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ACES’ hearings in Juneau intense Legislators question past, current consultants, administration, industry: tax rate, proposed floor, exempt auditors, ethics aired Kristen Nelson Petroleum News
A special session of the Alaska Legislature gaveled in Oct. 18 to consider Gov. Sarah Palin’s proposal to change the petroleum profits tax lawmakers enacted in August 2006 under the previous administration. Palin — and the previous governor — are Republicans, as are a majority of legislators, although the Senate organized around a working group of Republicans and Democrats after the 2006 elections and has a Republican minority.
PPT, a tax on net profits, is part of what the state receives from oil companies operating in the state. Other revenues include royalty on oil and gas from state leases, property tax and state corporate income tax.
PPT was introduced by the previous administration as part of a package to get a gas pipeline built to carry Alaska North Slope gas to market. Oil and gas lease owners on the North Slope wanted a stable tax system over the life of a gas pipeline — or at least the first three decades of its life. The previous administration’s contract for a gas line failed; its tax proposal, a 20 percent net tax with a 20 percent credit, was replaced in the Legislature with a 22.5 percent tax which increased as crude oil prices increased — the so-called progressivity feature.
Issue on process Concerns about how PPT was passed arose after an FBI investigation became public and several legislators who served during the PPT debates were arrested. Oil service industry executives confessed to, and were convicted of, offering bribes, with the goal of defeating PPT, or lowering the tax rate. The oil and gas industry had favored a 12.5 percent net tax, not the 20 percent tax that the previous administration put forward.
Palin said in her campaign that she favored a tax on the gross rather than a net tax, but her proposal, Alaska’s Clear and Equitable Share, or ACES, is a hybrid of a gross and net tax system. It would increase the tax rate to 25 percent as well as creating a more substantial floor — 10 percent of profits from the Prudhoe Bay and Kuparuk fields — in the event of low oil prices.
The first committees of referral, the House Special Committee on Oil and Gas and Senate Resources, have heard from the administration, administration consultants, legislative consultants, the oil and gas industry and the public.
Industry opposed to bill The major North Slope oil and gas producers as well as smaller companies have testified, telling legislators that increasing the tax rate will put marginal projects at risk. The issue, the companies have said, is the volume of oil production. They argue that the easier barrels from existing fields have been produced and that remaining resources — in the tens of billions of barrels — include not just smaller accumulations of light oil but heavy oil in the West Sak-Schrader Bluff formations and the heaviest oil, Ugnu, which is not yet under production.
It will require more investment to keep barrels flowing down the trans-Alaska oil pipeline, the companies have argued, and many of those investments are marginal or somewhat marginal and at risk of not being funded if taxes are raised because competitive projects within the companies would show better expected rates of return.
Legislators have expressed concern both about keeping companies investing in Alaska — and about getting a fair share for the state at a time when oil companies are reporting high earnings.
The committees are expected to take up amendments and pass the bills on as soon as the weekend.
Issues are likely to include whether the state could return to a gross production tax (its previous severance tax was a gross tax with an economic limit factor which tied it to production rates) and still encourage investment; whether the present rate should remain the same or be raised; and how to deal with issues around cost factors, which have turned out to be higher than projected when PPT was passed, leading to lower returns to the state.
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