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Senate committee advances oil tax bill

Posted: March 3, 2012 - 8:47pm

JUNEAU — The Senate Resources Committee on Friday advanced a new oil tax plan, which would address progressivity, reward new production and set a production tax floor to ensure that the state doesn’t lose money if oil prices tank to $50 a barrel or less.

The bill also would separate oil and gas production for purposes of taxation, a concept known as “decoupling” and vetoed by the governor two years ago, and it would establish an “oil information system” that would consolidate in one place available public oil and gas information now scattered among agencies.

It wasn’t immediately clear what the overall financial impact of the package would be. 

The bill advanced on a 5-2 vote, with Sens. Lesil McGuire and Tom Wagoner voting no. All seven senators are members of the Senate’s bipartisan majority, which in statement last week said it wanted increased oil production, more jobs of Alaskans and sustainable state revenue over the long term.

Wagoner, R-Kenai, and the committee’s co-chair, said he doesn’t think the bill accomplishes any of those things. 

The state is grappling right now with how to address declining oil production. This is a significant issue, because oil drives Alaska’s economy and state government relies heavily on oil revenues to run. North Slope crude closed at $125.20 a barrel Friday.

Under the current tax structure, known as Alaska’s Clear and Equitable Share, or ACES, there is a 25 percent base tax rate and a progressive surcharge triggered when a company’s production tax value hits $30 a barrel. The idea, when the law passed in 2007, was that the state would help companies on the front end and share profits with them when oil flowed and prices were high. 

But the industry says the surcharge eats too deeply into profits at times of high oil prices and discourages new projects and drilling.

Gov. Sean Parnell on Thursday said his tax cut plan set the bar in the oil tax debate. The part of the Senate’s bill that addresses progressivity doesn’t go as far as Parnell’s in scaling it back.

The committee this week held hearings on a narrow bill that would cap progressivity and lower the progressive rate. That provision remains in the new bill, which incorporates three of the 18 possible amendments that committee members had thrown out for discussion. 

Decoupling oil and gas was not among those, though it has been an issue of concern for some senators the past several years and committee co-chair Joe Paskvan, D-Fairbanks, told reporters it was raised by a consultant earlier this session as part of the oil tax debate and “explicitly before” the committee.

Wagoner said senators have “patted ourselves on the back” for having an open and transparent process but he said there hasn’t been one on the oil tax issue. He said the bill grew from two pages to 21 pages overnight, that the public, in testimony, was overwhelmingly not in favor of the way the committee proposed handling progressivity and he said that he personally did not know decoupling would be a part of the bill.

During the 2010 debate, some senators argued that under the current system, there’s risk of a “dilution effect” on revenues when oil prices are high relative to gas. They said the drag could cost the state significant revenue once gas starts flowing through a major line. The governor vetoed the bill, calling it a tax increase.

On the progressivity piece alone, compared with ACES, the revenue department has estimated that the Senate plan would result in a loss of about $125 million in revenue next year, $230 million in fiscal year 2014 and about $200 million from 2015 through 2020. The progressivity aspect alone of Parnell’s plan would reduce revenues by about $700 million next year, $1.3 billion in fiscal year 2014 and $1.1 billion in fiscal year 2015, figures that assume no change in production. 

Revenue Commissioner Bryan Butcher has said a tax cut of a couple hundred million dollars isn’t likely to change how companies view Alaska, in terms of investment. He said the state doesn’t want to make such a small reduction in taxes that it’s merely giving away funds and getting nothing in return.

When asked for his first impression of the bill Friday, he said there was “no question in my mind that this isn’t a material change.

“It’s just kind of a slapped-together group of ideas that I don’t think work very well together,” he said. 

He added he didn’t know that for sure because the department got the bill late Thursday and hadn’t had a chance to run models on it, to gauge its potential financial impact. He said as the bill works its way through the process, the department will have a chance to discuss its issues “and then hopefully make (the bill) into something that will take Alaska into the future.”

Industry representatives also testified that they didn’t think the progressivity piece went far enough to change investment behavior. The committee defeated two proposed amendments by McGuire that would have bracketed the surcharge so that different portions of the production tax value would be taxed at increasing incremental levels. 

One of those proposals would have applied to new fields only, and for a limited period. Sen. Bert Stedman, R-Sitka, said McGuire was on point with the idea of encouraging new production but he said the state can’t make the tax system overly complex. He opposed the amendment but said that didn’t mean the issue was going away.

Stedman is co-chair of the Senate Finance Committee, the bill’s next stop.

Sen. Bill Wielechowski spoke against McGuire’s other bracketing proposal. He said companies are making billions of dollars of profiting producing oil in Alaska now and that he couldn’t see just giving them billions of dollars more.

Parnell has said that companies have pledged at least $5 billion in new investment in the first three years under his plan. That commitment has come from BP and ConocoPhillips, but on Thursday, BP Alaska’s Damian Bilbao testified it would likely be six-plus years before the bulk of the money, $5 billion among the companies, was spent. And the North Slope’s other major player, Exxon Mobil Corp., would also have to buy in.

BP spokesman Steve Rinehart said the goal is to get projects, worth $5 billion, started within three years. He said it is established procedure that the three companies agree on economic projects.

An Exxon Mobil spokesman did not speak to the $5 billion investment level, saying instead that the company stands by its position that “substantive ACES reform, as proposed by Gov. Parnell, will affect additional investments in Alaska that will lead to greater development and production.”

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