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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2013

Vol. 18, No. 4 Week of January 27, 2013

Not everyone agrees with oil tax change

Opposing views from Senate Democrats, one Senate Republican, with concern about regressive nature of change, breaking the system

Kristen Nelson

Petroleum News

As the Alaska Senate’s Special Committee on TAPS Throughput begins hearings on the throughput aspects of Gov. Sean Parnell’s proposed oil tax changes, a couple of Senate players in the last round of tax hearings expressed their concerns with the governor’s bill.

Sen. Bert Stedman, R-Sitka, who was a member of the Senate Finance Committee during recent tax changes, and co-chair of the committee when ACES (Alaska’s Clear and Equitable Share) was passed in 2007 and through discussion of the governor’s proposed ACES last session, said Jan. 16 that he feared the proposed changes would return Alaska to a regressive tax system.

Sen. Bill Wielechowski, D-Anchorage, said at a Senate Democratic press availability Jan. 23 that the governor’s proposal to remove progressivity would destroy the balance struck in ACES, where the state gave up surety at low prices in exchange for higher takes at high oil prices.

Regressivity risk

Stedman said that by eliminating progressivity, Parnell’s proposal restores the regressive nature of the tax system prior to ACES, so as oil prices rise, the state’s percentage take drops.

He said he believes ACES is too progressive, with the state taking too much at very high oil prices, but eliminating progressivity exposes the state at low oil prices. Last year there was progress in getting issues on the table on the state’s exposure at low oil prices with the level of credits in ACES, Stedman said.

The state has some problems with the present system and industry has some problems.

“So we have to fix both sides of the ledger and put it in balance,” Stedman said.

But prior to ACES the state’s system was regressive, “so as the (oil) price advanced our share of the pie as sovereign, people of the state, decreased.”

Progressivity was the solution to that problem.

The elimination of progressivity in the governor’s bill is “one of the red flags,” he said, because while progressivity takes too much at high oil prices in the present tax, “you can’t go, in my opinion, to a regressive tax and expose the state to that low,” Stedman said.

And, with the source rock on the North Slope, Alaska has “a bright future in front of us; we just need to get over this little bump in the road that we’ve been working on for a couple of years.”

Back to ELF?

Wielechowski said everyone wants more oil in the pipeline — there are just differences in philosophy on how to get there.

“The governor’s philosophy is to go back to a similar tax structure that we had under the ELF, very low taxes.”

The state had that system for some 30 years and during 30 years of low taxes there was a “5.2 percent average decline in production,” he said.

Eliminating progressivity is a shortcoming in the governor’s bill, Wielechowski said, because with the passage of ACES the state gave away its protection at low prices in exchange for more money at high oil prices.

He also cited the 20 percent gross revenue exclusion on new oil in legacy fields (that portion wouldn’t be taxed), saying no experts the Legislature heard from said the state needed to do that.

The governor’s bill eliminates the 20 percent capital credit, designed to incentivize companies to reinvest in Alaska. By taking that away, “you are giving companies every incentive in the world to pocket their money and go invest it” elsewhere in the world.

And deferring payment on net operating loss credits, something designed to help small producers, discourages new companies. That was in ACES as a deliberate way to draw new players, because “we knew we needed more competition on the North Slope,” Wielechowski said.

Not a durable system

Wielechowski said a change in the system is needed because “we don’t have a durable system.”

At oil prices of $60-$80 a barrel, “our system is at risk because we don’t have a floor.”

Wielechowski said Alaskans could be protected on the low price side by establishing a minimum gross tax, or floor, and he would propose that, and capping progressivity at very high oil prices.

But he said the governor’s bill makes too many changes. ACES is a system, he said and “when you start pulling strings, the whole thing falls apart.”

You can’t, for instance, get rid of capital credits and leave everything else in place.

“Once you start pulling on the string, it really does start to fall apart — the philosophy of it falls apart.”

Wielechowski recommended Gaffney, Cline & Associates, the consultants who worked on ACES, to advise legislators.

Sen. Johnny Ellis, D-Anchorage, the Senate Democratic caucus leader, said Gaffney, Cline was well thought of in the Legislature, and while he didn’t always agree with them, “they were the people that talked Democrats into switching from a gross profits tax to a net profits tax in this modern era,” convincing legislators “that we were old fashioned in our simplicity of just counting the barrels.”






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