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Vol. 18, No. 12 Week of March 24, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Bill House bound

Revision of oil tax scraps progressivity, ties credits to production

Kristen Nelson

Petroleum News

The Alaska Senate has sent an oil tax reduction bill on to the House. Or will send the bill, pending a reconsideration vote scheduled March 21 after Petroleum News goes to press.

The bill passed the Senate March 20 11-9 — with proponents and opponents both calling it was a significant vote.

Based on Gov. Sean Parnell’s proposal, Senate Bill 21, removal of progressivity is a main feature. Progressivity became a part of Alaska’s oil and gas tax system with passage of ACES, Alaska’s Clear and Equitable Share; it pushes up the tax rate as oil prices increase.

The Senate Special Committee on TAPS Throughput heard the bill and sent recommendations to the Senate Resources Committee. Both the Resources and Finance committees crafted committee substitutes; the bill was also amended on the floor.

Senate changes

Senate committees reworked the governor’s proposal to focus more directly on benefits for production: the base tax rate was raised to 35 percent (from 25 percent in ACES) and a $5 per barrel allowance for taxable production was added, resulting in a slightly progressive tax, as the $5 is fixed and has more value at lower oil prices than it does at high.

As Rep. Anna Fairclough, R-Anchorage, said on the floor in speaking for the bill, the 35/5 combination allows the tax to rise slightly at higher prices, mitigating the regressivity of the state’s royalties.

The governor’s bill included a concept the Senate passed in 2012, a gross revenue exclusion for new oil. The amended Finance Committee substitute extended that 20 percent credit to include new oil from legacy fields — as long as the producer can demonstrate to the satisfaction of the state that a well was not contributing to production prior to Jan. 1 of this year. The gross revenue exclusion, or GRE, also applies to oil from a lease or property not within a unit at the beginning of this year, or from a participating area established after Dec. 31, 2011.

The credit issue

ACES provided credits for qualified capital expenditures and there has been concern that those credits didn’t necessarily lead to more production and that the volume of those credits was so large that if oil prices dropped the state could end up owing more in credits than it was taking in from taxes. They are eliminated in SB 21. Exploration credits and small producer credits are allowed to sunset July 1, 2016.

The bill includes a 35 percent net operating loss which can be monetized or carried forward. And the bill adds a manufacturing credit against corporate income tax for qualified oil and gas service industry expenditures of 10 percent not to exceed $10 million.

The bill also reduces the interest rate for delinquent taxes to 3 percentage points above the annual rate charged member banks by the 12th Federal Reserve District, a reduction from what had been described as a punitive rate of the higher of 11 percent or the fed rate plus 5 percent.

Democrats opposed

Some opponents favored changes to ACES and some said more work was needed.

Sen. Hollis French, D-Anchorage, said it was “a bad bill” that should be voted down and called it a giveaway. The oil industry hasn’t committed to new production if the bill passes, he said, and argued that the bill should be held. He said he’d be happy to spend the summer just working on the issue of getting the production decline curve right.

Sen. Bill Wielechowski, D-Anchorage, called for killing the bill and starting from scratch, and said that under the state’s oil and gas leases producers have an obligation to produce, an obligation the state should be enforcing.

He praised the credits under ACES as encouraging investment and said they make the state the largest investor. Wielechowski said under ACES you pay high taxes if you ship money out of the state, or get big tax breaks for re-investing.

Sen. Berta Gardner, D-Anchorage, called the bill a colossal failure, said the state is highly profitable for industry under ACES and agreed with Wielechowski that under their leases the producers have an obligation to produce.

Sen. Lyman Hoffman, D-Bethel, said the stakes were too high for changing the tax system without some assurances of more production so that benefits could be ensured to Alaska residents.

Sen. Johnny Ellis, D-Anchorage, argued during debate over an amendment adding back in progressivity for North Slope legacy fields said it was an issue of fairness. The legacy fields are Alaska’s legacy, he said, and shouldn’t be treated like ATM machines for the producers. Alaskans want their share, he said, and want their cut when prices go higher.

More time needed

Sen. Gary Stevens, R-Kodiak, said the bill has a long way to go — and comparing it to cooking, said it’s not yet soup. He recited conflicts the state has had with the industry including the Amerada Hess case, the Exxon Valdez oil spill and the VECO bribery scandal. Senators, he said, have decided to put enormous trust in an industry which has often been untrustworthy.

The bill gives away too much to major oil companies producing from legacy fields, Stevens said.

He had advanced an amendment adding a sunset clause to the bill, which failed 9-11, and said the bill would have been easier to support had the sunset clause been added.

Calling the bill a historic gamble with the people’s money, he said the bill was “not yet soup.”

Sen. Bert Stedman, R-Sitka, who has worked extensively on the oil tax issue, said there are some good policy calls in the bill dealing with credits and excessive progressivity, but said he was concerned that progressivity was completely removed.

For new production, the bill is fairly close, he said, but the state’s take might be low, calling it at the bottom of the recommended range.

It’s been a three-year process and it’s come a long way, with “just baby steps to go,” Stedman said, expressing concern that the state’s share at legacy fields was too low and that it wasn’t necessary to reduce rates when that production was already economic.

Stedman said his main concern was the legacy fields, saying that was where the oil is, where the money is and where the margins area. He said the bill left too much money on the table and it wouldn’t be easy to go back and pick that up.

Clock is ticking

Those voting for the bill were upbeat about the outcome.

Fairclough said the clock is ticking and the need for a change is recognized. The goal, she said, is to increase production and make Alaska competitive. The fiscal notes which project a tax loss from replacing ACES don’t take into account any new production, she said, and present a worst-case scenario, Fairclough said.

In a press availability after the floor session Fairclough said the vote for the bill was a “courageous move” for Alaska’s future, for the future rather than taking benefits today.

Sen. Lesil McGuire, R-Anchorage, cited testimony legislators had heard that ACES is broken and said now is the time to act. She rejected remarks that the bill had been put together quickly and noted that many of the components in the bill were voted on by the Senate a year ago. The expansion of GRE to legacy fields, she said, is aimed at getting new oil in the line in the next three to five years, since it takes so much longer to get new fields into production.

Sen. Cathy Giessel, R-Anchorage, said in the press availability that the bill is innovative in meeting the state’s needs. The change in credits, she said, gets around the problem that under ACES about 50 percent of the credits were going to companies without production.

Competitiveness necessary

Sen. Peter Micciche, R-Kenai, said after the floor session that there had been arguments that no business would operate this way. He called it a competitiveness issue and said to survive every business has to compete and said the committees spent hours determining competitiveness, learning from global experts how to be competitive.

He also noted that the most damaging aspects of ACES, increased progressivity, passed on the floor without investigation. The state has paid for that for years, Micciche said, as oil prices drove a “reset” in the American petroleum industry, and Alaska wasn’t invited.

On the floor earlier in the day he said the real giveaway was the result of capital credits under ACES with no connection to progressivity. SB 21 had been slightly regressive, he said, and the change to the 35 percent base tax and the $5 per barrel allowance, referred to as 35/5, made the bill “slightly progressive.”

Sen. Pete Kelly, R-Fairbanks, said on the floor that he was concerned with how legislators were “spending our children’s future.”

He said he doesn’t “accept decline as inevitable,” which would mean accepting failure and called keeping ACES, “clinging to decline” and riding that decline rate down the route to failure.

SB 21, he said, is aimed at the future and trying to extend production so our kids will have something left.

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