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Parnell 'quits' push for billions in tax breaks to Alaska oil producers

Amanda Coyne

In an unexpected reversal, Alaska Gov. Sean Parnell on Wednesday called off the oil tax debate, a move that comes less than two weeks after he demanded a special legislative session aimed at offering up to $2 billion in tax breaks to Big Oil.

Parnell now has called on the Alaska Legislature to focus only on passing legislation to fund development of a natural gas pipeline to serve Alaska communities, otherwise known as the "bullet line."

While that proposal is controversial, cutting oil taxes has dominated Alaska politics, with Parnell advocating for big cuts -- upwards of $2 billion a year -- that would most benefit ConocoPhillips, Exxon Mobil Corp. and BP. Parnell and others have been trying to boost oil production by rolling back tax hikes approved by the Legislature in 2007 while he served as lieutenant governor under Sarah Palin.

But there haven't been any guarantees, and the standoff between lawmakers, Parnell and the oil companies has played out like a game of Risk at a time when redistricting has put nearly every legislative seat up for grabs, and when Parnell has hinged much of his political clout on cutting taxes for industry.

After a tumultuous 90-day session in which oil taxes figured prominently, the Alaska Legislature gaveled out April 16 without passing an oil tax bill. Parnell called lawmakers back for a special session, which started April 18, to debate his most recent attempt at what he and the oil industry call "meaningful oil tax reform."

But things have not gone well for the governor the past two weeks, particularly with the Alaska Senate, which has been skeptical of significant cuts to the state's oil tax system. Oil taxes and royalties fund up to 90 percent of state government.

His most recent oil tax proposal was to reduce taxes by $1.7 billion a year when Alaska North Slope crude is fetching around $120 a barrel, where it's been hovering lately.

Parnell had until recently enjoyed philosophical alignment in the Republican-dominated House of Representatives. The Senate, however, has been more intransigent and probing on the need for a tax.

Indeed, Parnell blames the Senate for giving up. "Given the hardline position of some in the Senate against increasing production from both existing and new fields, the Senate appears incapable of passing comprehensive oil tax reform," Parnell said Wednesday in his explanation for his sudden announcement of removing oil tax debate in the special session.

But it's become increasingly obvious that the administration hasn't been clear on why the state should give tax breaks to companies that are making huge profits on Alaska's North Slope, and what the state would get in return for those breaks. Alaskans are torn over whether to believe the oil companies -- particularly the big three producers in Alaska, Exxon Mobil, ConocoPhillips, and BP -- will actually produce more crude in exchange for substantial tax cuts. The companies already earn several billion dollars a year in profits from Alaska oil, and production charts throughout the history of the state's oil patch don't necessarily show a correlation between lower taxes and increased oil production.

To continue on would have likely only meant more bad public relations for Parnell, whose approval ratings are high, as well as for the oil industry. 

Even Sen. Lesil McGuire, R-Anchorage, one of the senators in that chamber's governing bipartisan majority who is most in agreement with Parnell on the need for the tax breaks, called the governor's most recent attempt "half-baked."

As they did last year, things have gone from bad to worse in committee testimony with Parnell’s Commissioner of Revenue Bryan Butcher, who didn't seem able to answer major questions by the Senate in testimony. He wasn't able to answer, for instance, questions about who provided the modeling and analysis for the bill. What fields are uneconomic now that would be economic under a different tax regime? If the tax system is so onerous, why has investment increased? Why have jobs increased? Why isn't the state asking the companies about their internal rates or return? Where did the $1.7 billion tax break number come from?

Butcher seemed at a loss to explain any of it, as he was last year during the tax debate.

Sen. Bert Stedman, R-Sitka, probably summed it up best when he said the following: "We should be able to rely with a high degree of confidence on the Department of Revenue."

That confidence hasn't been there, nor would it likely come. Sen. Joe Paskvan, D-Fairbanks, who is co-chair of the Senate Resources Committee, sent a letter to Butcher, requesting specific information about the tax break. He was supposed to receive a response on Tuesday, but as of Wednesday evening, when Parnell made his announcement, he still hadn't gotten the information.

Meantime, the House heard testimony from the state's budget director Wednesday that the tax proposal would lead to budget deficits.

The oil companies have repeatedly testified in legislative hearings that such breaks will result in increased investment to squeeze more oil out of North America's largest fields: Prudhoe and Kuparuk.

The Senate did pass a bill in the regular session that would have given new oil fields generous tax breaks. Those breaks, however, wouldn't be offered to the big three oil companies for Prudhoe, Kuparuk and other older oil fields. Because of that, Parnell didn't support that bill, and it died in the House.

That Parnell would call an end to the special session without those tax breaks on new fields will not likely sit with some senators -- particularly McGuire, a champion of the bill. McGuire was traveling and unavailable for comment.

Nor will it likely sit well with Armstrong Oil and Gas Inc., a relative newcomer to Alaska that along with Repsol, another independent, has committed $9 billion in investment in Alaska.

All told, the other big producers have said that they will invest as much as $5 billion.

On Wednesday, Sen. Bill Wielechowski, D-Anchorage, said it was unfortunate that Parnell "quit" without giving tax breaks to that new oil. 

It's unclear who this latest move benefits. The state has gone through a redistricting process that will leave all but one of Alaska's political seats up for grabs. The redistricted map now favors Republicans, and could put at least three Democratic senators at risk.

Too, the powerful Alaska Oil and Gas Association did not seem to oppose Parnell's move. "It was apparent that the Legislature was too fragmented on finding the right solution right now," Kara Moriarty, the group's executive director, said in an email. She said that AOGA will continue to work for a better tax system.  

But then again, Parnell is halfway through his four-year term. He has yet to score a major political victory, hinging much of his administration on his controversial proposal to slash oil taxes.

Eyes now go to the bullet line bill, which is also controversial. The bill would give money and authority to the Alaska Gasline Development Corp., a public-private entity charged with building the line. The bill got tied up in the session, with some senators saying it gives too much authority to the agency.

Sen. Johnny Ellis, D-Anchorage, said that the Senate wasn't comfortable with the "super agency" the House would have created in the gas line bill. Specifically, the Senate wanted legislative oversight of the project, as well as to allow the Regulatory Commission of Alaska a greater hand at setting tariff rates.

House Speaker Mike Chenault, who is a major supporter of the bill, has repeatedly said that the line would at long last provide Alaska gas to Alaskans.

It's unclear how the governor's dictate to take off the table any legislation dealing with oil and gas taxes will affect that gasline bill. A few of the provisions in that bill deal with gas taxes and royalties. 

Contact Amanda Coyne at amanda@alaskadispatch.com

Correction: The orginal version of the story said that AOGA will likely support candidates who support a tax break on industry. That's incorrect. AOGA does not oppose or support political candidates or parties.