Recent Alaskan bill seeks to reduce tax burden on larger oil and gas operations

Incentive could result in increased production to mitigate North Slope declines, says analyst

Uncertainty surrounds the outlook for Alaska’s fiscal terms as a referendum seeking to repeal a new bill, which imposes a flat 35% production tax rate, will be held in 2014, says a new report from research and consulting firm GlobalData.

According to the company’s latest report*, Alaska has made several changes to the fiscal terms governing its upstream oil and gas operations in the past decade, mostly through amendments to the production tax and the introduction of a vast range of tax credits, resulting in a relatively unstable regime over this period.

Alaska’s new production tax, as laid out in Senate Bill 21 (SB 21), seeks to reduce the tax burden on larger oil and gas operations in the hope that this will promote exploration and development activity in the region, thereby boosting its economic growth and employment.

However, opposition to the tax change comes from those who believe it will significantly affect state finances, by reducing the tax take, and low-margin oil and gas producers in the state for whom the tax burden will increase.

Evan Turner, GlobalData’s Lead Analyst covering Upstream Oil & Gas, says: With almost nine months to go until the referendum is held, there is a high degree of uncertainty around the likely outcome of the vote. Currently, polls suggest that the vote will be close, with no clear majority yet formed on either side of the argument.

However, given that it is the larger producers who are likely to gain from the tax change, it is expected that the no campaign may benefit from considerable financial support, so that it can promote a message of economic and employment gains. For instance, BP Alaska has announced that due to the tax changes, it plans to add $1 billion of investment for the next five years.”

GlobalData expects this referendum to be the key determinant of the medium-term outlook for Alaska’s  upstream oil and gas fiscal regime.

Turner says: “If SB 21 is repealed, the tax will revert back to Alaska’s Clear and Equitable Share (ACES) system, with rates varying from 25-75%. If not, the new flat rate of 35% will mean an improvement in the investment climate for large oil and gas operations and the possible deterioration for smaller operators.

Incentivizing larger operators in the state to increase investment and the drilling of wells should result in increased production to mitigate North Slope declines, concludes the analyst.

*Alaska Upstream Fiscal and Regulatory Report