Bradners'

Alaska Legislative Digest

October 25, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Advisor: Be wary of comparisons with other oil-producing regions

Legislators should be cautious in making comparisons of Alaska with other oil and gas producing regions because of critical differences in the “prospectivity” of the regions – the potential for discoveries and new oil. These can distort an analysis, consultant Steve Porter told the House Oil and Gas Committee Oct. 24. Over the past week legislators have been comparing government tax “take” in Alaska and other regions. Porter pointed out that the differences in oil potential are also important, however. Porter is a former Deputy Commissioner of Revenue and was a senior manager with ARCO Alaska Inc. He is now under contract to the Legislative Budget and Audit Committee.

Setting aside Cook Inlet, a mature and declining basin, as well as regions with potential far in the future like Bristol Bay, Porter said the only parts of the North Slope which can make contributions to the state budget are the central slope area of state-owned lands between the Canning and Colville Rivers and the National Petroleum Reserve-Alaska west of the Colville River. Geologists believe that the state-owned central North Slope area, which has been pretty well picked over, has only 20 percent of the oil that may be discovered; NPR-A, which will pay production tax and part of the federal royalty to the state, has 30 percent; the federal offshore, which makes no royalty or tax contribution to the state, has 50 percent.

Porter’s point is that a valid comparison of potential should include only the central slope area and NPR-A, both regions which pay revenues to the state but which have potential for small to medium-sized discoveries and very high costs. Find other regions like this to contrast Alaska with, not regions with potential for major discoveries, Porter said. His main message is that comparisons with other regions are tricky and must be done carefully.

Porter also took aim at the administration’s proposed tax of 10 percent of gross revenues on “legacy” fields (Prudhoe Bay and Kuparuk). His top recommendation to legislators is to get rid of the gross revenues tax, he said, because it can load up the tax burden if oil prices dip and injure the economics of high-costs projects like heavy oil. “The gross revenues tax is a penalty aimed right at heavy oil,” Porter said. In talks with consultants to the administration Porter found agreement with this, he said. The governor’s main goal with the gross revenues tax is to secure the state’s revenues if oil prices dip. A better state policy, Porter said, would be to avoid the disincentive of the gross revenues tax and for the Legislature to set money aside during years of high oil prices in a “rainy day fund” to use if prices dip. “The gross revenues tax is just spendthrift protection,” he said.

Porter said that if the state’s priority is to stem the production decline the most intelligent fiscal system would be one that encourages, in order of priority, (1) new investment in the large “legacy” fields; (2) investment in heavy oil, and (3) exploration and new entrants in exploration, such as the independent companies. Of these goals, investment in the legacy fields creates the biggest and quickest return in terms of new production because the risk of failure is low.

The existing Petroleum Profits Tax accomplishes all three of these objectives admirably, Porter said, with its mix of allowing capital and operating cost deductions and the additional capital investment tax credits. Except for the gross revenues tax, Gov. Palin’s proposed changes are essentially “tweaks” to the existing Petroleum Profits Tax and should not do serious damage to industry unless the tax rates were raised significantly, Porter said.

Chevron, Anadarko, Pioneer join in opposition to tax hikes

Alaska’s “other” energy companies (aside from the big three producers) all urged the Legislature to stick with the current Petroleum Profits Tax either because it provides a marginal incentive or the state had enough time with the tax to confirm the problems the administration claims exist.

John Zager, Alaska general manager for Chevron, told the Senate Finance Committee Oct. 23 that his company is “dramatically increasing” its capital spending here. Plans to increase capital spending from more than $150 million in 2007 to over $400 million in 2009 could be jeopardized by Gov. Palin’s proposed tax increase, Zager said. Also, lack of progress on a gas pipeline significantly hampers investment because of the inability to monetize gas found while drilling for oil. “We are fighting an oil and gas business with one hand tied behind our back,” he said.

Ken Sheffield, president of Pioneer Natural Resources Alaska, Inc., said Alaska’s main competition for his company's investment funds are other U.S. and not international prospects. He said Pioneer was not consulted by the Murkowski administration when the PPT bill was written but said the current law provides a “modest incentive” for exploration.

Anadarko Petroleum Corp. spokesman Mark Hanley also endorsed the present PPT and pressed lawmakers to reach a decision that would close debate on oil taxes. He said he has warned his management that future debate on natural gas terms “will open it all up again,” including oil. He has also told management that a “reasonable” progressivity escalator in the tax actually improves Alaska’s stability by reducing legislators’ appetite for tax rate hikes at premium oil prices.

Thursday’s schedule

10 a.m.

• Senate Resources Committee: questions for previous presenters.
• House Special Committee on Oil & Gas: roundtable discussion with administration, industry and legislative consultants.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.