JUNEAU -- A week into a 30-day special legislative session, and a proposal by Gov. Sean Parnell to provide big tax breaks for the oil industry appears doomed.
Oil taxes are the main focus of the session called by Parnell, and he put a new bill on the table.
Despite a slew of unanswered questions, legislative leaders and Parnell say they still expect a solution that sparks more oil production, even if it's not what the governor proposed. A new way may emerge, said Parnell, who's been talking individually with legislators and watching the legislative hearings on Gavel to Gavel public television.
The measure before legislators is the governor's House and Senate bill 3001, which as written would cut oil taxes for North Slope producers whether they invest in new developments or not. That's troublesome for both Democrats and Republicans, House members and senators.
The struggle is over how to determine what counts as new oil production.
Senators who have been holding hearings on oil taxes for months say Parnell's latest idea would give away hundreds of millions of dollars with no guarantee of stemming the decline from aging North Slope fields -- the same problem that strangled an earlier tax proposal by Parnell. The state budget -- money for schools, roads and troopers -- is built around taxes generated from those mammoth but declining fields.
House members are skeptical too, asking far more questions than they did about House Bill 110, the Parnell measure that cleared the House last year but stalled in the Senate.
No one seems to like the new version, which would cost the state treasury $1.5 billion to $2 billion a year, about the same as the governor's earlier proposal, though it achieves the cuts in a new way.
"Dysfunctional," is how Sen. Bert Stedman, R-Sitka, described Parnell's new attempt. Stedman is the influential co-chairman of the Senate Finance Committee and a member of the Resources Committee, which is now hearing the oil tax measure.
"Sort of a half-baked bill," Sen. Lesil McGuire, R-Anchorage, said last week, upset that lawmakers were being held hostage in Juneau over something Parnell administration executives couldn't justify or explain.
Unlikely to pass as written, said Rep. Paul Seaton, R-Homer and co-chairman of the House Resources Committee. His panel is holding two hearings a day on the bill all week.
Oh, but consider that new ideas are popping up, the governor said in an interview Tuesday. His measure was just intended "to keep the conversation going from where it ended in the regular session." He never expected it to be the final word, he said.
The state's current oil tax system, passed during the Palin administration, increases the state take at higher oil prices. Under that system, Alaska's oil taxes are high, but so is the state's investment in oil development through generous tax credits, according to the Legislature's oil tax consultants.
The Senate, with a day to spare in the regular session, passed a measure giving a 30 percent tax discount to companies that bring new oil fields into production.
Parnell took that idea, then tweaked it for the legacy fields of Prudhoe Bay and Kuparuk. The discounts for legacy fields alone would cost the state $1.7 billion a year if oil is selling for $120 a barrel, as it is now, under an estimate by House Democrats.
"I'm not ready to condemn existing fields and Alaskans to status quo decline there when I think there's so much oil that could be recovered with more competitiveness on our part," Parnell said.
Senators on the Resources Committee last week battered Parnell's executive revenue team -- Bryan Butcher and Bruce Tangeman -- with questions over whether that approach would be anything other than a tax giveaway. They are still awaiting answers.
Sen. Hollis French, D-Anchorage, said the tax break sought by the governor amounts to $167,000 an hour. In four days, it's enough money to build a high school. And Sen. Bill Wielechowski, another Anchorage Democrat, pointed out that the state used to have very low oil taxes with 15 of 19 oil fields and satellites paying nothing at one point. But even then, oil production was declining.
"I don't want to go back to that policy, to that failed policy. That's a mistake," Wielechowski said.
One blogger compared the committee action to a rumble at a hockey game, and concluded the senators were winning, big time.
Senators are willing to listen, but the administration must make its case, Senate President Gary Stevens, R-Kodiak, said.
"I don't think the administration, in its presentations, has really answered that very basic question: Are we giving tax reductions for something that is going to happen anyway?" Stevens said. That's what the public is wondering, he said.
House Speaker Mike Chenault, R-Nikiski and one of the biggest supporters of lowering taxes, said senators seemed to have their minds made up and weren't giving the Parnell administration a chance. But, he said, the administration needed to do a better job of defending its proposal.
Parnell said he didn't like the senators' aggression.
"I've been obviously disappointed by the bullying tactics being employed at Senate Resources on my commissioner and deputy commissioner of revenue," Parnell said. Was Butcher prepared? "For a civil discussion, yes. For the bullying, no."
But, he said, new ideas are percolating to address some of the Senate concerns. A House member --- he wouldn't say who -- proposes giving companies the same tax discounts for the oil produced from newly drilled wells on aging fields as for oil coming from new fields. That is easy to measure and "that's clearly new production," the governor said.
Anticipating the criticism that oil field operators are drilling ne w wells anyway to more effectively draw up oil from different layers of the reservoir, Parnell said big areas on the North Slope are ripe for more drilling -- with tax relief.
The Senate tried during the regular session to figure out a way to push new production from North Slope existing fields by cutting taxes. But with oil production declining, senators couldn't agree on where to set the starting point for what should count as new oil, taxed at a lower rate.
The governor's bill takes a tax fix intended for a targeted problem, such as expensive-to-extract heavy oil, or oil embedded in rock, and applies it to the entire North Slope, Stedman said.
"It's just nonsensical," Stedman said. And on top of that, the governor also wants to apply a generous 40 percent tax credit for the costs of drilling new North Slope wells. Once all the financial calculations are in, the state could end up paying 90 percent or more of drilling costs, according to the Legislature's consultants, PFC Energy.
If the goal is simply to lower taxes across the board, it would be much simpler to change the rates in current law, the consultants said. "You wouldn't do all these calculations and then throw that goofy thing on top of it," Stedman said.
Was the governor's bill dead on arrival?
"I think it was dead within the first 20 minutes" of the Revenue Department presentation last week, he said.
The governor's tax breaks for existing fields have no chance of passing the Senate, said Sen. Joe Paskvan, D-Fairbanks and chairman of the Senate Resources Committee.
The Senate worked on oil taxes during the regular session, and the House didn't take up the tax bill it passed with only one day left. Now it's the House's turn to take the lead and suggest a new answer, Stevens said. The Senate is open to hearing what the House comes up with, he said.
Seaton, the House Resources co-chairman, said he and others don't back a tax overhaul that puts the state budget in the red and don't want to give tax breaks for investment that would happen anyway. But like the governor, they want more oil development.
Tax breaks directed at companies that boost investment in oil field development might work better than those reward new production, since the latter is tricky to calculate, he said.
Seaton also is working on another approach, to allow state loans to oil explorers to develop production facilities. One new North Slope explorer, Brooks Range Petroleum, says it has found a prospect that could produce more than 13,000 barrels a day, but it needs capital to build a processing center to separate the oil from water and gas, Seaton said.
Paskvan said he doesn't yet know whether his committee will produce its own bill.
"At the moment, I am waiting to see what process is reached in the House," he said.
Besides oil taxes, Parnell also directed legislators to work on a House-passed bill sponsored by Chenault to create an in-state natural gas pipeline from the North Slope to Southcentral.
No hearings on that bill have been scheduled.
Reach Lisa Demer at email@example.com or 1-907-500-7388 in Juneau.