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Oil Taxes 101

Oil Taxes 101. Bradford Keithley Perkins Coie, LLP Partner & Co-Head, Oil & Gas Practice March 29, 2013. Agenda. Understanding investment The role of government take in investment Five important elements of oil tax policy A comment on tax credits

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Oil Taxes 101

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  1. Oil Taxes 101 Bradford Keithley Perkins Coie, LLP Partner & Co-Head, Oil & Gas Practice March 29, 2013

  2. Agenda • Understanding investment • The role of government take in investment • Five important elements of oil tax policy • A comment on tax credits • The role of overall fiscal policy in driving investment

  3. Understanding investment • Investors think long term • What are the fiscal terms likely to apply over the full investment cycle • Price • Use a price range • Fiscal terms and costs • Use assumptions about fiscal terms and costs • Major field investments: 20 years • Later life, enhance field development options: 5 – 10 years

  4. The role of Taxes in investment • A determinative cost • Overall government take is the largest development cost • Investments go to best overall returns over price and life cycle

  5. The significance of government take Government take levels are hugely significant … even under the current version of SB 21, government take exceeds investor take …

  6. Five important elements of oil tax policy • Competitive rates • Durability • Neutrality • Simplicity/Predictability • Alignment

  7. Five important elements • Competitive rates • Those necessary to attract sustained, long term capital • Competitive across the full, anticipated, long term price range, not just a portion • Durability • Investors are able to rely on fiscal terms over full investment cycle • Neutrality • Letting market decide what investments are best • Government bias impairs benefitting from changing technology and market dynamics • Simplicity/predictability • Easy to administer; not subject to significant interpretation/dispute • Easy to calculate and compare to other investment alternatives across a range of prices • Alignment • Aligned with investors in growing the pie

  8. A comment on tax credits • Tax credits are an effort to direct activity to activities favored by government • Exploration outside existing units • Capital spending • But, the oil market is dynamic • New technology provides new access • New understanding of old information • Also, providing incentives to some areas, burdens others • Credits inhibit investment in new areas as market evolves • Finally, government has limited knowledge • Attempting to direct activity usually creates unintended consequences • Neutrality enables market to identify best opportunities, enhances alignment

  9. The role of overall fiscal policy • Absent special provisions (e.g, contract), durability depends on investor perception of overall fiscal policy • Investors ask themselves … • … are the the fiscal terms likely to change during the investment life cycle ISER (Jan. 2013): “Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash.”

  10. The role of overall fiscal policy My concern: Alaska will not attract significant long term investment tied to its natural resources as long as potential investors see the type of fiscal cliff demonstrated in ISER’s analysis and anticipate that, once reached, they will be expected to be part of the solution.

  11. Summary • Tax policy needs to be designed to facilitate investment decisions • Overall government take levels usually are the largest development cost • Tax policy and rates should be designed to be • Competitive • Durable • Neutral • Simple/Predictable • Aligned with pursuing best investment opportunities • Tax credits are tricky and problematic • In the absence of special durability provisions, perceptions about overall fiscal policy is critical to attracting long term investment

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