Rethinking oil taxes -- again
| Dec 21, 2009Some lawmakers say there's a limit to the amount of taxation the oil industry -- which provides 90 percent of the revenue to Alaska's state treasury -- will tolerate. There's a line, they say, and if the state crosses it, oil companies will no longer be willing to keep reinvesting their profits in developing Alaska's resources.
That line -- so fine it's invisible -- could be the centerpiece of debate in the legislative session that starts Jan. 19.
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In a state where political allegiances can just as easily form along rural/urban splits or regional blocs, lawmakers are hunkering down along party lines for a potential fight over oil and gas taxation. Leaders from both parties are cautious in their assessments of just how far politicians are going to take the battle this session, but 2010 candidates are already building platforms on just that topic as dire projections about the state's future economy surface: dwindling new exploration to find the next revenue-generating oil fields, fewer dollars invested in building up existing finds, and the big question of when another rich resource, natural gas, will finally head to market.
A coalition of 13 House Republicans and two Democrats who caucus with the majority recently sent Gov. Sean Parnell a letter laying out their top concerns about the effectiveness of the current tax plan -- Alaska's Clear and Equitable Share, or ACES - and asking for answers on some complex financial data.
"Regardless of whether you thought ACES was a good thing or a bad thing, there are a number of people on both sides who are looking at the economy," said House Speaker Mike Chenault, a Nikiski Republican who signed the letter. "We have no control whatsoever on the world economy, but we have control over things that happen in this state, to some extent."
He wants to clear up the mixed messages he's hearing from revenue collectors and from those who pay the tax bills.
In a written response, Parnell assured lawmakers he'll get their answers, plus more information they didn't ask for but that could weigh in on the bigger dilemma: how to rescue Alaska's future from the specter of a broad economic downturn, job losses and pinched flows into the state treasury, all predicted in the next decade unless oil companies start exploring for new stock.
"Your letter appears to indicate you believe that a tax regime is the only indicator worth looking into," Parnell wrote. "The legislators' focus on ACES is far too narrow an inquiry because other factors discourage investment."
Rep. Beth Kerttula, a Juneau Democrat who leads the minority, said Parnell's response was well-balanced, and she takes the dire projections with a grain of salt.
"It's a little like ‘The sky is falling,'" she said. "We're in a very symbiotic relationship with the oil industry, and we'll always be that way. We're used to hearing their concerns, and we will look at it. If there's evidence that this is causing issues, then we'll obviously take it seriously -- but so far, there doesn't seem to be any proof."
Sen. Bill Wielechowski, an Anchorage Democrat well-versed in oil and gas issues, echoed a willingness to review the current tax scheme but also a hesitancy to act without substantive data.
"If someone can come in and show me that we made a mistake, I'm willing to listen -- but I haven't seen that," he said.
He doubts enough lawmakers are on board with a tax change to drive the loaded issue.
"(With) ACES, there was a perfect storm of things, if you will, that came together to pass that," Wielechowski said. "I don't see that replicating."
Regardless, he isn't so sure the anticipated declines can be attributed to Alaska's taxes.
"We're in a worldwide recession," he said.
At the same time, independent companies like Eni and Pioneer are exploring in Alaska, as ACES was intended to encourage. Wielechowski said explorers probably won't hit on new "legacy fields," massive reserves of easy-to-extract oil such as Prudhoe Bay and Kuparuk. Unless the Arctic National Wildlife Refuge or offshore areas open for development, Alaska may have to get used to potentially less revenue from smaller fields.
Chenault said Alaska is shouldering some of the global economic blow, evidenced by neighbors who have worked years in the oil patch now facing layoffs.
"Is there a point where you can declare, (ACES) is the greatest thing since buttered bread?" he asked. "We've got a lot more revenue, that's true, but if all that revenue is coming at the cost of jobs to Alaskans, than we as policymakers need to step back. To make Alaska move forward, we need to have jobs. It doesn't' matter how much money the state has if we don't have jobs."
