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'Sleeping dog' oil tax policy is exactly the wrong approach for Alaska

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  • Updated: March 18
  • Published March 18
A 1978 newspaper ad by the Alaska Oil & Gas Association.

A 1978 newspaper ad by the Alaska Oil & Gas Association.

A veteran consultant told legislators last month that the oil industry can be counted on to offer three main arguments whenever any oil tax increase is proposed.

First, the increase would create instability and drive away investment. Second, it would make other places more competitive. Third, it would put jobs at risk.

Consultant Rich Ruggiero said that "operators routinely deploy the top three detractor themes" to fight tax increases.

This is understandable and no cause for alarm, though the Republicans on the committee found the term "detractor themes" derogatory.

Awkward is more like it. Keep in mind that the companies exist to maximize profit for their owners, these are effective arguments and the only change the companies want is one that boosts profits.

"In their world there is no concept of the operator earning too much and a government earning too little," he said in his presentation to the House Resources Committee.

It is this dynamic — which will be at or near the surface this coming week in the House Finance Committee — that underlies the long history of political and economic tension between the industry and the state government.

The revised oil and gas tax bill would add about $180 million to $200 million a year  for the state, the Department of Revenue estimates, based on the current oil price forecast.

To put this in some context, both the proposed income tax and the proposed cut in the Permanent Fund dividend formula would be worth hundreds of millions more to the treasury.

If the final product of the 2017 Legislature relies entirely on Permanent Fund earnings, with a big dividend cut and nothing from the oil industry or an income tax, I fear we could have a replay of the 1999 Permanent Fund fiasco — when the state's power structure was united in support of an idea that the voters rejected in a landslide.

Among its many provisions, the oil tax bill would raise the minimum tax from 4 percent to 5 percent and reduce the major remaining credit on the North Slope by half — the carried-forward annual loss credit that largely benefits new competitors.

That part of the plan could create problems for the companies hoping to develop recent discoveries and co-exist with the established giants on the North Slope. This is a complicated situation that warrants more research to prove we've got the right approach.

Alaska and the companies can benefit, but only with a tax and credit policy that strikes the right balance. This has to be monitored and studied continuously.

The bill is not a major overhaul of oil taxes, but, to no one's surprise, the oil industry said the measure would create instability and be bad for investment and jobs.

Two days after Ruggiero argued that stability in the energy industry never exists, the president of the Alaska Oil and Gas Association said the consultant's comments about investment, competitiveness and jobs were "insulting."

AOGA President Kara Moriarty said one would think by the way Ruggiero talked that the "industry is not being genuine and just providing the same old arguments that they deploy across the globe when governments consider changing tax policy."

"He was insinuating that industry is not credible and that these themes should not be believed," she said. Moriarty said they are real factors and "changes in government take do impact those three things."

She included a slide that asked, "Would you invest in Alaska if tax policy changed seven times in 12 years?"

One advantage of having watched these issues for 40 years is understanding that a lot of this has come up in the past.

"Harsh and discriminatory taxes are a clear signal to potential investors that Alaska may not be a good place to do business," AOGA complained in a 1977-78 ad campaign.

The "Where is Alaska headed?" ad included a graphic of a prospector, representing the oil industry, weighed down with heavy taxes, while other prospectors considered leaving Alaska.

"When the petroleum industry came to Alaska, the ground rules and tax policy were clear. Since then the rules have changed, and changed and changed. Oil and gas taxes have increased 12 times since the Prudhoe Bay Field was discovered," the trade group said 40 years ago about unstable conditions.

In another ad, it said higher taxes "will tend to discourage development of marginal fields which would create many new construction and operations jobs."

"As an industry, we realize that good government costs money. And we are willing to pay our fair share," AOGA said before the pipeline went into operation.  "But consider this: for every dollar of increased taxes, there is less for us to invest in Alaska. There is less exploration, less production, less work and fewer jobs."

The largest oil field ever found in North America has been in decline for a quarter-century and economic conditions are much more challenging with smaller fields, but Alaska needs to be vigilant and more informed about oil economics — it matters little if you think SB 21 is the greatest thing ever or that the repeal was the greatest mistake ever.

The best description I've ever heard about the industry decision-making process was nearly a decade ago from an executive who told lawmakers that investment decisions are based on a "combination of strategy, resource prospects, technology, economics, including fiscal policy and risk."

Where state government has failed over the years is in not developing the expertise and depth of understanding necessary to adapt to that complex and ever-shifting combination.

Generations of governors and legislators felt no pressure from the public to invest in a staff of experts capable of analyzing everything related to oil. Instead, we've relied on intermittent reports from consultants.

Every time an oil tax battle ends, as with the 2014 failure of the SB 21 repeal effort, there is a tendency to leave things alone, assuming that no changes are needed and hoping to delay the next battle.

On the day Ruggiero testified, Anchorage Republican Rep. Chris Birch wondered whether it would be best to "let this sleeping dog lie" seeing as how SB 21 was not repealed three years ago and that oil production in 2016 was higher than in 2015.

The pipeline carried 189 million barrels of oil in 2016, up from 185 million in 2015 and 187 million in 2014, and down from 195 million in 2013 and 200 million in 2012.

I don't know what it will be in five years or that a new trend exists, but we need to know a great deal more about industry investment decisions, not less.

Sutton Republican Rep. George Rauscher said we already have a tax policy in place, SB 21, and "more oil is going down the pipeline." He said he was worried about "getting our partners exhausted from change."

The energy industry is constantly changing. For the benefit of Alaskans and investors, state oil and gas tax policy needs to be able to deal with change, which is why a "sleeping dog" policy is exactly the wrong approach.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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