Texas is booming, North Dakota has now surpassed Alaska in production, and California is nipping at our heels for third place. All of this growth, and most of the industry investment, has passed Alaska by -- due in large part to our absurdly out of balance and highly progressive oil and gas production tax system. ACES – Alaska's Clear and Equitable Share, was touted as the way to make big oil pay in times of high prices. In an industry with intense global competition for investment capital, it has turned into ACES – Alaska Can't Expect to Survive!
In an effort to put Alaska back on track with a competitive business climate and robust industry, Governor Parnell introduced Senate Bill 21. Along with his legislation, he announced his principles for oil tax reform: 1) Fairness to Alaskans; 2) Encourage new production; 3) Simple, so that it restores balance to the system; and 4) Competitive and durable.
Following weeks of review, volumes of consultant reports, and hours of public testimony, we have arrived at the measure in its current form. The Senate Resources Committee revision of SB 21 sets aside our broken oil tax system and puts in place a system for the taxation of oil and gas that is fair, stable, predictable, durable, balanced and free from complexity across a wide range of oil prices.
I believe the following changes make significant improvements to Governor Parnell's proposal and will create a system that puts Alaska back in the oil business:
Total Government Take. Increases the base tax rate from 25 percent to 35 percent and eliminates progressivity - widely identified in testimony as the most onerous and investment stifling feature of the current tax system. Models of this new rate show that the total state take would maintain an almost constant rate across price changes with a slight increase on the upper end.
Gross Revenue Exclusion. Rewards new oil production through the expansion of the Gross Revenue Exclusion (GRE) by sheltering 30 percent of new oil production across all fields. Including legacy fields will increase production and Trans Alaska Pipeline System (TAPS) throughput. More total oil means more total revenue and supports more efficient and dependable TAPS transportation. In order to get this new tax break under our new bill, companies must produce new oil.
Volumetric Production Credit. Creates incentives for increased production in the purest form: volumetrically. This is accomplished through a $5 per barrel tax credit for all oil production. This feature, coupled with the 35 percent flat base tax, helps to maintain the constant rate for state take. This provision also adds significant safeguards to the state's exposure, limiting any credits under this provision to the current year and only to be applied against current tax liability.
Exploration Incentives. Advances exploration through eliminating the current boundary restrictions around wells and units. A great deal of new oil exists on the slope – inside and outside of the legacy fields. Exploration incentive credits provide the state the opportunity to partner with the industry in order to ameliorate a portion of the risk of exploration. This helps level the playing field between Alaska exploration projects and less expensive alternatives in other jurisdictions; making Alaska more competitive.
Alaska Manufacture Incentive. Creates Alaska manufacturing and jobs in the oil and gas industry by providing tax relief for Alaskan companies that manufacture or modify goods used in the oil and gas sector. This provision will also help ensure that products will be made available when needed, engineered and designed for the arctic environment, and made right the first time without the typical need for major modifications prevalent in the industry today.
Competitiveness Review Board. Assess our work and keep abreast of the ever-changing global oil and gas investment environment to ensure that Alaska will continue to be a competitive place of opportunity. The new Competitiveness Review Board brings a non-political, expert review panel together to provide input to the Legislature on an annual basis. This panel consists of the commissioners of the affected state agencies, members of industry, and public members with specific expertise in their field, who will be tasked with providing a holistic review and viewpoint to this critical ongoing discussion.
Not only does Alaska have proven billions of barrels of oil and trillions of cubic feet of gas, the North Slope has the additional potential to hold vast undiscovered resources. Providing for the long-term continuation of a competitive and vibrant oil and gas industry in Alaska is critical. We need an industry that continues to play the historic and crucial roles in providing revenue for the state's coffers and underpinning our resource based economy.
By passing this bill out of committee, the Alaska Senate Resources Committee has chosen opportunity over declining production. While others seem content to pick the meat from the bones of a dying oil and gas industry, we have worked to return Alaska to a leadership position in domestic oil production and ensure the prosperity of future generations of Alaskans.
Senator Lesil McGuire is currently Chair of the Alaska Senate Rules Committee and has served in the Alaska State Legislature for the past 12 years.
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