Alaska News

Lawmakers warned to 'be careful' before revamping Alaska oil taxes

An independent oil industry consultant cautioned lawmakers Thursday that they're not getting the whole story from oil companies pushing for billions of dollars in state tax breaks.

Rick Harper, a former ARCO Gas president who's previously advised the Legislature and two Alaska governors, warned lawmakers to be careful before revamping the state's tax structure known as Alaska's Clear and Equitable Share (ACES).

"What you're not being told is more important than what you are being told," Harper told the House Finance Committee, where numerous other legislators also were sitting in the audience.

The committee is considering House Bill 110, introduced by Gov. Sean Parnell, that would reduce production taxes paid to the state on North Slope oil while increasing tax credits producers can claim for certain kinds of exploration and development work. Under ACES, in place since 2007, the state gets more money for oil pumped from state-owned fields as oil prices climb through a progressivity provision that kicks in when the net cost of a barrel of oil -- after producers deduct expenses -- reaches $30. Then, the state gets more and more of a cut for every $1 rise in the oil prices. When prices skyrocket, as they are now because of the political turmoil in the Middle East, the state can make billions of dollars more.

HB 110 would reduce the base rate on some fields but the big change would come in the progressivity element. The bill would retain progressivity but ratchet down the rate at which it rises. The measure also changes the price at which oil is taxed to an annual average rather than the monthly price average.

The end result is that oil producers would save about $2 billion a year in state taxes. Parnell and other proponents believe the companies would reinvest that money in Alaska, leading to more oil production in the long term, more jobs and stronger economy in the future. They argue it's necessary to trade short-term cash flow for long-term financial stability.

Opponents say it's better to get as much money now, while oil prices are high, and put that away in savings as the state has been doing with much of the extra revenue ACES has brought in. They're also not convinced that the oil producers need the tax break to spur investment or that the companies will actually put any money they save on taxes back into the state.

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Harper, who is considered an independent advisor even though he was hired by House Democrats who oppose the bill, says he's troubled that oil industry representatives have not made a strong case for the tax breaks. In fact, he pointed out, testimony by two of the major North Slope producers -- Exxon and BP -- has been that little would change for them because they're not in the exploration business in Alaska.

He said lawmakers need to see the "hard numbers" and other detailed projections from the oil companies before cutting the tax.

But industry representatives have been unwilling to provide detailed economic information or go so far as to promise certain projects that have been put on hold would be cranked up again. A number of company executives -- independent and exploration businesses as well as the major producers -- testified Wednesday before the House Finance Committee and unanimously supported the bill. All said it would stimulate more investment in the North Slope and encouraged lawmakers to pass the measure this session.

But none have named a specific project or development that they would definitely pursue if they received a tax break. And none have threatened to walk away from existing operations if they don't get a tax reduction. Even administration officials and legislators who support the tax change base their concerns on perceptions that work has slowed down and oil production is declining, blaming taxes. People who oppose changing ACES blame other factors like the natural decline of an aging field.

Bart Armfield, vice president of operations for Brooks Petroleum -- the only company drilling an exploratory well this year -- said his company will move forward into the development stage as it has planned for years. The company has already invested $154 million in its North Slope project and investors are expecting a return on that money, Armfield said.

Armfield pointed out that his company, unlike the major oil producers who already have a revenue stream from their developments, can't afford to sit back and wait for the tax climate to become more favorable.

Claire Fitzpatrick, chief financial officer for BP, called into the hearing from London where she said that she would be talking with the president of the giant oil company about HB 110. She intimated that part of the discussion would be what the company could say that might more specifically address plans for Alaska if the tax rate was reduced.

But on Wednesday, she repeated the testimony she'd given a few weeks ago to another House committee -- that a change in the tax structure would prompt BP to re-evaluate its North Slope operations, including projects it had shelved as economically unviable.

Rep. Mike Hawker, a strong proponent of oil tax change who is sitting on the Finance Committee as an alternate, asked her to address the three basic themes that have emerged in the oil tax debate -- that Alaska's competiveness with other oil producing areas isn't really an issue, that the companies are not promising to invest more money in the state if taxes are cut, and that exploration credits alone without a cut in the overall tax rate would lead to a significant amount of new production.

Fitzpatrick insisted Alaska's ability to compete with other world oil prospects was a big factor in BP's decisions about where to spend its money.

"I'm working on your second question," she said, suggesting she was hoping to be able to get some sort of commitment for new work from the home office.

But on Thursday, Harper pointed to Fitzpatrick's testimony as more evidence that the oil companies were dodging the question of commitment. "I would want to see the hard data before I made concessions," he told the committee.

Harper said he sees no evidence that ACES is a deterrent to industry investment in Alaska, a point he also made to the committee or that "the economics in Alaska are upside down."

"I see no evidence that industry will do anything more (if there's) a substantial abatement of tax," he said.

In an interview after the hearing, Harper said he thinks the industry isn't making a very good case for tax cuts simply because it can't.

"I believe the economics show that it is robust here," he said.

Contact Patti Epler at patti(at)alaskadispatch.com

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