Workforce issues concern for Paskvan

Fairbanks Democrat has tax bill in Labor & Commerce, raised issue of report on state’s inability to process tax data efficiently

Steve Quinn

For Petroleum News

Sen. Joe Paskvan has one session as co-chairman for the Senate Resources Committee under his belt, and his work is far from over.

Some may say it’s kind of fitting that he shares those duties of running the committee. He comes from a mining family whose first contact in Alaska was in Juneau during the gold mining days. His father Tom Paskvan Sr. worked as a blacksmith who made tools for the mining operators.

Now Paskvan, a Democrat from Fairbanks, finds himself immersed in the state’s oil tax reduction debate not only as co-chair for the Resources Committee but also as vice chair for the Senate Labor and Commerce Committee.

HB 110, the governor’s oil tax reduction bill, sits in Labor and Commerce and also has a referral to the Senate Resources Committee.

Paskvan wasn’t as busy during the Legislature’s special session, but he raised an issue before his colleagues on the Senate floor: due diligence.

Paskvan brought to light a feasibility study completed by Fast Enterprises, which examined the state’s ability to process tax data efficiently.

A $37 million appropriation for a technology upgrade may address that deficiency, but Paskvan remains concerned during the ongoing debate about the state’s tax system.

During the interim he’ll join Labor and Commerce chairman Sen. Dennis Egan in examining the state’s oil and gas workforce and how the state’s tax system may or may not influence hiring.

Just before the special session ended, Paskvan sat down with Petroleum News to discuss what lies ahead.

Petroleum News: Where have you been most busy since the regular session ended in April?

Paskvan: There are several areas I have been investigating since the end of the regular session. When the press of daily business was over, then I could focus my efforts during the special session. In part I’ve done that in the area of tax issue, effective tax rates and also in the Department of Revenue and its access to information, which is closely connected to the effective tax rate issue.

Petroleum News: What concerned you about what you read in the Fast Enterprises report?

Paskvan: When we know that the information that the Department of Revenue is providing us is subject to what the Fast study says is a probability of human error, one has to be apprehensive of one’s alliance on that data. We now understand in the area of Alaska’s oil production tax, that the processes are manual, that they are not assisted by 21st century technology as far as computer support of that production tax, that you necessarily know the Department of Revenue’s ability to analyze is significantly restricted and its ability to advise — whether it’s the Legislature or the governor — is restricted as well.

Petroleum News: Do you feel like any information was deliberately from the administration withheld during the debate on oil taxes?

Paskvan: I think it’s disappointing that the report was not put on the table at the same time as the Department of Revenue’s report to the Legislature on production taxes was submitted to the Legislature, which was Jan. 18, 2011. One section of that Department of Revenue report to the Legislature deals with the lack of an integrated tax management system and certainly the release of the Fast report addresses that issue and would be directly relevant to that section of the Jan. 18 report. Again, it’s disappointing that the magnitude of the reasons why the Department of Revenue stated what it said in the Jan. 18 report, the information they were obviously relying on was not disclosed, so that’s very disappointing

Petroleum News: What kind of information will help you next session?

Paskvan: The immediate response to the Fast was the inclusion of the Senate’s appropriations of the $34.7 million. That is a first step so that the Department of Revenue will have the systemic capacity to receive, to analyze, to forecast, to better advise the Legislature once that integrated tax management system has been implemented.

Petroleum News: Once that’s in place, is there anything specific that needs to be examined.

Paskvan: Oh, absolutely. It will tell us whether operating expenditures that are claimed are accurate. The systems will provide better capacity for auditing, whether it’s targeted or spot auditing of sections of the information most important to the State of Alaska, given the very lucrative treatment in Alaska as it relates to capital expenditures. We would be able to determine whether the capital expenditures are being spent for true capital investment as compared to items one would normally or might normally think are operating expenditures. So, once we have the idea as to how the monies that are being 100 percent deducted and with those same dollars, a 20 percent credit to the bottom line, are being used, then we will know if the credit structure in Alaska’s tax system is being used to create more production as compared to something other than creating more production.

Petroleum News: Can you please clarify what you meant when addressing your colleagues, measured twice and cut once?

Paskvan: Growing up, I heard that a lot. It’s a general philosophy that one needs to be certain of what you’re doing. You want to measure the distance twice before you bring the saw out and cut the board. If you want to cut a two-by-four, well you measure twice before you cut once and that way you don’t have to buy two two-by-fours. I would suspect not only the citizens of Alaska but the industry as well would hope that whatever change that might occur would be a change that everyone would understand to be a necessary and a long-term as well as effective policy.

