Legislators Study ‘Rebalancing’ Taxes, Not Cutting Them

In the legislative session that begins in January,  members of the House and Senate will face several high priority issues.  But at the top will be whether to change the state’s oil tax structure in hopes of encouraging more new production.  Based on the high prices paid earlier this week for leases on the North Slope,  there is evidence of renewed interest from possible producers.   And lawmakers are now looking at their options –they’re thinking of re-balancing the taxes,  not just cutting them.

The Spanish Oil company Repsol recently showed up in Alaska, looking around the North Slope to see if this is where they wanted to focus their future exploration.   They had been heavily invested in South America – Argentina particularly.  But Argentina had a tax structure that – like Alaska’s – took a high percent of the income as oil prices increased.   Repsol drew the line in that country when they were in a position that there was no reason to make new investment:   one hundred percent of the price above $60.90 a barrel went to the Argentine government.  Alaska looked good in comparison.

Legislators have just finished two days of seminars with international petroleum consultant Pedro Van Meurs, who helped put together the tax regime that passed under Governor Frank Murkowskl.   The state’s current plan – that passed under Sarah Palin — is an amendment of that.

Anchorage Republican Mike Hawker says Van Meurs presented some options to the current tax plan that he says could result in putting a million barrels of oil per day through the TransAlaska Pipeline – and could create a tax structure that would make Alaska’s natural gas economically viable in Pacific Rim countries – while still giving the state a good return.   It’s not the overall tax rate that needs to be cut.  Hawker says  it’s  just the balancing point that needs to change.

We have a fiscal system that offers an excessive amount of front end credits for exploration,  at the same time taking too much in the out years in the form of ongoing production taxes.  His proposal is very much a rebalancing of our system.  Lowering the amount of front-end benefit and at the same time lowering the amount of government take in the out years.

Hawker says Governor Parnell has privately expressed an openness to new ideas and amendments to his bill  that is now under discussion.

That current tax-changing legislation  passed the House earlier this year, but was not taken up by the Senate – and there were a lot of problems raised there.   However,  Senate Finance Co-Chair Bert Stedman,  who has taken a seminar with Van Meurs in London, says he anticipates a better reception this year.  And he sees the same alternatives as Hawker does.  He says the problem comes when oil prices are high – within ranges the state has seen in the past few years.

When you have oil prices at $130,  $140,  $150 a barrel there isn’t enough sharing of that increase in gross dollars to the industry.  Basically it all goes to the state pretty much.   So we’ve got to work on that.  And then there’s problems with our credits.  And the problem is when the state reimburses part of the capital costs, 20% to 40% of the capital costs.

Simply reducing the oil taxes became a divisive issue during the last session.   However, going into next year’s session,  there is some agreement – at least in principle – with the need for some sort of change.  Anchorage Democrat Berta Gardner supports what she calls “tweaking the system.”  She says Van Meurs documented where the state’s tax regime has its good and bad points.

Our credits might be too generous.  Unnecessarily generous in fact.  He said they’re probably the best in the world.  And it’s not necessary.   But at the same time, at the higher levels, particularly for the more expensive to produce heavy oils and things like that, we may need to make some adjustment. And the other thing that was a take-away for me is that what ACES really does is it’s wonderful for the explorers and not really quite so wonderful for the producers.

When Repsol began to look at Alaska from its Spanish offices, it tried to hire fiscal consultants to explain the state’s tax structure.  Van Meurs says they were unable to find any accountant who would take the contract – Alaska was too confusing.  Gardner says that confusion is part of the reason that there is not enough audited information on which to base deicisions.  And Hawker says that’s another goal for the state – simplify the rules.

Stedman, Hawker and Gardner anticipate the issue of oil taxes arising at the very start of the session that begins in January.