Any tinkering with the tax structure could come at another cost: Companies making multi-year investment decisions in Alaska like to have some idea of what they'll be taxed, and how long that level will apply. In a business besieged by risk, the companies say that's necessary.
Part of the problem seems to rest with the origins of the current tax model.
Some legislators believe Gov. Sarah Palin's ACES was reactionary, a swift swing of the pendulum from Gov. Frank Murkowksi's scandal-tinged Petroleum Profits Tax. Within months, FBI investigations revealed layers of ethics breaches within the state Legislature, casting a deep pall over the tax scheme. It wasn't Alaska's proudest moment, but the environment offered Palin a platform from which to promise open and transparent government and an end to the "good old boys" network some faulted for the corruption.
"You should never do major policy calls in that environment," Sen. Bert Stedman, a Sitka Republican, said. "That was clouded with corruption allegations and indictments. We also had a governor who was more interested in sound bites for raising taxes. You're going to always get suboptimal results."
Murkowski's PPT was Alaska's first major oil tax overhaul in years, and it set up a mechanism called progressivity, making the state and the companies partners. When oil prices were low, the state's take would be less. When oil prices ratcheted up, driving major profits, the state would get a bigger cut.
Under Palin, ACES resulted in steeper progressivity levels, but also set a floor in standard deductions, limiting the savings for companies producing in the monster-sized legacy fields. The bigger breaks went to explorers willing to tackle tougher oil finds that could be expected to replace dwindling future flows from the legacy fields.
"(ACES) is a profits tax, and we made major compromises to get to it," Kerttula said, pointing out that many Democrats favored a gross tax. A fresh debate could reopen old disputes.
Still in play is the state's gas tax. While the administration maintains that the current system is good for the state and producers and offers an incentive for new production and gas commercialization, others say oil and gas should be taxed separately, at least in part.
But it's too soon to construct a gas tax, Stedman said. First, lawmakers need to see much-anticipated data -- concrete construction costs and tariffs for a natural gas mega-pipeline proposed from the North Slope to markets. That information is expected from pipeline builder TransCanada during an open season between May and July. Working together as Denali on a similar project, producers BP and ConocoPhillips say they'll hold an open season of their own later in the year.
Contact staff writer Rena Delbridge at rena_alaskadispatch.com.
UPDATED: Sen. Bill Wielechowski said he didn't think Alaska has new legacy fields left to find, not that the existing legacy fields were tapering off.
The first is the alternative claim that either there isn’t a problem with Alaska oil development, or if there is, it’s because of the “worldwide recession” and not an Alaska-specific problem.
With all due respect, a lengthy New York Times article from September of this year (http://bit.ly/7wDTYY) rebuts both claims. Under a headline that reads, “Oil Industry Sets a Brisk Pace of New Discoveries,” the article reports “[t]he oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector ….” Seemingly anticipating the core of Senator Wielechowski’s argument, the article reports that the hot streak is occurring “despite falling prices and a tough economy.”
The article also goes a long way toward dispelling the myth that all is well in Alaska. Despite the fact that there remains almost as much known oil and gas on the North Slope as has been produced since the beginning of Prudhoe – which is a huge resource even when viewed globally – the article mentions Alaska only as a historical footnote. Instead, the focus is on the “dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia,” where “more than 200 discoveries have been reported so far this year.” To the extent the U.S. is mentioned, the focus is on the Gulf of Mexico and the Lower 48 states involved in what Daniel Yergin refers to as the shale gas “revolution.”
If even more is needed to demonstrate the extent to which Alaska is becoming marginalized in the competition for investment dollars, it was provided at this November's annual Resource Development Council meeting in Anchorage. There, ConocoPhillips (“Alaska’s Oil & Gas Company”) announced that, for the first time in 45 years, it would not be drilling an exploration well this year on land or water that is subject to ACES. And, at the same meeting, BP announced cuts in capital spending in Alaska which, in the face of the industry’s “rekindled excitement” elsewhere, are significant and look a lot like the redeployment of Alaska capital to other parts of the world.