Petroleum News: Part of your point of the Fast study was that it was not part of the oil tax debate. Are there other things that could emerge and broaden the scope of the oil tax debate — and no specific bill, just the overall debate?

Paskvan: I think the concept of an accurate bottom line of what the state keeps on its side of the ledger sheet regarding the production tax is something I’ve been focused on for several months. It seems to me that that number is not easily obtainable from the Department of Revenue. I would have hoped that number would have been easily obtained and then the debate would focus upon more what that number is in relationship to the gross oil produced. In other words production tax value after royalty, transportation, operating expenditure, and capital expenditure deduction. Looking at that as profit oil, then when you know what the true net number is to the state after deduction for all credits, we will know what the actual or effective tax rate is with respect to profit oil.

Paskvan: While the effective tax rate is certainly a critical piece of information, something else I’m looking into are issues of throughput. We know through litigation that the state Department of Revenue has been in that there have been substantial amounts of information that indicate that the pipeline will be operational for many decades. There is also litigation that the state’s involved in at this time that arises out of the March and August 2006 spills at Prudhoe Bay that deal with the substantial decline in throughput. There is apparently a component of that which deals with backout agreements and how that might affect throughput decline.

Petroleum News: You’ve said in the past that you wanted to take a close look at the progressivity segment of the state’s tax regime. What is it you’re looking for?

Paskvan: It’s my general understanding that the industry has been saying for quite some time that their upside has been taken away by the magnitude of progressivity. In some of the questions that I have submitted to the Department of Revenue, I’m hoping to receive information that will either confirm or substantiate my present impression that much of what industry is saying in that regard about high oil prices may in fact be accurate.

In part, that’s why I had indicated in that one speech how my analysis has been confined to the $75 to $95 barrel price range because those were the 2010, 2011, and 2012 fiscal years under the parameters of the fall 2010 and spring 2011 forecasts.

So what I’ve requested are charts using those same parameters but taking the price out to $200 on the high end and using the same parameters to run them to $50 a barrel. That way we have a depiction of progressivity at low oil prices all the way to high oil prices. I hope in part that will give us objective information that will help guide a better policy decision. If we understand what the effect is at $50 a barrel and $75 a barrel and $95 a barrel, then we need to have this information at $120, $140 and $160, so we can see the effects of progressivity and the split of profit oil at those levels.

Petroleum News: How do you weed through positions that range from everything is OK to do we need a change?

Paskvan: I would hope that I am not advancing a position based upon unsubstantiated arguments. I would hope that at the end of the day, I’m advancing a position based upon analysis, based upon objective information, based upon critical and essential information being shared. I would hope and welcome people to critique the analysis and debate the analysis. I would hope there is a substantive reason on the analysis that I draw.

Petroleum News: Is throughput all about taxes? Or is there something else that needs to be examined?

Paskvan: There’s a question about whether there should be a focus upon treatment facilities because without treatment facilities no additional throughput can occur. No tax change will make a difference if treatment facilities are not built. I’m waiting for DNR’s information on water handling and treatment handling on the central North Slope and what’s been done the last 10 or 12 years.

Petroleum News: You’ll be busy looking at North Slope employment during the interim. Why is the tax debate an issue for Labor and Commerce?

Paskvan: The two primary issues advanced for a radical change in Alaska’s production tax structure were employment losses and throughput declines, so the issue of employment is relevant to that. It appears the Department of Labor numbers show — rather than 1,700 or 1,800 jobs lost — show that Alaska through 2010 is at an all-time high employment in the oil and gas industry. It’s troubling in my mind when the numbers can be at all-time high employment numbers and so many Alaskans that I know — and the stories that I’m hearing from around the state — aren’t working. So I think that’s something I think we need to look into.

Petroleum News: It sounds like you haven’t made up your mind what changes, if any, should be made, or do you know what you want changed?

Paskvan: It would be premature. Then I would be only in effect wanting to get information that supports my view. I want to get the facts, think about them for a while, then come up with a way to address the issue. I want to have objective, reliable information in a format that is usable so that everyone is operating from the same set of data. My general belief is that in the $75 to $95 realm we don’t have punitive tax rates.

Petroleum News: So what realm should you be looking at?

Paskvan: Again, that’s where the question is: progressivity. What’s the rate at $130; what’s the rate at $150 a barrel. What impact does progressivity have at those high levels, then as a secondary component of this analysis, there is the understanding that the big three operators will have a different attitude toward Alaska’s tax system than the 26 other operators attitudes are toward the tax system. One has to not just look at it as if Alaska’s tax was of a singular operator or a homogeneous industry. You have to look at the potential impacts on the large, legacy operators and the new operators.