Paskvan seeks limited scope to tax reform

Resources co-chair says bill should focus on progressivity and credits, expects issues work in Resources, numbers work in Finance

Stefan Milkowski

For Petroleum News

Senate leaders made clear in a press conference Jan. 26 that Gov. Sean Parnell’s HB 110, which passed the House last year, would not be the vehicle for reforming the state’s oil production tax.

Instead, they said, the Senate Resources Committee will introduce a bill focusing on two key components of the tax system: the progressivity surcharge applied when per-barrel profits top $30, and tax credits.

Sen. Joe Paskvan, who co-chairs the Resources Committee with Tom Wagoner, says there’s growing consensus that at high oil prices, the progressivity surcharge creates a “distortion” in the relationship between the state and oil producers. But he suggests that certain tax credits may be reduced — a marked difference from HB 110, which would increase tax credits.

Paskvan is taking a wide view, considering, for instance, the effect on state revenues of heavy oil production and the limited capacity of central North Slope treatment facilities.

Petroleum News spoke with Paskvan on Jan. 31.

Later that day, comments made during a Senate Bipartisan Working Group press conference hinted at differing views within the Resources Committee. Wagoner mentioned his SB 85, legislation introduced last year offering a 100 percent tax credit on development expenditures. And Sen. Lesil McGuire said she intends to offer several different amendments related to progressivity.

Petroleum News: I understand Senate Resources is working on a legislative alternative to HB 110. Can you tell me the status of the bill and when you expect to introduce it?

Paskvan: I would certainly expect that in a week or so that would be in a position to emerge. The goals of this committee bill are going to be to address progressivity and to address credits.

Petroleum News: Why did you choose to start over rather than amend the governor’s bill?

Paskvan: I think that was a consensus within the Bipartisan Working Group — that the best way to address this issue was to focus on the tax issues that are most important to our fiscal system.

Petroleum News: So it’s different enough from the governor’s bill that you decided not to work within that framework?

Paskvan: I don’t know that we’re doing that type of a comparison. The point was that to address the two most significant issues, which are the progressivity and the credits, it seemed appropriate to try to simplify and hit the target as compared to making a half-dozen or so targets. That doesn’t mean there aren’t other minor issues, but those are the two primary targets we want to address.

Petroleum News: The governor’s bill does have lots of smaller pieces, like extending some tax credits and adjusting the interest rate on late payments.

Paskvan: Those are issues that can detract and take up time. The focus that we really need is on the progressivity and the credits.

Petroleum News: Can you tell me about the process of putting together the bill? How collaborative was it with other members of the Senate majority?

Paskvan: I don’t really feel that it’s important or productive to get involved into that type of detail. I just think it’s important that we educate the public that we’re going to be working on progressivity; we’re going to be working on credits.

Petroleum News: Did you work primarily with Senator Wagoner, or were there others involved? Did you talk with financial experts?

Paskvan: PFC Energy is a consulting group that will be presenting modeling and things like that. I expect that to be primarily completed at the Senate Finance level. After it leaves Resources, that’s where they’re going to chew on it with respect to the details of the fiscal system.

Petroleum News: Do you think you’ll have any expert testimony in Resources, or will that mostly be in Finance?

Paskvan: I would suspect that most of that will be in the Senate Finance Committee.

Petroleum News: Have you talked with the House at all about the bill?

Paskvan: I know there have been discussions between the Senate President and the House Speaker, and that has been on logistics and just what are the structures that need to be in place, so that hopefully if consensus can be reached, there’s enough time to accomplish what needs to be accomplished.

Petroleum News: Have you spoken with the administration?

Paskvan: I have not.

Petroleum News: I understand you requested some information from the Department of Revenue and the Department of Natural Resources. What did you ask them, and what did you get back?

Paskvan: I received back from the Department of Revenue I think approximately 100 pages of answers, and then from the Department of Natural Resources, I received back a couple dozen pages of answers.

It’s everything from the application at certain tax levels of the unconventional oils to future blending of streams — whether that’s heavy oil or shale oil — with conventional oil, and some of that analysis that deals with the revenue stream to the State of Alaska at various throughputs of oil and/or heavy or shale.

Paskvan: We have significant questions that have been responded to that deal with the treatment facility and the constraints on the central North Slope throughput that arise out of that. So this Friday (Feb. 3) we’re having a hearing on that.

In order to understand taxation, you need to appreciate the constraints on throughput that arise out of the treatment facilities when handling a mature basin.

