Alaska legislators began hearings in Juneau Feb. 7 on legislation proposed by Gov. Sean Parnell to reduce the state's oil and gas production tax.
Deliberations on the bill are expected to be protracted, and at times contentious, and last for much of the Legislature's scheduled 90-day session.
"We find we're stymied by the federal government in development new oil in places like the offshore, so we need to focus on what we can control ourselves, which is to develop new oil on state-owned lands," State Revenue Commissioner Bryan Butcher told the Resources Committee in opening remarks Feb. 7.
Parnell's bill focuses on changing the structure of the state tax to reduce the burden on new projects, and also expanding tax credits to encourage in-fill drilling and more intensive development of fields now producing, Butcher told the legislative committee.
The governor's proposed changes would reduce the industry's taxes by about $1 billion per year, according to an analysis of the bill by the revenue department.
Petroleum tax and royalty revenue now pay for about 90 percent of Alaska's $5 billion general fund budget.
Parnell and the state's producing companies have argued the change is needed to encourage investment and stem declining oil production from North Slope fields and Trans-Alaska Pipeline System throughput.
Butcher told the legislators that a recent four-day shutdown of TAPS due to a pump station pipe leak was a wake-up call as to the problems of low throughput through the pipeline.
"At low throughput levels the crude oil is cooler and Alyeska's management became seriously concerned about a shutdown during winter," Butcher said.
The solution is to get more oil moving through TAPS by encouraging new field development, he said.
However, legislators who oppose the change say there's no guarantee that giving industry a big tax break will result in substantial new investment.
Opposition to Parnell's bill will come mainly from the state Senate, where several senators who were architects of the current tax are in positions of influence.
State Sen. Hollis French, D-Anchorage, who chairs the Judiciary Committee, said industry investment and employment are both substantial in spite of the tax.
"We're not convinced they need this," French said.
The Resources Committee's first week of hearings was to listen to state Department of Revenue and consultants the Legislature has hired to explain problems with the current tax system.
Industry will be invited to appear this week, and the bill will probably be marked up and sent to the House Finance Committee the week of Feb. 21, committee co-chair Rep. Eric Feije, R-Valdez, said.
Alaska's current production tax, which is based on producers' net profits, was adopted in 2006, with significant modifications made in 2007. Industry has complained that under certain circumstances the tax results in a 80 percent or more of net profits from a new project going to the government.
Marilyn Crockett, director of the Alaska Oil and Gas Association, the industry trade group, said in an interview that the tax has throttled exploration and dampened drilling.
"Alaska exploration drilling has dropped to a record low with only one exploration well planned this year," Crockett said in a presentation in Anchorage to the Resource Development Council. Drilling of all type of wells has dropped sharply over three years, she said.
In a related development, the Senate Finance Committee planned to review Alaska's oil and gas exploration and development incentives and tax credits, and their effectiveness, in hearings Feb. 10.
The credits are worth about $800 million a year to the industry, revenue officials told the senate committee.
The committee's co-chair, Sen. Bert Stedman, R-Sitka, wanted to know why the tax subsidy isn't having more of a stimulus effect in inducing more exploration.
"Before we give the industry another big tax break we need to know if the existing tax break is working," Stedman said.
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