Thursday, September 29, 2011

Lawmakers, state square off in continued tax debate

Tim Bradner
Alaska Journal of Commerce

Sen. Hollis French and state Deputy Revenue Commissioner Bruce Tangeman squared off Sept. 21 in a testy prelude to the Legislature’s oil tax debate that will resume in Juneau in January.

French said oil jobs and investment are up, not down, despite Alaska’s high oil tax. The tax is also bringing huge revenues to the state treasury, and state exploration incentives will spur a sharp increase in drilling this winter.

Tangeman said the increased jobs and capital expenditures are due to maintenance, not new oil development, and that the production decline is continuing. High oil prices are masking the effect of the oil decline, he said. Yes, exploration drilling will be up this winter, but state tax credits are paying most of the cost of that.

If explorers are lucky and find something, they’ll then have to decide whether they can afford to produce it with Alaska’s high taxes.

Tangeman and French squared off in a panel discussion at the Alaska Oil and Gas Congress, an energy conference held in Anchorage.

As Alaska debates reforming its oil tax, North Dakota meanwhile is sucking a lot of investment, Tangeman said. North Dakota’s taxes are a fraction of Alaska’s, and oil production there may surpass Alaska’s as early as next year, he said.

People are leaving to work there, too. “We saw a lot of Alaska license plates down there,” during a recent visit, Tangeman said.

In a separate panel discussion, Rep. Charisse Millet, R-Anchorage, said no matter how you slice the data, the most important number to watch is the amount of oil moving south through the trans-Alaska oil pipeline, and that is still dropping.

Opposing perspectives presented by French, Tangeman, Millet and also by Sen. Bill Wielechowski, D-Anchorage, who appeared on the panel with Millet, illustrate the stark divisions in the Legislature over Gov. Sean Parnell’s bill to ratchet down Alaska’s oil tax, called ACES, or Alaska’s Clear and Equitable Share.

Parnell’s bill, House Bill 110, passed the Republican-led House last session and is now in the Senate, lodged in the Senate Labor and Commerce Committee. Given that Democrats in the Senate like French and Wielechowski, who oppose changing the oil tax, are part of a Senate Republican-Democrat coalition leadership, the prospects for the governor’s bill seem uncertain.

Parnell and House Republicans, who favor the change, hope the May-through-December break between the legislative sessions will put some fresh air into the tax debate.

The arguments made Sept. 21 had a sharp edge, however.

French said the industry’s average tax rate over the four years since the ACES law replaced the previous tax, the Petroleum Profits Tax or PPT, was 32 percent, not the 80 percent and 90 percent that some have claimed.

“The 32 percent average rate is before the generous tax credits are factored in, lowering taxes significantly,” French said.

Also, there are twice as many industry taxpayers, indicating more companies are doing business in the state, French said. They aren’t all small independents exploring, either.

Repsol, a major Spanish oil company, purchased leases on state lands last year and announced it would be spending $750 million in exploration. Among other things, Repsol cited Alaska’s stable political environment in its press release, French said.

Industry hiring is up, too, but state labor department records, “show that 50 percent of the new industry jobs in the state are going to nonresidents.”

French was citing a Department of Labor statistic for August 2010. In a separate response, the Alaska Oil and Gas Association said many industries, including state government, see spikes in nonresident hiring during peak summer work.

Tangeman said the governor feels the changes in ACES went too far, and that the tax rate has impeded investment in new production, as evidenced by the continued decline in production. It is true that Repsol and other companies are exploring, “but we’re covering a lot of their up-front costs through the tax credits,” he said.

“The overall tax is punitive because we’re taking away the upside,” of a producers’ chances for big profits if a risky exploration venture turns out well.

Still, oil prices are high and Alaska is enjoying robust revenues, Tangeman said, so from that perspective, ACES is a great success. “It’s really filling our tank,” at the treasury, he said.

“We do have a lot of money in the bank, but my concern is the drop in production.” Tangeman said.

Alaska oil production is dropping and North Dakota is set to pass Alaska as an oil producing state, he said. Production averaged 450,000 barrels a day in North Dakota in September and is expected to exceed 500,000 barrels per day next year. North Dakota’s tax on oil is 5.5 percent of the sales price when oil prices are below $50 per barrel and 11.5 percent when prices are above that. The tax is simple compared to Alaska’s, Tangeman said, and much lower.

Alaska production meanwhile is headed the other way, with production dropping from 600,000 barrels per day to the mid-550,000 barrels-per-day range. Two years ago Alaska was at 700,000 barrels per day, on average.

Tangeman also challenged French on the notion that jobs are up in spite of the tax increase under ACES, which took effect in 2007. Industry hiring took a sharp hike in 2007 after the late 2006 BP oil pipeline spills on the North Slope. Those were workers employed for pipeline repairs and replacement, and increased maintenance, and they went to work before the new ACES law was implemented, Tangeman said.

As the new tax took effect in 2008 and 2009 industry employment was generally flat, he said.

Republished with the permission of the Alaska Journal of Commerce. Tim Bradner can be reached at