Together, all of that provides compelling evidence that there is a problem, and the problem is Alaska.
The second thing about Wielechowski, Kerttula and Parnell’s positions that I don’t understand is the focus on “show me,” “proof” and “evidence.”
The oil industry is showing Alaska where our state stands on the investment curve; what part of reduced investment and no exploration well for the first time in 45 years is unclear. Having done that, the burden has shifted to Alaska to figure out what it takes to move the investment back over on our side of the fence. The job of our legislators and leaders is to do the hard work.
Of course, these legislators and the Governor could be engaging in gamesmanship. After all, what car salesman wouldn’t like to know how much income his customer makes and what the dealer down the street is charging for the same model before making an offer.
But if, as the New York Times indicates, Alaska's oil industry has other places to go – and it is moving its investment to those places – it’s time for the state to move forward with engaging the industry, rather than continue to argue about what data needs to be on the table first.
As most business people know (other than those that work for a monopoly, and Alaska certainly doesn’t have a monopoly on oil), it’s up to the person seeking the investment to do the spade work on the competition to know what it takes to close a deal. Alaska is as much in the oil business as any of the companies; rather than continue to lose investment, our legislators and Administration need to put our existing knowledge to work and get on with bringing the customer back into the house.
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Once again those who took felon Bill Allen's cash are rising up to do more damage to Alaska. Virtually every signer of the letter to Parnell took money from Bill Allen. Instead of resigning from public office in shame, these wing nuts are crawling out of their fetid swamp to prove that greed has no limits.
This year Big Oil took about 19 billion dollars in Alaska oil. Alaska- for the oil we own- took less than five billion.
In the same week representatives sent their letter to Parnell Iraq had auctions for its oil leases. Oil companies from around the world lined up to bid on rights to develop Iraq's oil- for a fraction of the profits ExxonMobil, ConocoPhillips, and British Petroleum take from Alaska. Why? Because in Iraq, unlike Alaska, there is not a virtual monopoly controlling the ability of an oil producer to get its oil to market. Unlike Alaska. In Alaska TAPS (owned by the above multinational corporations) the courts have established that fraudulent tariffs are charged. Those fraudulent tariffs, combined with similar problems getting slope oil through (non member owned) oil filed distribution systems makes it incredibly difficult for independent oil companies to do business in Alaska. Instead of 50- 100 independents bidding for oil leases on the slope, their are only a handful. Alaska has lost billions of dollars as a result.
In Iraq, where suicide bombings, civil war, and internecine strife is the norm, companies take substantially less profits than in Alaska- where there has never been even one suicide bombing. Yet wing nut Alaska legislators want to give away more billions to Big Oil? This is a joke, right? Anyone remember the Alaska Constitution? Article VIII, where finite resources are to be developed for the maximum benefit of the people?
And off shore development is not an answer, either. Past the six mile limit Alaska derives ZERO revenue. Those are federal leases. Setting aside the fact that no oil spill clean up can be done in ice choked waters, this development should be opposed by Alaska legislators. If legislators really wanted to raise Alaska revenue they would be working to break up the virtual monopoly that exists on the North Slope. Legislators should be calling for criminal investigations and looking at anti-trust activities that have been on going for decades in Alaska.
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Third, the results of the Iraq oil lease sale where lifting fees were less than $2. Alaska should consider a much bigger take.
Fourth , The latest BP spill where BP is lying about what happened, is not going to sit well. BP needs to be replaced as operator of Prudhoe Bay. BP should also learn to think thru their BS stories where it is more just peddling it to the oily drill stem sucker press. . While the puny press cannot think the spill thru, does mean others can’t. This time expect fines in the $200 million class and a different judge.
Fifth, the oily legislators like Chenault tried this give away in Cook Inlet and they are back at it again. doesn't work. It is responsible the for contrived Cook Inlet Gas shortage.