ACES hot topic as Legislature convenes

Some legislators concerned tax may be anti-competitive; some want more information; others want state to get something for changes

Kristen Nelson

Petroleum News

Whether the Alaska Legislature will make changes in the state’s oil and gas production tax this year is an unknown, but the tax was a popular topic as legislators began the 2010 session on Jan. 19.

The Department of Revenue has issued a report on how the current tax is working; the governor is proposing tax credit and other changes (see story in this issue); and one bill has been filed to reduce the tax rate.

Alaska changed its oil and gas production tax in 2006 from a tax on the gross, generally referred to as the Economic Limit Factor or ELF, to a tax on the net called the Petroleum Profits Tax or PPT, revised in 2007 with the passage of ACES, Alaska’s Clear and Equitable Share.

Under ELF the tax was based on gross revenue, and the state received taxes even if the producers had no profit because of low oil prices. On the down side for the state, the ELF formula resulted in some fields paying very little production tax and when oil prices soared the state didn’t benefit.

Under PPT and ACES production tax revenues reflect the price of oil: The state faces the risk of receiving no production taxes if oil prices are very low but it receives a larger percentage of profits when oil prices are high.

Producers complained about the regressive nature of ELF, under which they paid taxes even if they had no profit; with PPT and especially ACES the complaint is that the state takes too much of the upside — the benefit producers realize when oil prices are high — thus making Alaska projects uncompetitive and hurting investment in the state.

One of the goals of ACES was to encourage investment in Alaska by providing tax credits for certain work done in the state.

Issue in Juneau

The effectiveness of ACES was a frequent topic as legislators held the first press availabilities of the session Jan. 19 and 20.

House Speaker Mike Chenault, R-Nikiski, said Jan. 19 that he didn’t know where legislators would end up on the oil tax this year.

“There’s been a lot of interest in the House to at least have some questions asked,” and some of those questions have already been posed to the governor, he said at a House majority press availability.

Chenault said he didn’t think legislators were interested in a repeat of the recent “bloodbath” over tax changes, “but if that’s what it takes to keep Alaska’s economic driver moving down the road then I think there’s a number of legislators that are willing to stand up … for Alaska and try to keep our economy moving.”

He said he had some concerns with data on ACES from the Department of Revenue.

Chenault said he hadn’t seen any reports, but understood that investment was said to be up in 2007, 2008 and 2009.

“But if you dig into the numbers and you find that most of that money was spent on maintenance — because there have been some pipeline integrity issues — and less on exploration, then maybe you get a clearer picture of whether the ACES program is actually incentivizing exploration instead of we’re just spending more money on maintenance,” he said.

Senate: Work needed

Sen. Bert Stedman, R-Sitka, co-chair of Senate Finance, said the committee would start with the Department of Revenue forecast and look at the revenue picture and then “walk though those component parts (of ACES) so we get a good understanding of what works and what … may need some tweaking or quite frankly what may be broken. And then let a policy fall out of that analysis.”

The Senate Finance Committee spent considerable time working on PPT and ACES and consultants working for the Legislature did extensive modeling for the committee on projected results from different tax proposals.

Stedman said from his perspective what doesn’t work in ACES is “our gas tax component and the way it’s calculated,” because the gas part of the tax package was based on the 2006 assumption that the state would take 20 percent of its gas in kind and own 20 percent of the gas pipeline deal proposed under the Stranded Gas Development Act.

He said the state lacks the information it needs to fix the gas portion of the tax.

“We cannot, in my opinion, set the gas tax because we do not know the cost of the line and the information’s not available.”

House Democrats were wary of a tax change.

Rep. Mike Doogan of Anchorage, said Jan. 20 at a House minority press availability that “generally we want to know what we get for what we’re being asked to give,” if a tax reduction is on the table. He said he thinks everyone understands that it’s in the interest of the oil industry “to claw back as much money as they can. … That’s what they’re in the business for.” Doogan said he would have to see “that there was actually some benefit to Alaskans and Alaska for making these changes.”

Fairbanks Rep. David Guttenberg said that under ELF some fields were classified as marginal fields and paid very little in tax. “What economic development did they do when … it was basically not taxed at all?” he asked, referring to concerns that tax rates under ACES make Alaska projects uncompetitive.