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Hackles raised in Juneau over analysis showing tax-free deal for 'new oil'

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published February 22, 2016

New oil fields are helping to slow Alaska's long-running production decline, and they're paying the state a royalty share of the oil produced.

But according to a recent analysis of the state tax system by the Alaska Department of Revenue, they currently pay no production taxes. And they may not for a long time, according to the state's oil price forecast. That's because so-called "new oil" — from fields that began producing in 2008 — received the most generous tax breaks during the fight over the oil-tax overhaul that was approved in 2013.

About 50,000 barrels of "new oil" are produced daily — amounting to about 9 percent of recent oil production. And the proportion of new oil could grow in the next two years if planned projects are completed, giving it an even larger share of overall production.

At today's low oil prices, around $30 a barrel, that oil pays no production tax. And it won't pay one unless North Slope oil sells for about $73, according to a letter released Thursday from Tax Division Director Ken Alper.

Alper's letter, dated Feb. 2, was a response to questions from Rep. Les Gara, D-Anchorage. It caused a stir in Juneau last week after it was sent to reporters on Gara's behalf by his Democratic-led minority caucus.

The letter was released as the Republican-led Legislature considers a proposal from Gov. Bill Walker that would slightly increase the production tax and reduce a $500 million tax credit program for oil companies.

House Speaker Mike Chenault, R-Nikiski, said Thursday that the analysis angered members of the House Resources Committee. The lawmakers had asked administration officials in hearings to provide "modeling" related to the governor's oil-tax bill. They were told by administration officials that no such analysis was available, Chenault said.

"Here you have an administration that is asking for a tax rewrite of oil tax bills, cannot supply the committee the modeling it needs, but has the opportunity and the time to put together a model for one member of the body," Chenault said, holding up a copy of the statement to reporters sent by House Democrats.

That press release said a "new analysis" shows the current oil tax system "vastly shortchanges Alaskans," and that Gara plans to propose a tax increase on industry in the coming days. Gara said the tax increase will be modest at low prices, but will rise as oil prices increase.

Revenue Commissioner Randy Hoffbeck said Gara asked his question about taxes on "new oil" before the session began, and that the response was not really an analysis. Hoffbeck said the House Resources Committee had asked for information later, and it was about oil-tax credits, a different topic than the information sought by Gara.

Hoffbeck met with Chenault and House leaders Thursday and said he's committed to providing the best information "with no spin."

"It was two different things crossing paths," Hoffbeck said. "We'll answer every question asked as quick as we can, but it was unfortunate timing."

Kara Moriarty, president of the Alaska Oil and Gas Association that lobbies for the oil industry, said the association has not had time to study Alper's letter. But she pointed out that "new oil" pays income taxes and property taxes in addition to royalties, regardless of prices.

"Bottom line, Rep. Gara seems to support raising taxes on an industry that by the state's own admission is losing money," Moriarty said. "We are hopeful the Department of Revenue will share a full analysis and impact of the governor's tax policy proposal in public and with the House Resources Committee in the near future."

An additional 50,000 barrels of "new oil" could be flowing in 2018. The state would take some of that as part of its royalty share, usually around 12.5 percent.

Some of that new production is expected to come this year from ExxonMobil's Point Thomson field, which is projected to add up to 10,000 barrels daily to the trans-Alaska pipeline. The production stems from a settlement agreement ExxonMobil reached with the state after it refused to develop the field for decades.

In 2017, Brooks Range Petroleum's Mustang field is expected to add about another 10,000. ConocoPhillips' Greater Mooses Tooth 1 project is scheduled to come into production in 2018, adding another 30,000 barrels.

That oil will also enjoy a tax holiday if North Slope oil prices remain at $72 a barrel or below. The North Slope won't see prices that high until 2021, according to the state's latest oil price forecast.

The tax rate is too low, Gara said.

"You can't run a society and have a decent school system and hire troopers when all your future oil is paying a zero percent production tax," he said.

Alper's letter said oil that is not considered "new" pays a minimum tax of 4 percent, an amount that will not rise until oil prices reach $76. Recently, around 500,000 barrels of that oil has been produced a day.

The state's revenue forecast anticipates total petroleum revenue of $1.1 billion in the current fiscal year, with $172 million of that from production taxes. That's if oil averages $50 a barrel for the year.

The production tax brought in $2.6 billion in 2014, before prices crashed.

Gara said he received the same information last year, but sought some updated numbers from Alper, a former legislative aide who worked on oil-tax issues for House Democrats.

"I can't believe the Republican party is complaining that a Democrat got information," he said. "Is it wrong for them to answer my questions?"

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