BRADNER: Time to take a look at Alaska's oil tax credits (12/16/12)

Tim Bradner

Legislators and others following state budget and revenue numbers got a bit of a shock last week when the Department of Revenue released its annual fall state revenue and oil production forecast. The bottom line is that we'll see a $2 billion decline in oil revenues from 2012 to 2014.

So far the overall revenue numbers are still healthy: $6.4 billion in 2014, thanks to high oil prices, but it's still down $2 billion from 2012 and that's sobering.

Part of the decline is because of the continuing drop in oil production of 5 percent to 6 percent yearly but part is also due to the rising cost of oil industry investment tax credits, an expense that is now more than $800 million a year and will climb to $1 billion in 2014.

A lot of people, myself included, think it's time to take a hard look at what we're getting for this.

About half the investment tax credits are paid out as incentives for oil and gas exploration. This is sound policy, given the urgent need to find new natural gas in Southcentral Alaska and spur drilling on the North Slope, where exploration drilling is slow.

The other half of this spending is in the form of a general investment tax credit to support, among other things, field maintenance and infrastructure projects.

There are arguments for all of this but we should question what we're getting. Exploration is still at low levels on the North Slope and while there is a spurt of drilling in Cook Inlet, we have yet to see significant gas discoveries announced.

Keep in mind that Cook Inlet pays no significant state production tax. On the North Slope, the production tax, called ACES, does apply and it is high compared with other producing regions.

To me, all this illustrates how wacky our entire state oil tax system has become. We're giving away the farm at the front end with these tax credits but slamming investors at the back end with the high tax rate. Industry investors see this quite clearly, which is why investment in new oil development is lagging.

Ironically, the state pays 60 percent to 75 percent of the cost of most exploration wells and the bulk of that is paid in cash. That's right. The state writes a check to the exploring company.

This helps an independent company exploring but it doesn't mean a lot to a larger company exploring, and those are the only firms that will drill -- even with the incentives -- remote and very high cost wells. For these firms, other factors, like geology, weigh more heavily. The big firms appreciate the state tax credit subsidy but they don't really need it, they will acknowledge. But they are very concerned, they say, with the state taking most of the long-term gain through ACES tax.

It's really a screwy system. We encourage North Slope exploration but we discourage actual production if they make a find. No wonder all our industry investment money is going to North Dakota.

Another problem is that the exploration tax incentives, those that pay 60 percent to 70 percent of costs, encourage finding new oil fields outside big existing fields, the ones that hold most of the known undeveloped oil on the Slope. This seems odd. We should put the incentive where it will be most effective in producing new oil.

After failing last year, reforming ACES will be front and center in the Legislature again this spring. The debate should also include careful examination of the tax credits. Gov. Sean Parnell and revenue commissioner Bryan Butcher are looking carefully at this issue, I know.

An interesting new approach is one worked on in the state Senate in the 2012 legislative session. It would reduce ACES in the big producing fields, to get that undeveloped oil, if an increase in oil production is demonstrated. There are always complications, of course.

I support the goals of the incentives -- to spur exploration and encourage companies to invest more in development -- but things are out of whack.

I'm not smart enough to suggest how to fix this but fine-tuning the system to ensure we're getting what we really want should be the goal -- not just oil discoveries but oil production too.

Tim Bradner is an Alaska business writer who lives in Anchorage. His columns appear once a month.

Tim Bradner