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Tax tweaks worth $550 million to industry

Posted: Sunday, January 24, 2010

Alaska Gov. Sean Parnell is proposing to boost the state's tax credits for oil and natural gas producers by up to $550 million, an initiative that will bring the contentious oil tax issue to the front burner for state legislators.

Parnell's proposal would have to be approved by the Legislature, which convened in Juneau Jan. 19.

The governor said the proposals follow a detailed six-month review of performance of the net profits tax and the investment tax credits.

Changes the governor wants include a new 30 percent tax credit for infield well development and expanding the period for which producers can claim tax credits.

"These refinements will boost production at existing fields and provide greater incentives for companies looking to develop oil and gas in Alaska," Parnell said. "More investment means more jobs for Alaskans."

The governor last fall asked Revenue Commissioner Pat Galvin to review performance of the tax, he said. The revenue department's analysis, completed recently, concluded that the tax is working well overall, but that the tax credits should be tweaked to boost investment.

Alaska now has a 20 percent tax credit for all qualified upstream oil and gas investments and a separate 30 percent credit for exploration wells outside existing fields, as well as a 40 percent exploration credit for remote exploration wells more distant from existing fields.

Parnell said increasing the tax credit for in-field development work is in response to requests from industry and in recognition that activity like workovers of producing wells results in more oil being produced.

Infield activity that now qualifies for a 20 percent tax credit would instead receive a 30 percent tax credit under the new proposal.

"We estimate that this benefit is worth $250 million to $300 million if it were available this year," Parnell said.

The governor also proposes to accelerate the period in which companies can claim tax credits from two years, under current law, to one year. This change would be worth an estimated $250 million year if it were in effect during 2010, Parnell said.

A third change proposed would waive interest charges on late tax payments to the state that resulted from the state's delay in implementing regulations for production tax changes enacted in 2007.

Alaska adopted a new net profits production tax on oil and gas, as well as a set of investment tax credits in 2006 and made refinements in the law in 2007. There have been delays in writing detailed regulations that give industry taxpayers guidance on how the tax will be implemented, however.

Galvin said the state feels it is only fair to waive interest on late payments resulting from underpayments due to the lack of regulations.

Parnell said he has resisted calls from critics for more aggressive changes to the tax system.

"Long-term investments by industry require stability in tax law," he said. "I held the line in calls for changes. I wanted to verify that our tax system is doing what it is supposed to do," and the revenue department analysis shows that it is working.

When oil prices spiked, the state got a large share of the profits. When prices dropped, the tax dropped, Parnell said. The governor wanted the revenue department to show him the state was getting its fair share of revenues as crude oil prices rose and fell, he said.

Overall, Alaska's revenues have increased substantially compared to what would have been paid under the tax system prior to the 2006 and 2007 changes, Galvin said.

Industry investment is at healthy levels, and oil and gas employment is high, he said. However, it is still premature to say just how much of the increased industry spending is a result of the investment tax credits, Galvin said.

Clearly, the tax credits have spurred exploration from small independents. There are three exploration wells being drilled this winter on the North Slope, all conducted by small companies that depend on the tax credits to help finance the drilling.

Critics of the state's oil tax say much of the industy's spending on the North Slope is related to increased maintenance as existing fields age. Not enough is being spent on new drilling and new projects that will find and develop new oil, they say.

They point to a steady decline in the number of new wells drilled on the North Slope since 2007, when the new tax system went into effect. The decline in new exploration drilled has been more dramatic, with exploration this winter at record low levels.

No major oil and gas company is drilling this winter, for the first time in years.

ConocoPhillips Alaska Inc., a major North Slope producer that has been been an active explorer in recent years, said it is shifting its exploration emphasis offshore, beyond the state's tax reach.

The company said it welcomes Parnell's proposal, but it doesn't go far enough.

"It's a step in the right direction and it will stimulate near-term investment, but additional steps are needed for the long term," said Brian Wenzel, ConocoPhillips Alaska vice president for finance.

What is really needed, Wenzel said, is a change in the progressivity formula in the tax that drives the overall tax rate on net profits higher as oil prices increase.

At current oil prices, Alaska's tax on net profits can range from 60 percent to 80 percent, depending on the project, according to data provided by the revenue department.

A more modest progressivity formula, which would keep the tax rate at lower levels, would stimulate more investment in Alaska and create far more jobs, Wenzel said.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.



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