Jan. 16 State of the State address, citing dropping production and remaining oil on Alaska’s North Slope and telling legislators: “Our problem is not below the ground. Our problem is above the ground. One recent analysis shows a company will make substantially more, at today’s oil prices, by investing in the Lower 48 rather than in Alaska.”

The bill proposes “eliminating progressivity, and rebalancing capital tax credit payments” to create “a simpler 25 percent tax,” he said.

New production encouraged

In his transmittal letter Parnell told legislators tax changes are needed because of declining production.

The current tax system does not “attract new investment for more production,” the governor said, but takes more profit from investors at high oil prices than competing jurisdictions. Its “generous tax credits for capital expenditures support company spending now, but on spending not necessarily targeted for new production,” exposing the state to “the short-term risk of writing large checks from the treasury for those credits with no corresponding increase in production.”

The governor said his proposal maintains a 25 percent base tax rate with a 20 percent gross revenue exclusion for new oil while eliminating progressivity and qualified capital expenditure credits for the North Slope.

The governor said the bill “targets new Alaska production rather than just company spending, thus unlocking more of Alaskans’ oil for more Alaskan private sector and public sector opportunities.”

The current 20 percent tax credit for qualified capital expenditures on the North Slope is eliminated effective Dec. 31, 2013.

The 25 percent tax credit for a carried-forward annual loss would be amended by “limiting the transferability and monetization of the tax credit,” encouraging “investment aimed at production by requiring a producer or explorer to carry the credit forward to offset future tax liabilities.” Currently this credit can be redeemed through the state or sold to companies with production tax bills.

Gross revenue exclusion

Revenue’s fiscal note says the bill includes a gross revenue exclusion for new production — from leases or properties on the North Slope that were not within a unit on Jan. 1, 2003, or from participating areas established after Dec. 31, 2011, for properties in a unit formed before Jan. 1, 2003.

Revenue said that because the provision is intended to incentivize future production, the revenue impact on the current production forecast is minimal.

The current small producer tax credit, which is nontransferable, is extended from 2016 to the later of 2022 or the ninth calendar year after first commercial production.

The Department of Natural Resources said in a fiscal note that with increased production there would be an increase in royalty revenues, calling the fiscal impact on royalty revenue “an indeterminate positive.”

Changes do not apply to Cook Inlet or Interior production.

The legislation was assigned to committees Jan. 16: House Bill 72 to the Resources and Finance committees; Senate Bill 21 to the newly formed Senate Special Committee on TAPS Throughput and to the Resource and Finance committees.

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