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Firing back, Democrats say oil tax cut 'creates an Alaska fiscal cliff'

Alex DeMarban
Stephen Nowers illustration

With the ink still hot on the governor's newly proposed oil-tax cut, the Legislature's withered Democratic minority is already shoving back, saying the proposal will gut state income and lead to fewer capital projects and jobs for everyone from teachers to construction workers to police.   

"Lobbyists for the Big Three oil companies couldn't have written a better bill for themselves," said Sen. Bill Wielechowski, D-Anchorage, referring to the state's largest producers, BP, ConocoPhillips and Exxon Mobil Corp. "I think it's the worst bill he's introduced."

"It creates an Alaska fiscal cliff," added Rep. Les Gara, D-Anchorage. "It massively reduces taxes on the Big Three and doesn’t require them to spend their tax breaks in Alaska."

Parnell was preparing for his State of the State speech Wednesday morning and could not talk to Alaska Dispatch, said his spokeswoman, Sharon Leighow.

In a statement released Tuesday, Parnell called the proposal essential to spark oil-field investment. It would replace the 2007 tax passed under the Palin administration, known as Alaska's Clear and Equitable Share. That’s a law Parnell once supported as lieutenant governor under Palin. ACES steadily increases taxes on oil producers once profits exceed $30 a barrel.  

Parnell proposes keeping the law's 25 percent base rate, but removing that progressive fee. As a result, instead of a maximum tax of 75 percent, producers will be taxed at no more than 25 percent, providing an incentive for companies to invest in projects that will reverse the state's declining oil production, Parnell has said.

Parnell also proposed new tax credits while eliminating others.  

The bill would reduce state income by $900 million in 2014, $550 million in 2015, $800 million in 2016, and $1 billion between 2017 and 2019, according to a fiscal note prepared by the Department of Revenue.  

Wielechowski said Democratic legislative analysts are poring over details. Past proposals would have cost Alaska up to $2 billion annually without necessarily resulting in new production.

Those proposals failed to pass the Senate and its bipartisan-led majority the past two years, but a Republican majority swept into office last fall.

Fiscal losses will come at a time when Alaska is already facing financial uncertainty, Gara said.

"The better way to do oil tax reform is require new provisions targeting new oil production," Gara said. "If you're not going to spend money on things leading to new oil production, you don't get new tax breaks. It's earn it or lose it."

In December, Parnell refused to meet with a Dispatch reporter to discuss that idea.  

Parnell's bill, if it passes the Republican-dominated Legislature, gives substantial benefits to bigger companies already profiting handsomely from North Slope oil, while reducing them for a number of smaller companies working in Alaska, such as Armstrong, Repsol, Linc Energy, and Great Bear, Wielechowski said.

The current tax structure is working, and some of those companies are on the verge of putting additional oil in the pipeline, Wielechowski said.

Parnell's staff has said those credits have been on the books five years, and they're not working.

Not true, countered Wielechowski. "How many presentations have we had where people say it takes seven to 10 years to get new fields up and running?" he said.   

Some fear the cut will be worse than what the administration predicts, Gara said. In a move he called "fishy," the Department of Revenue recently reduced its near-term oil production forecast by a large amount.  

For example, the state had consistently predicted oil production in 2017 would average around 550,000 barrels per day. But the latest fall forecast dropped that figure significantly, to 476,000 barrels. Fewer barrels of oil produced means tax revenues fall, too, he said.

"I'm concerned they suddenly changed the numbers to make the loss look smaller," Gara said.

How will the tax cut be spent?

Asked during past hearings what they'd do with money saved by a tax cut, officials with BP and ConocoPhillips have testified they won’t explore new fields and ConocoPhillips has been non-committal," Gara said in a press release.

So if Parnell's latest proposal passes, what projects will the Big Three launch? When will they yield more oil? How many jobs will they produce for Alaskans?  

Natalie Lowman, a ConocoPhillips spokeswoman, said in an email that she had no information about future projects or production. 

"We have not yet reviewed the governor’s bill in detail," she wrote. "We are committed to continue working with the governor and the Legislature on a structure for oil tax reform that will increase investment, stem the decline in TAPS and support a healthy economy and future for Alaska."

Before the 2012 legislative session, BP proposed a list of five projects it would tackle if taxes were more favorable. Are those projects still going to happen if Parnell's newest proposal passes?  

Dawn Patience, a BP spokeswoman, answered that question by saying in an email that business decisions are based on current policy.

"We’ve testified to the Alaska legislature that increasing production will require greater efficiency, technology and an improved tax policy," she said.  

Patience included a recent statement by BP Alaska President John Mingé that current tax policy has lead BP to shutter a "heavy oil pilot project within a few months.

"Currently there are three heavy oil pilot wells and a test facility at Milne Point, which will be (turned off) over several months,” Mingé said.

Mingé added that BP would instead focus on light oil development at Prudhoe Bay and Milne Point and work to reduce declining oil production by working more efficiently with better technology.

An Exxon Mobil spokesman did not immediately return an email seeking comment.

The Alaska Democratic Party released a statement Tuesday noting that Alaska oil under current taxes is already one of the most profitable areas in the world for drillers.

ConocoPhillips is the only one of the Big Three to separately report its income in Alaska. Alaska produces more profits for ConocoPhillips than the Lower 48 or Europe, and nearly as much as Asia and the Middle East combined, said the Democratic release, citing ConocoPhillips 2011 annual report filed with the US Securities and Exchange Commission.

"ConocoPhillips profits in Alaska grew from $1.54 billion in 2009 to $1.98 billion in 2011," the release said.

That trend hasn’t changed in 2012. The company's profits for the first nine months of the year was $1.7 billion. That represents a 9 percent increase from the same period the year before, according to Conoco's Oct. 30 SEC filing.

Contact Alex DeMarban at alex(at)alaskadispatch.com