Paul Jenkins: ACES needes fixing; Parnell's bill is a start

Paul Jenkins

Now that Alaska may lose $700 million in revenue next year because of predicted North Slope oil price declines, slipping production and more than $1 billion in capital investment incentives being handed the oil industry, perhaps we finally can put the political screwiness behind us.

While billions of barrels of oil remain on the North Slope, trans-Alaska oil pipeline throughput -- underwriting 90 cents of every dollar the state spends -- continues to dry up at 6 percent annually. Over the past three years, flow has diminished by 100,000 barrels a day.

North Slope production is down, investment for new oil is too, and now there is talk of North Dakota oil being hauled by train to West Coast refineries, possibly triggering price drops for our crude.

Meanwhile, state spending continues. Unabated. Unsustainable.

With all that, Alaska should be well beyond sophomoric political grandstanding, or ambush "debate" challenges or fatuous claims of "giveaways" or "gotchas." This is an oil state. We need crude in the pipeline or we will go broke. Period. Alaska's Clear and Equitable Share oil tax -- which has hamstrung production and investment for new oil -- must be fixed.

ACES, thanks to then-Gov. Sarah Palin and an eagerly compliant Legislature, is the gift that keeps on giving -- or taking, depending on your point of view.

Under ACES, North Slope oil companies pay a base 25 percent production tax on net profits up to $30 per barrel. At $31, the state adds 0.4 percent to the base. That rate is not only added to the additional $1, it is applied to the entire $31. And 0.4 percent is added each time the price rises by $1. The tax contributes to as much as a 90 percent marginal rate at higher oil prices, something the industry says is unfair.

While it has been a sharp stick in the eye for the industry, the progressive nature of ACES has been an absolute boon for Alaska's tax-and-spenders. It has siphoned off somewhere between $1 billion and $2 billion too much from North Slope industry shareholders for each of the last six years or so, prompting fat state budget surpluses -- but adding not a drop of oil to our aging pipeline.

ACES also allows oil companies to apply for incentive payments for qualified capital spending and exploration -- without directly encouraging investment for new oil production. Even if you find new oil, you cannot afford to bring it on line because of Alaska's predatory oil production tax. So, investment money for new oil ends up in more friendly tax climes such as Alberta, the North Sea and North Dakota -- which surpassed Alaska in production last year.

The tax allows companies to seek costly capital investment credits at a time when revenues could dip. That means as we get less oil revenue, the companies could get more from Alaska in credits without producing an additional drop of oil. A spurt in development, and state expenditures for credits could rise dramatically, with no increased production, no new revenue.

Gov. Sean Parnell says he wants change and he is pushing for new, long-term investment, but with increased production as the light at the end of the tunnel. He says he wants a simple, fair and balanced tax system. And new oil. So does everybody else.

In his House Bill 72 transmittal letter, Parnell says the measure: "Maintains a 25 percent base tax rate with a 20 percent gross revenue exclusion for new oil. It eliminates the progressivity calculation, and eliminates the qualified capital expenditure credits for North Slope expenditures. The bill reforms the remaining credits so that they are taken when there is production."

The only way to fully benefit from the tax breaks or incentives is to produce new oil -- not simply throw money at capital projects -- which hardly seems a "giveaway."

There are, of course, questions. One seasoned observer opines that cutting all progressivity will be a political problem for Parnell and a lower tax rate on new oil virtually guarantees revenue declines in the future. Those are issues that must be worked out.

Perhaps this time around, with pipeline throughput gurgling to a dribble, lawmakers of all political stripes will be more focused on the brass ring -- increased oil production.

If not, as I have said before, Alaska could someday be a lot like Appalachia, only colder and darker.

Paul Jenkins is editor of the Anchorage Daily

Paul Jenkins