Our view: Oil tax deadlock

It's frustrating, but also a chance for Alaskans to get it right

April 14, 2012 

On Saturday the Senate tried to break its deadlock over oil taxes by not trying to do everything at once.

The bipartisan majority took a House bill that offered tax breaks for oil and gas development in "Middle Earth," south of the North Slope and north of Cook Inlet, and loaded it with one key provision of its North Slope oil tax bill. That provision would sharply reduce taxes for 10 years for new development. At least one independent producer, Armstrong Oil and Gas, likes the bill.

The Senate passed the measure, but in the House majority Rep. Mike Hawker wasn't enthused, and Speaker Mike Chenault said he didn't see any way to vet and vote on the bill before adjournment.

So we may be headed for a special session on oil taxes.

Alaskans should give the Senate credit. Senators have worked hard. They have tried to find common ground in a coalition that includes a wide range of views, as both Senate President Gary Stevens and Finance Committee co-Chairman Bert Stedman have pointed out. They have been deliberate, methodical and thoughtful. That has been a welcome contrast to Gov. Sean Parnell and the House majority, both of which were too quick on the trigger, with too little information, in last year's session -- proposing to give up billions in tax revenues for not much more than a vague promise from the oil industry.

There was no need to panic, and the Senate didn't let itself be stampeded.

Whether in special session this year or regular session next year, we encourage lawmakers and the governor to ensure that any tax changes meet these criteria:

• Give tax breaks for investments that put new oil in the pipeline, not for investments the producers already planned to make. This is not as easy as it sounds, of course, because the state isn't privy to the producers' long-term plans. That should change, but if it doesn't, lawmakers should do their best to focus tax breaks for oil that would not have been produced otherwise.

One of the central arguments of the large producers is that ACES, the current tax regime, takes too big a bite and discourages investment in new production, especially when oil prices are high, as they are now and are likely to be in the future. Alaska already offers generous tax terms under ACES for exploration and new development. We think it is appropriate for legislators to consider a sweeter tax deal at the production end.

But let's reverse the order of the current approach. The companies want a guarantee of lower taxes now, before they produce anything more, and they want the lower tax to cover all the oil they produce, not just new oil. The state should instead offer lower taxes for new oil when it's produced, not when it's promised. For guaranteed tax breaks, we need guaranteed investments that increase production.

Advocates on all sides should be able to agree on this. The justification for cutting taxes is that it will lead to additional production. If that isn't going to happen, there should be no tax cut. But if more oil will be produced, industry supporters shouldn't have a problem tying tax breaks to production increases.

The state's line should be "first produce more, then profit more."

• Legislators should be wary of defining "new production" based on projected rates of decline in the legacy fields of Prudhoe and Kuparak. The decline rate is squishy; if production stabilizes or the decreases just slow, "new oil" could really be old oil not deserving of a tax break.

• New tax terms should aim to encourage more companies to explore and develop in Alaska. The Senate measure agreed on Saturday serves that goal. Companies like Armstrong, Great Bear, Repsol and others already have invested heavily here. Tax terms should encourage even more new competitors.

• The progressivity of ACES -- the curse of Alaska, from the companies' point of view -- can stand some moderating at prices that few anticipated when ACES became law in 2007. But again, the state should be able to secure guaranteed investment in exchange for lower rates at higher prices if the big producers are serious about their commitment to Alaska.

The companies are obligated to their shareholders to gain every dollar they can while committing to as little as possible. Alaska's elected officials need to remember that they are just as obligated to their shareholders, the citizens of Alaska.

Every legislator should focus on this question:

If we pull back on progressivity, what exactly do we gain, and on what schedule?

Our approach should not be antagonistic -- just savvy and tough.

• To be savvy and tough, we need good information. Any tax-change bill should keep the current Senate bill's provisions for a central, up-to-date and public site of oil production, forecasts and tax data, including revenue and credits. Alaska should demand the information it needs from the oil companies; we respect proprietary information but shouldn't define proprietary strictly on company terms.

It takes technical expertise and tremendous effort to get oil out of the ground and to market from Alaska. Oil company executives have pointed out that they work in big numbers, with investments that measure in the hundreds of millions and billions of dollars.

Oil is one of Alaska's most valuable assets. When it's gone, it will be gone forever. Alaskans also work in big numbers. We owe generations to come a foundation to provide education, public safety and a healthy environment and that also will run to the hundreds of millions and billions of dollars.

Lawmakers should see that obligation to the future as a guide to oil tax decisions.

BOTTOM LINE: If Alaskans give up a billion dollars in revenue, we should get a billion dollars in value.

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