Tuesday, April 16, 2013

Legislature approves oil tax change, other energy issues in final days

Tim Bradner
Alaska Journal of Commerce

The Legislature approved a long-argued reduction of the state oil and gas production tax Sunday, on the final day of its 2013 session.

Two other energy-related bills passed in the last three days of the session. One was a bill authorizing $350 million in state financing for a project to truck liquefied natural gas from the North Slope to Fairbanks, where residents and businesses now depend on fuel oil for space heating. Senate Bill 23, authorizing the financing, passed the Legislature on Friday.

Another is a bill expediting an in-state gas pipeline project from the North Slope that is seen as a fallback plan in case a larger industry-sponsored gas and LNG project fails to proceed. House Bill 4, making changes in the enabling statute for in the in-state line, passed the Legislature Saturday.

The tax change, in Senate Bill 21, is a bid to attract new industry investment. The current tax is considered among the highest in the world among oil producing states, and it has made Alaska uncompetitive, Gov. Sean Parnell has said.

The result has been flat industry investment in new North Slope development while investment in other oil producing regions has boomed. Production from North Slope oil fields has meanwhile been declining at about 6 percent annually for several years.

Parnell complimented legislators on weeks of study and public hearings on the measure.

“We are signaling to the world that Alaska is back, ready to compete, and ready to supply more energy once again,” Parnell wrote in a statement.

Democrats in the Legislature criticized the bill mainly because there was no guarantee by industry of new investment and an impact on the state treasury of several hundred million dollars a year at a time when production, and state oil revenues, are declining.

“This bill is a no-strings-attached giveaway that sells Alaska short and asks Alaskans to give up our savings, but it doesn’t demand anything in return,” said Rep. Chris Tuck, D- Anchorage, who is the House Minority Whip.

The change would reduce “total government take” of industry production profits from an average of 74 percent to about 61 percent, said Roger Marks, a former state economist now working as a consultant to the Legislature.

Taxes on industry would be reduced by about $500 million a year beginning in 2015 and increasing to approximately $1 billion a year in 2018, according to a fiscal analysis by the Department of Revenue.

However, even a modest new investment response by industry, the addition of four rigs drilling new development wells in producing fields, would offset the loss to the state treasury within a few years, the analysis concluded.

Senate Bill 21, which makes the changes, eliminates a complex “progressivity” feature of the current tax system, which causes tax rates to climb sharply at higher oil prices, and replaces it with a 35 percent base tax rate on net profits and a per barrel tax credit tied to the production of oil.

The 35 percent base tax rate is higher than the current 25 percent base tax, before the progressivity formula drives up the rate, but the higher base rate is compensated for by the per-barrel tax credit on production, state revenue officials explained in legislative hearings.

In producing fields the production tax credit begins at $8 per barrel in lower oil price ranges and declines as prices rise.

There is an additional 30 percent tax reduction for new fields or new projects within existing fields, Mike Pawlowski, a special assistant on fiscal policy to the state revenue commissioner, told members of the Finance Committee in a briefing.

On the in-state gas pipeline, HB 4 makes technical changes in the enabling statute that governs the project including authorization to keep commercial information from potential gas shippers and partners confidential, gives the state-owned Alaska Gasline Development Corp. access to funds to do more engineering on its project, Dan Fauske, president of the AGDC, has said in briefings to legislators.

AGDC is working on a 737-mile, 36-inch pipeline from the North Slope to Southcentral Alaska that could be built if the larger industry-led project is delayed.

The legislation gives AGDC access to $200 million set aside two years ago for engineering.

The money would be used to complete engineering and design work for an open season that is now planned for 2015, Fauske said.

The current plan is for the pipeline to move 500 million cubic feet a day, which is sufficient to meet demand in Interior and Southcentral communities, but the volume could be increased if a separate 42-inch pipeline planned by North Slope producers BP, ConocoPhillips, ExxonMobil and TransCanada, is delayed.

That project, which includes a large LNG plant at a Southcentral Alaska port site not yet designated, would move 3 to 3.5 billion cubic feet of gas daily.

If the larger project does proceed the AGDC project could become a spur line to serve Alaska communities, Fauske said.

State Rep. Mike Hawker, a Republican from Anchorage and one of the sponsors of the legislation, said the bill is really a “toolbox” of resources to build several spur pipelines that might be needed.

“This is not just about one pipeline. It also gives us the ability to participate in the larger industry pipeline if that project moves forward,” Hawker said. AGDC would be the instrument through which the state could provide financing and be an equity partner in the large project, he said.

On the LNG trucking project approved Friday, the Alaska Industrial Development and Export Authority, the state’s development corporation that is leading the project, expects it to lower energy costs in Fairbanks by about half.

Fuel oil is now used as a primary fuel for space heating in Fairbanks, the state's largest Interior city, and the expense has imposed severel hardship on home and business owners there, said Sen. John Coghill, a Republican of Fairbanks, who is Senate Majority Leader.

"The Interior is finally going to see some short-term relief through trucking natural gas," Coghill said. "This is not a final solution but it is an important first step as we work toward long-term solutions," mainly a natural gas pipeline, Coghill said.

The financing plan includes a medium-sized LNG plant on the North Slope, a re-gasification facility in Fairbanks and funding for a municipal-owned regional gas distribution system in Fairbanks.

Read more: http://www.alaskajournal.com/Alaska-Journal-of-Commerce/April-Issue-2-2013/Legislature-approves-oil-tax-change-other-energy-issues-in-final-days/#ixzz2QeHO5ziY