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Parnell dumps oil tax change proposal Governor cites lack of support in Senate for oil tax bill introduced at start of special session April 18; asks for work on HB 9 Kristen Nelson Petroleum News
Just when the House Resources and Energy committees were on a roll in their House Bill 3001 hearings, Gov. Sean Parnell abruptly withdrew the legislation April 25, citing lack of support in the Senate.
In a late afternoon statement April 25, a week to the day after introduction of his oil tax bill, Parnell said he had signed a supplemental proclamation removing oil and gas production taxes from consideration by the Legislature during the special session.
He said the Senate must still take up House Bill 9, the in-state gas pipeline bill, to complete its special session work.
“Stemming Alaska’s production decline and growing our economy through increased oil production is extremely important, both now and in the long term,” Parnell said in a statement. “But there are some in the Senate who believe that Alaska’s oil production decline is a myth. This is an irresponsible disregard for the facts and Alaskans deserve much better.”
He called the position of some in the Senate “hard-line,” and said “the Senate appears incapable of passing comprehensive oil tax reform.”
The statement said the governor has the authority to convene special sessions and set agendas, and also has the authority to withdraw a topic from consideration, noting that the Legislature has the power to call itself into special session to consider the same issue.
Hearings to date The governor’s new proposal was introduced April 18, the first day of the 30-day special session, and combined the new-field tax allowance proposal the Senate developed at the end of the regular session, a 30 percent 10-year allowance on both the base tax and progressivity, with a similar approach for existing fields, a 40 percent deduction on progressivity only.
House Bill 110, passed by the House last year and never taken up in the Senate, provided across the board tax reductions for all North Slope oil production. Senators said last year that they needed more information before considering changes in the state’s oil production taxes, changed in 2006 with the Petroleum Profits Tax and again in 2007 with ACES, Alaska’s Clear and Equitable Share. The progressivity rates in ACES at today’s oil prices have been frequently cited by industry as a disincentive to investment in the state, because the state takes progressively more as oil prices rise. Crude oil prices have risen above what was projected when ACES was passed.
Additional oil While HB 110 would have cut production taxes across the board, providing incentives just for new oil was the only agreement the Senate majority was able to reach in the regular session which ended in mid-April.
There was a division of opinion in the Senate Bipartisan Working Majority with some senators believing ACES is working just fine.
Others in the majority, including Senate Finance co-Chair Bert Stedman, R-Sitka, have said that progressivity at high oil prices is a concern, noting that when work was done on ACES in 2007 the focus was on oil prices in a much lower range than they are today.
As for what should be changed, legislators were told by consultant Pedro van Meurs prior to tax discussions in this session that total government take (state and federal taxes) for existing fields was within the world-wide norm at 70 to 75 percent.
North Slope production is on the decline and Parnell set a goal to increase throughput on the trans-Alaska oil pipeline to 1 million barrels per day (it is currently less than 600,000 bpd).
More throughput would require an increase in investment, so a major issue for the Senate was finding a way to incentivize additional oil production without reducing taxes on existing production.
After weeks of work, first in Senate Resources and then in Senate Finance, senators produced a comprehensive oil tax bill, Senate Bill 192, but that bill wasn’t able to garner enough support in the Senate Bipartisan Working Majority to reach the Senate floor for a vote.
Following that, Senate Finance proposed a change only to taxes on oil from new fields, attaching that to a House bill providing credits and production tax breaks for unexplored or underexplored basins close to communities in need of more reasonably priced energy supplies. The House Rules Committee moved the so-called “middle earth” provision to another bill, and the Senate new oil tax reduction was never considered in the House.
Special session In announcing the special session tax bill, Parnell said the administration used the Senate’s new tax provision, plus a variation of that for existing production.
The bill was very poorly received in Senate Resources, where the governor’s team — Commissioner of Revenue Bryan Butcher and Deputy Commissioner Bruce Tangeman — were barely allowed to present the bill and even the Legislature’s consultants, PFC Energy, came under fire.
While new oil and oil from legacy fields were split out in the governor’s new bill, Senate Bill 3001, the dollar amount of the overall tax reduction in SB 3001 was within a couple of million dollars of that cut in HB 110.
Butcher said that the level of cut in oil taxes was close to that in HB 110, and said that was the level of tax cut the administration believed necessary to make a tax change “meaningful” enough to attract the new investment needed to increase production.
Senators did not accept the administration’s reasoning, and Senate Resources co-Chair Joe Paskvan, D-Fairbanks, wanted to know what experts the administration could bring to the table to defend its reasoning that tax reductions were needed on existing production.
House Resources The House has not had an oil tax bill to consider this year, and House Resources, meeting with House Energy, began at the beginning, meeting twice a day, and into the weekend the first week of the special session.
The House committees heard from PFC Energy, the consultants working with the Legislature on oil tax issues, beginning with some of the industry overview presentations the Senate heard during the regular session.
They also heard what the Senate heard from PFC Energy’s Janak Mayer, that while cutting taxes across the board is the simplest way to incentivize investment, that method moves a lot of cash across the table unnecessarily, because a lot of the work the companies do in legacy fields is economic.
New field development is particularly challenged under the ACES tax regime, Mayer said, but incentivizing specific new oil developments, while putting money where it will do the most good in inducing more production, is more challenging than across-the-board cuts, both administratively and for industry.
The House committees had gotten to the point of taking testimony from industry April 25 and were preparing to hear public testimony April 26 when the governor pulled the bill.
Industry representatives, who had not yet testified in the Senate, told the House committees that House Bill 3001 made significant enough changes in the tax rate that it would result in more investment.
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