Alaska Dispatch

A week's worth of hearings on the state's oil tax hasn't done much to resolve a debate dominating the legislative session and this year's gubernatorial race.

Is the state's oil tax, Alaska's Clear and Equitable Share, working as planned to spur investment in North Slope oil fields, spinning off a boon of high-paying jobs and a continuing flood of money into state coffers?

Or does the tax hinder investment by offering too little reward for the risk companies take spending millions, putting future oil development -- and the state's share -- at risk?

Hours of testimony from the state, industry and consultants before the Senate Finance Committee last week and early this week seem to show that the more lawmakers know, the more there is to still learn before making any decisions that could have significant impacts on Alaska's future.

"Is it that the 20 percent tax credit needs to be increased? Is it that there's too much slope to progressivity?" Sen. Bert Stedman, R-Sitka, and committee chair, asked. "Or is it these other economic and geopolitical issues at hand that are distorting the results of our basins? That's what we're trying to sort out."

The bottom line is that Alaska doesn't know, and probably won't without more information that companies say is confidential in order to maintain competitiveness.

"We don't have the evidence that says why certain things are happening," revenue commissioner Pat Galvin said in an interview. "I'm not going to tell you the increased spending is because of ACES for the same reason I can't really directly refute Conoco or BP saying they're spending less. They're spending less, but I can't tell you it's because of ACES."

As difficult as it is to assess whether ACES is working, predicting outcomes of tax changes now being considered is just as challenging. The word from the industry is that the state's tax structure doesn't leave companies enough profit when oil prices are high, and gives incentives to exploration, instead of to big, established fields like Prudhoe and Kuparuk. Production from those big fields supply the cash that allows companies to reinvest in exploration.

Testimony also indicates that there's simply no telling whether the tax regime, passed in 2007 with bipartisan support, is working or not. Not enough time has passed for a thorough analysis, and the interval was wracked with unpredictable swings in oil prices and a world economic crash that hit many oil companies hard.

"Over the course of the last three years, we had huge swings in oil prices at the same time we made significant adjustments in our fiscal system," Galvin said. "At the same time, we're in the middle of a transition with regard to the players on the North Slope ... All three of those things are at play when we look at the investment experience."

Alaska's oil fields are among many world-wide, and pale in scale to those in some countries, like Iraq, where recent gains in political stability have drawn producers like flies to honey. Changes to the tax structure may not impact the investment decisions world-class companies like Exxon Mobil, ConocoPhillips and BP make.

"We are not the center of the oil universe, even though oil is the center of our universe," Sen. Joe Paskvan said. The Fairbanks Democrat has a keen interest in the issue, and sat in on the Finance meetings.

"We have to recognize that there are other markets in the world, and there are others making decisions," he said. "Many of those, we have no control over ... I don't know that adjustments in our (tax) credit structure or our production tax necessarily has a direct correlation with what happens in the next couple of years."

Administration consultant Rich Ruggiero of Gaffney, Cline and Associates, a Houston-based firm that operates worldwide, said there hasn't been any real change in investment patterns in Alaska as the state shifted tax plans twice. More than 70 percent of the big companies' exploration and spending money is spent outside of the U.S.

That leaves Stedman thinking there won't be much movement on any of the tax-related bills on the table this session.

"I don't see a big upswell of support in the building (for changes)," Stedman said. "We've got to give ACES more time."

The endgame is the same for industry and the state. Everyone wants to sustain the flow through the 800-mile big oil pipeline to the tidewater port at Valdez -- that's where the money comes from. High volume means more oil moving to market, which in turn keeps the state in the black and keeps tariffs lower for companies, boosting their bottom lines.

But flow is declining, and at some point there may not be enough oil running through the line to keep it operating without changes that may not be worth their price tags, said Michelle Egan, spokesperson for Alyeska, the consortium that manages the pipeline.

Flow peaked in 1988 at just over 2 million barrels per day, but has steadily declined since. In 2000, about 999,202 barrels per day traveled the route; in 2009, that was down to 672,028 barrels per day. At 500,000 barrels -- projected for 2014, barring new production coming online -- Alyeska will have to contend with fairly major problems caused by lower, slower flow.

Industry has warned investment is declining, and the numbers back that up for the legacy fields like Prudhoe and Kuparuk, which account for the vast majority of Alaska production. Officials with BP and Conoco have further cautioned that investment will continue to taper off, at least through 2010.

Conoco Phillips' vice president for external affairs, Wendy King, testified that the state's tax does hurt, but that decisions are broader. In particular, she said the state could refocus incentives to take the edge off legacy field production. And, companies would like to see a lower tax rate when oil prices are high. Uncertainty in ACES regulations over which spending will qualify for tax credits also skews the risk/reward balance, she said.

"Is that balance sufficient to help with those long-lead, higher risk projects that we have in our portfolio?" she said. "There is uncertainty. That is cash going out our door."

That's left many Republican lawmakers and some gubernatorial contenders clamoring for reforms. Several bills are now before lawmakers that would offer a sweeter deal to the oil companies. Democrats generally resist the changes, and say the tax is working as intended. Three Republicans and Gov. Sean Parnell have introduced legislation that would amend ACES.

Galvin cautioned against the kind of broad changes lawmakers are proposing. While ACES brings more revenue into the state's coffers, the tax also spreads the burden in a way hits hardest those companies taking profits out of Alaska, instead of reinvesting them here, he said.

Incentives favor smaller companies exploring new fields outside of the legacy fields.

"It encourages those who want to invest in new opportunities in Alaska, because they will get a tax reduction," he said. "That's an important thing for the Legislature to understand as they look at potentially changing some of the parameters of the tax system."

Sen. Joe Thomas, D-Fairbanks, sits on the committee. He said lawmakers should move cautiously, and perhaps give ACES a little more time to show what it can do.

"I think it's going to take a little more time, there's no doubt about it, and more from the industry," he said, acknowledging industry clearly would like greater reward for their risks. "We certainly want to pursue development -- I don't think anybody opposes that concept -- but we also want to make sure we' re not throwing open the door and giving credits on everything."

He didn't expect lawmakers to approve tax changes in the 60 or so days left in this legislative session, but wouldn't rule it out.

"I would find that difficult, but not impossible," he said. "People are going to make sure they take a thorough look at it, rather than react on a couple months worth of data."

Contact Rena Delbridge at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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