Oil tax bill gets chilly reception from industry
State Revenue Department officials say the oil production tax increase being debated in the House would not change bottom lines much at current market prices but company leaders stress it would further cement Alaska’s poor reputation in the oil and financial sectors.
Tax Division Director Ken Alper testified to the House Resources Committee Jan. 26 that the proposal to raise the minimum gross production tax from 4 percent to 7 percent would increase the state’s tax take by 54 cents per barrel at oil prices of $70 per barrel.
According to the state Revenue Department, Alaska North Slope crude sold for $70.57 per barrel when markets closed Jan. 29.
That 54 cents per barrel extrapolates out to an additional $91 million per year to the state per year at current prices and production rates.
Alper said the state can be expected to receive about $400 million in oil production taxes at $70 oil and again current production rates forecast for about 533,000 barrels per day.
House Bill 288, the vehicle for the tax proposal sponsored by House Resources co-chair Rep. Geran Tarr, D-Anchorage, would become revenue-neutral at $72 per barrel, Alper projected, because that is the price at which the progressive net profits tax calculation would generate more revenue for the state than the gross minimum tax and by law automatically kick in.
However, HB 288 would amount to an annual collective tax increase of $205 million to $256 million at average prices between $50 and $60 per barrel — where the delta between the current 4 percent and proposed 7 percent minimum tax would be realized.
Alaska’s oil price-linked production tax is structured to act as a progressive net profits tax at higher market prices and as a gross tax that ensures the state makes some revenue at lower prices.
Whichever calculation between the net profits calculation, with the per barrel credit that grows at low prices, and the simpler 4 percent gross tax is the one the state applies to tax North Slope oil.
Currently, that “crossover” price, where the applied tax switches from the gross to the net tax calculation, is just less than $70 per barrel, according to Alper.
The crossover price has been falling in recent years as companies have cut costs to stay in business while prices have been mostly less than $70 since late 2014.
In fiscal year 2015, North Slope operators deducted on average $43.60 in lease expenditures per barrel from the net taxable value of their produced oil, according to the Revenue Department. Today, those lease expenditures have fallen to about $25 per barrel, Revenue estimates.
“There has been more efficiency in the industry and that has made them money but that has also made us money because it lowers the breakeven price of a barrel of oil,” Alper said.
Anchorage Republican Rep. Chris Birch said the Legislature should be focused on doing what it can to spur more industry spending and oil production because the state also gets at least 12.5 percent of all North Slope oil through its royalty share, which, particularly during periods of lower prices, makes the lion’s share of petroleum revenue.
“The tax against the net is certainly worthy of discussion here but I think we need to not lose focus on the fact that anything we can do to encourage investment and production is going to have a much larger and significant impact on our state revenues,” Birch said during the Jan. 26 meeting.
Industry representatives testifying Jan. 29 before the Resources Committee stressed the fact that HB 288 could be Alaska’s eighth oil tax change in the 12 years since it switched from a gross to a net profits-based system in 2006.
Benjamin Johnson, CEO of BlueCrest Energy, a small company developing the Cosmopolitan oil field in Cook Inlet, said despite the fact that his company would not be directly impacted by HB 288, “the stability of Alaska’s taxing regime affects all companies.”
Cook Inlet oil is taxed at a flat $1 per barrel, and HB 288 applies only to North Slope production.
“We have to create an environment of confidence with global capital markets. So far Alaska has unfortunately gained the reputation of trying to squeeze the oil industry in any way it can,” Johnson added. “For the long-term good of Alaska I urge you not to support HB 288.”
While Alaska’s constant oil tax debates and not keeping up with expected refundable oil and gas tax credit changes has left a black mark on the state in the eyes of oil financiers, Tarr emphasized HB 288 is largely a means to start closing the state’s $2.5 billion-plus deficits absent another compromise from the Republican-controlled Senate.
Senate Republicans shot down a House-passed income tax last year. Senate President Pete Kelly, R-Fairbanks, said before this session that any other broad-based tax proposals would be met with “mocking laughter” and summarily dismissed in favor of further budget cuts.
House Speaker Bryce Edgmon, D-Dillingham, has said his caucus won’t push for an income tax this year but hasn’t ruled out other revenue measures.
On the other hand, state business leaders in sectors other than oil have pushed for the state to resolve its four years of large deficits in some manner to bring stability to local economies that have been in limbo as legislators tussle over what government services to cut and who should be taxed.
HB 288 is an alternative to otherwise fruitlessly pushing for a deal with the Senate on individual taxes, according to Tarr.
ConocoPhillips Alaska Vice President Scott Jepsen told the committee that despite the cuts made to the oil and gas tax credit program over the past two years the key provisions of the tax structure that took effect in 2014 with Senate Bill 21 — a change industry by and large supported — remain in place.
“I can tell you from our company, that (keeping SB 21 in place) has helped when it comes to our investment decisions,” Jepsen said.
He indicated that while those in favor of raising taxes on the industry often note royalty and production tax rates are higher in many oil states across the Lower 48, oil in those basins requires drastically less money to produce and because companies factor all economic elements into investment decisions meaning Alaska needs to have lower taxes to stay competitive.
“I like to say the center of gravity for oil and gas investment right now is in the Lower 48 and particularly in Texas,” Jepsen said.
He continued to say, “No surprise, we would recommend this committee not pass this bill and try to keep the competitive environment that we still have in place here in Alaska.”
Elwood Brehmer can be reached at [email protected].