Petroleum News: I remember House Democrats last year proposed legislation relating to facilities access (HB 138, Rep. David Guttenberg; HB 220, Rep. Berta Gardner). Do you anticipate a legislative fix?

Paskvan: If a company on the central North Slope wanted to construct additional treatment facilities, the current ACES structure allows for the deduction of 100 percent of the capital expenditure in the year incurred, and a 20 percent credit at the bottom line of that capital expenditure. To the extent that there is a legislative fix, that is currently in place.

It’s important to understand the last major treatment facility was constructed on the central North Slope in 1995, and those treatment facilities on the central North Slope are operating at or near capacities for gas and/or water. So that is what results in declining throughput.

In other words, it’s not a lack of oil resource; it’s the lack of capacity to treat the crude that comes out of the ground before it gets to the pipeline that is a primary function of declining throughput.

Petroleum News: Is one consideration whether additional tax credits might be warranted?

Paskvan: I don’t think that on the Senate side, we believe that additional credits are necessary or appropriate. That’s certainly my belief.

Petroleum News: You’ve had a fair number of oil- and gas-related hearings already, on things like heavy oil, tax credits, and tax administration. What was the goal of those hearings?

Paskvan: Even last year, we had some presentations on the potential development of heavy oil, and some of my questions to the Department of Revenue addressed that unconventional oil stream to see how that would affect the overall fiscal revenue stream to the State of Alaska.

Specifically with both of those unconventional resources, heavy and shale, in order to increase throughput into the pipeline, both of those unconventional oil resources will need to develop their own treatment facility. The heavy oil will need to create that if for no other reason other than to handle the large volumes of sand that need to be processed with the heavy oil. Shale oil as well will need to create treatment facilities to process their crude.

Petroleum News: Over the interim, we heard from some people, like Pedro van Meurs, that tax credits might be too high. But some argue tax credits are one of the only ways to ensure that tax breaks incentivize investment in Alaska. What are your thoughts on the current level of tax credits?

Paskvan: I guess I start from the premise that I, to some extent, have more faith in the free market system, to the extent that those types of decisions as to whether to invest or not invest should be private market driven, and to a lesser extent, subject to credits to induce that.

Certainly when you look at the potential where the state is a primary investor in a project, one has to seriously question the usefulness of that.

Even under the current system, for example, if someone wanted to spend $1 billion on a treatment facility, by being able to deduct 100 percent of the capital expenditure, they don’t then pay production tax on that billion dollars that was spent in this hypothetical year. Assuming a 30 percent production tax, that means the State of Alaska is contributing $300 million towards that $1 billion.

When you add in the 20 percent capital credit at their bottom line, that means the state is chipping in another $200 million. So at the very minimum the state is paying in that first year approximately $500 million of the $1 billion — before you even start looking at the effect on the state income tax or the federal income tax.

I think those are the issues of credits, as to government’s participation in that investment decision, where government is paying potentially the lion’s share of any investment.

Petroleum News: I know you’re not ready to release too many details, but can you tell me whether the adjustments will be to increase or decrease credits, or some combination?

Paskvan: My suspicion is that they’re going to be looked at, and specifically the extremely high exploration credits, in light of the Pedro van Meurs statement as far as the distortions that can occur when you have that level of credit.

Petroleum News: Sen. Bill Wielechowski has expressed concern over lease term enforcement and duty to produce. Is there any chance you’ll address that concern through legislation?

Paskvan: I don’t know that that is going to be in the committee bill, but certainly I believe that that is an appropriate subject for example of the Judiciary Committee so it can be addressed in greater detail.

On the progressivity issue, I think it’s important to understand, I believe there is a growing consensus that at very high oil prices, there is a distortion in the relationship between the State of Alaska as the nonworking entity and the oil industry, which is the working entity.

I think how we best deal with that is going to be a significant focus, or discussion in the Senate Resources Committee. I think that’s something that needs to be addressed.

Petroleum News: Will decoupling become part of the Senate’s tax bill?

Paskvan: It’s currently in a separate bill already at the Senate Finance level (SB 167). But certainly when you’re talking about future revenue streams to the State of Alaska, both the direct production tax issue and the decoupling of oil and gas taxation issue speak volumes about potential revenue streams.

Petroleum News: Will you invite oil companies to testify in Resources?

Paskvan: I suspect there will be testimony, yes.

Petroleum News: Anything else?

Paskvan: As I stated earlier, the general issues are going to be framed clearly in the committee bill, and it will be the intent to have the Finance Committee chew on the numbers.