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Vol. 16, No. 14 Week of April 03, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

ACES angst continues as House version of tax cut moves to floor

The hot-button issue in this legislative session is oil tax change — a change which depending on who you listen to, would provide incentives for the oil industry to increase investments, and production, from Alaska’s North Slope or result in the oil and gas industry taking more profits out of Alaska.

Alaska Gov. Sean Parnell wants to see a reduction in taxes on oil and gas production, viewing that as the way to get more investment in the state’s oil fields, thus increasing throughput in the trans-Alaska oil pipeline and more production in the long term.

A majority in the House, primarily Republicans but including rural Democrats who caucus with the Republicans, appear to be in agreement.

The House Resources and Finance committees have passed out the governor’s oil tax bill, which was being debated on the House floor as Petroleum News went to press with this issue.

The bill is expected to pass the House, but beyond that its future looks somewhat bleak.

Senate leaders have said repeatedly that this isn’t the time for an oil tax change, citing a lack of information on how the present system — Alaska’s Clear and Equitable Share, or ACES — is working, and consultant reports on fiscal issues which are not due until June.

The Senate Resources Committee has heard the governor’s bill and a bill by Sen. Tom Wagoner, R-Kenai, which would provide credits for work done to bring fields into production once discoveries have been made.

Senate President Gary Stevens, R-Kodiak, who sits on Resources, has said he doesn’t think there are enough votes to pass the governor’s bill out of that committee.

Either bill, if passed out by Resources, would go then to Senate Finance, where co-Chair Bert Stedman, R-Sitka, who also sits on Senate Resources, has steadfastly maintained that more information is needed before tax changes are considered and that there is no urgency.

A million barrels

Parnell upped the ante March 30 at an Anchorage luncheon and rally hosted by the Alaska Chamber of Commerce when he set a goal of raising the volume of oil moving through the trans-Alaska oil pipeline to 1 million barrels per day within 10 years. March throughput is averaging 634,000 bpd, down from peak production of 2 million bpd in 1988.

Parnell told an audience of about 1,000 that a North Slope production level of 1 million bpd would spark “tens of thousands of new jobs and billions of dollars in payroll.”

The changes proposed in his oil tax bill, House Bill 110 and Senate Bill 49, would reduce production taxes, primarily by reducing progressivity through brackets and imposing a tax cap.

He urged “all Alaskans to send a clear message to legislators in Juneau that a ‘do-nothing’ strategy is unacceptable because Alaska’s future is at stake.”

Concern about cuts in taxes

One concern among House legislators opposing the governor’s bill centers on the reduction in tax revenue that would result from the bill’s passage.

A March 28 fiscal note prepared by the Department of Revenue on the Finance Committee substitute for the bill projected reductions from current ACES’ production tax rates of $469 million for fiscal 2013, increasing to $1.554 billion for fiscal year 2017, based on production levels in Revenue’s spring 2011 forecast.

Increases in production, run at levels from 5 percent to 20 percent (above the spring forecast) reduced the difference between ACES and HB 110 to $1.373 billion in FY 2017 with a 5 percent increase to production and to $828 million in that same year with a production increase of 20 percent.

None of these projections are anywhere near the million barrels per day Parnell put as a target on March 30.

Another way to go

House Democrats opposing the bill have said credits would be a better way to go, because the companies only get credits when they do the work. Arguments against the governor’s tax plan have centered on the fact that there are no guarantees that lower taxes will result in more investment and more production.

In a House Minority press availability March 29, House Minority Leader Beth Kerttula, D-Juneau, said she hopes that everyone remembers that ACES is a profits tax.

Rep. Les Gara, D-Anchorage, a member of the House Finance Committee, said that for every dollar the price of oil goes up there is an extra dollar of profit. The cost of lifting oil remains the same at $20 or $1,000 a barrel, Gara said, and HB 110 will let profits at high prices leave the state. With ACES, he said, we all share in those profits.

Rep. Mike Doogan, D-Anchorage, also on the Finance Committee, called the governor’s bill “a race to the bottom” and said the state has $10 billion in hand and everyone is trying to figure out how to spend it: But with HB 110, he said, the state will just pay out $2 billion a year until the money is gone and there won’t be any money for projects like the Susitna dam. With the governor’s bill, Doogan said, the state is looking at a system that will spend every dollar the state has and probably the people who are first into the tent — the oil companies — are going to get it all.

Quid pro quo?

Commissioner of Revenue Bryan Butcher told House Finance March 28 that the administration believes industry would view the reduction as a material change and that it would have a positive impact on investment decisions. Has there been a quid pro quo with industry, an agreement to invest in exchange for the tax reduction?

There has not, Butcher said.

But he also asked whether ACES would have passed had the Legislature believed there would be oil prices above $100 a barrel over a sustained period of time, with exploration down in Alaska while it was booming elsewhere?

He said he didn’t think it would have passed.

What was considered?

Rep. Mike Hawker, R-Anchorage, said in House Finance March 28 that the state was in unchartered territory with HB 110 because it has never considered a reduction in the level at which the state takes wealth from the oil and gas private sector.

The original fiscal note on ACES, he said, shows that the outside upper limit considered for oil prices was $80 a barrel. He said ACES was never stress-tested at higher prices to see what the impact would be on the economy.

And that was before ACES was run up on the Senate floor, he said.

Hawker said the issue for him was whether the state was now overtaxing the industry that is the driver of the state’s economy.

“I don’t subscribe to the concept that you tax industry into production,” he said. “I subscribe to a more free-market concept.”

What will Senate do?

At a Senate Bipartisan Working Group press availability on March 29, Senate President Gary Stevens said there has been a lot of discussion about a special session, but said he wasn’t interested. It would, he said, be up to the governor to call the Legislature back.

Stevens said he watched the bill discussion in House Finance, thought good questions were asked and said he didn’t think the administration had done a good job of defending the bill. He said the job of the Legislature is not to rush into anything and he doesn’t think the Senate is going to be rushed.

—Kristen Nelson

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