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Alaska's current oil tax works for Alaskans and producers

Les Gara

This campaign season lots of candidates jumped on a rickety bandwagon. They pushed a failed policy - claiming in their campaigns that oil companies will spend more money in Alaska if we just reduce the share Alaskan's receive for our oil. That's the one-speed solution we've heard from oil company lobbyists, and those corporate folks who've attempted to create industry loopholes in every corporate tax they've ever seen. It's the old corporate call that used to be summarized in the 1960s claim that "what's good for GM is good for America."

Well, what's good for GM, or Exxon, or British Petroleum, is sometimes good for us, and sometimes not. The truth is always more complex than a soundbyte.

It's time for a more intelligent debate on this subject than the campaign season allowed for, especially as we approach the legislative session. With a fair discussion of the facts - something more intelligent than "let's lower oil company taxes / no let's raise them" - and without the back and forth from some talking heads, we can have a fair discussion of policy.

Gov. Jay Hammond always instructed us that there's an important starting point when it comes to discussion of oil policy in Alaska. When we'd sit down with him over coffee he would remind us that the Constitution has to guide our proposals. The Alaska Constitution wisely states that Alaskans are entitled to the "maximum benefit" from our public resources, including our oil. In shorthand, he'd remind us that Alaskans deserve a fair share for the oil produced in this state.

We also need to encourage production and jobs. But that's often something that has little to do with tax policy. For example, this year the Army Corps of Engineers didn't help Alaska when it unjustifiably blocked needed oil development in the National Petroleum Reserve. That's one of the most promising areas in the state for new oil development.

It's notable that ConocoPhillips wanted to move ahead with this major development, under Alaska's existing tax policy. That's hardly proof the existing system isn't working; in fact, it's actually proof the system encourages development. We are hopeful the NPR-A decision will be reversed on appeal, and some within the Department of the Interior indicate they'd like to see this bureaucratic decision reversed.

Achieving both policy goals - a fair share for Alaskans and investment incentives for industry - is complex. If we want strong production and a fair share of oil profits in order to fund our schools, roads, public safety and savings, we need to actually look at Alaska's oil tax law rather than pretending to debate it in dueling, unintelligent soundbytes.

Here are some important facts about Alaska's current oil tax investment incentives and the tax oil companies pay now - something they only pay when fields are profitable.
- Under Alaska's current rules, ConocoPhillips in 2009 earned $1.5 billion in after-tax profits on Alaska oil.
- Conoco has earned more than $6 billion in profits in Alaska since 2007.
- In 2009 Conoco's Alaska profits comprised one-third of its profits worldwide.
- BP and Exxon do not report their Alaska profits, but as co-owners of the Prudhoe Bay oil field they likely have done well, too.

More Alaskan jobs under current tax policy

Oil industry campaign ads this fall claimed that if we lowered Alaska's tax on their profits, they'd produce more oil. Unfortunately, history hasn't borne claim that out.

Until 2006 Alaska had a very weak, loophole-ridden oil tax system that sent far too much of the value of Alaska's oil out of state to Exxon, Conoco and BP's shareholders.


Here's how it worked. Apart from Alaska's 12.5 percent royalty, and property and business taxes, we taxed oil under an Oil Production Tax called the "Economic Limit Factor," or ELF. Under that tax, 16 of 19 North Slope fields paid less than a 1 percent tax on their production. They paid almost nothing in production taxes whether oil was a slim $9 per barrel, or a handsomely profitable $140 per barrel.

According to the Department of Labor, in 2006 roughly 10,000 people were employed in Alaska's oil and gas industry. With a stronger profits tax today, they estimate jobs have increased to roughly 12,000. And according to an estimate from the Department of Revenue in July, North Slope oil and gas investment went from roughly $4 billion three years ago, to roughly $4.9 billion this past yea

A lower tax simply did not lead to more jobs or more investment. And we've seen more investment and work under our current rules - rules that led Conoco to attempt needed new oil production in the National Petroleum Reserve, something we hope the Army Corps will allow to move forward.

So, what can we do? First, we have to ask for smarter proposals than just lowering the share Alaskans receive for our oil. We should focus on tax incentives that lead directly to Alaska investment, and should craft tax breaks that don't just let companies send more Alaska profits Outside.

For example, under a provision called "Royalty Relief," we already reduce company royalty payments if they prove the tax break is needed to bring a new field, or field enhancement, on line. Two North Slope fields, Ooogaruk and Nikiachuk, have moved forward recently under that provision. It's also telling that few applications for Royalty Relief beyond these two have come in, and a fair indication that tax breaks aren't what would lead to more North Slope development.

The current law is laden with very generous investment incentives aimed at encouraging Alaska investment. Under the old ELF companies were given no incentive to invest in Alaska, and it showed in the lower investment we saw before 2006. Under the new ACES rules, the state pays over 50 percent of the cost of new capital investment if companies invest in Alaska. That's the value at current oil prices of the tax credit and deduction companies get to take off tax payments if they make in-Alaska capital investments.

Spend a billion dollars on capital exploration or development investments and take more than a half billion of that off your taxes. It's a pretty good deal, and, we've been advised, one of the most lucrative investment incentive systems in the world.

And what about our tax rate? Under the current Alaska Production Tax, which replaced the old ELF along with the failed tax policy of the Murkowski Administration, companies pay a 25 percent tax on the profits. If a field isn't profitable the owner doesn't pay this tax. If a field is marginally profitable the tax is only paid on the portion of revenue that constitutes profit. As prices rise and companies achieve a $35-per-barrel profit, then the tax starts to rise as oil prices rise. High oil prices result in windfall profits and the state shares in those with a tax system that allows the rate to rise alongside prices.

So - no profits, no Production Tax under ACES. High profits bring a progressively rising tax rate at progressively higher prices. That's fair on both ends.

In the end, the current law grants generous incentives. And on top of those incentives, current law states that Alaska will reduce your taxes if that's needed to make a new project or an in-field development economical.

Smart provisions that bring long-term investment - and long-term revenue that exceeds the cost of the credits we grant - will help us stem the decline in production, and hopefully reverse it.

And we shouldn't take our eye off the prize. A large diameter natural gas pipeline will lead to gas field development, and make co-mingled, marginal oil fields more economic to produce. That's a crucial piece to the puzzle. Oil that's uneconomic to develop today due to the high cost of developing a small field great distances from infrastructure, becomes economic when that field gets developed for its natural gas resources.

In the end, we'd like you to be part of the debate as we work to encourage more North Slope oil and gas employment and production. But as we debate this topic, we'd like you to be armed with facts, not just empty soundbytes.

Les Gara is a state representative and Hollis French is a state senator. Both are Democrats. The views expressed are the writer's own and are not endorsed by Alaska Dispatch. We welcome a broad range of viewpoints. To submit a piece for consideration, e-mail editor(at)alaskadispatch.com