Oil tax changes on table
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Senate bill includes corporate income tax, per barrel credits, ringfencing
Kristen Nelson Petroleum News
The Senate Rules Committee introduced legislation March 24 to fix what the Senate Majority in a press release called “several flaws in Alaska’s oil tax structure.”
Senate Bill 114 would make three changes in the state’s oil and gas tax laws:
*Apply the state’s 9.4% corporate income tax to all oil and gas producers.
*Reduce the per-barrel tax credit from $8 to $5 per barrel.
*Ringfence North Slope fields so that lease expenditures can only be applied against the field from which production from those expenditures comes.
Simple v complex The proposed changes range from simple to complex.
In a Senate Majority press availability on March 28, Sen. Bill Wielechowski, D-Anchorage, chair of the Senate Rules Committee, said SB 114 would eliminate what he called a loophole in the state’s corporate income tax system by requiring all oil and gas producers to pay the state’s 9.4% corporate income tax. He said that change, recommended by the Legislative Finance Division, would amount to $139 million this year.
Sen. Bert Stedman, R-Sitka, co-chair of the Senate Finance Committee, said that when the state’s most recent oil tax change was passed the corporate income tax was paid by the three companies which then accounted for the majority of North Slope production. It was never contemplated, he said, that a major North Slope producer wouldn’t pay corporate income tax.
Corporate income tax is one of the four ways, along with royalties, production tax and property tax, that the state taxes oil and gas producers.
SB 114 amends state statute with a new section on corporate income tax, requiring that oil and gas producers with qualified taxable income of more than $4 million in a tax year will pay 9.4% corporate income tax on taxable income over $4 million.
No names were mentioned, but, unlike other major producers in the state, Hilcorp is not organized as a corporation.
Per-barrel credit The bill also reduces the state’s per-barrel oil tax credit from $8 to $5 and caps the credit amount as equal to capital expenditures. Wielechowski said when the state’s per barrel oil tax credit was established in 2013, the bill as it came out of the Senate had a $5 per barrel credit, which was raised in the House to $8 per barrel. Modeling for that bill, he said, was done at oil prices of $90, $100 and $120 per barrel. But in the 10 years since, only 19 months have fallen in that range, with most months seeing a lower oil price, he said.
Wielechowski also said capital expenditures have not risen, which was the Legislature’s expectation when the system was put in place. Capital expenditure on the North Slope was $3 billion in 2014, but only $1.6 billion in 2022. At Prudhoe Bay, he said, capital expenditure was $877 million in 2014, $160 million in 2021 and $220 million in 2022.
Ringfencing The most complex issue tackled in the legislation is ringfencing, which dictates where credits can be applied.
Stedman said the Legislature has looked at ringfencing over the years, with the state currently divided into three areas: the North Slope, Middle Earth - the central portion of the state - and Cook Inlet.
Currently, credits earned anywhere on the North Slope can be applied against existing North Slope production.
Wielechowski said limiting expenses that can be credited to the field where the production occurs would make Willow equivalent to Pikka. Santos, he noted, currently has no production in Alaska, so its expenses for Pikka can only be credited against production when that field comes into production.
Because ConocoPhillips has existing North Slope production, its capital expenditures for Willow can be charged against existing production immediately, which means the tax credits are applied before additional revenues from new production.
Complexity issue Wielechowski said he wasn’t sure the Legislature can make field-by-field ringfencing work because of the complexity of the state’s tax structure.
Stedman agreed, noting ringfencing is a complex issue. He said that the state’s oil and gas tax system is a complex structure and legislators need to be very careful about what they tweak.
The Senate Majority press release said ringfencing by field “does not result in a loss of revenue to producers and developers but shifts the time they apply for deductions to when oil starts flowing.”
Senate President Gary Stevens, R-Kodiak, said: “We are looking for common sense fixes to help stabilize our budget process, and this is one of many proposals that the Senate will evaluate and see how it shapes into closing our fiscal gap.”
Wielechowski noted the state’s long history with the oil and gas industry and said, “we share a common goal to have them stay and continue to succeed. To ensure that, we need good schools, a superior university system, quality infrastructure, and a PFD. That is what all Alaskans expect.”
SB 114 was referred to the Senate Finance Committee, which had its first hearing of the bill scheduled for March 31.
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