Web posted Thursday, September 1, 2011

Some basic facts on Alaska's continuing oil tax debate

By Rep. Les Gara


  Rep. Les Gara    

When debating proposals that could cost Alaskans billions of dollars, and hamper our ability to build infrastructure and build this state, it's important to have your facts straight.

Recently a lobbying group took liberties with the facts on the current oil tax debate. People are entitled to their opinions. But factual assertions that are incorrect, and in this case accusatory, should be corrected if we are to have a fair debate.

First, some background. While it's vogue to claim oil companies are suffering under Alaska's tax system, Exxon, British Petroleum and other companies that have reaped over $20 billion in Alaska oil profits since our new oil tax and investment incentive law, ACES, was passed in 2007. This law, according to a recent Petroleum News article, will likely lead to the busiest exploration season on the North Slope since 1969. The law allows for strong profits, doesn't kick in at all if a field is not profitable, and allows for credits and deductions that exceed 50 percent of the cost of new capital expenditures.

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Tax reduction proponents don't ever mention that. Nor do they mention the fact that we offer what Forbes magazine calls some of the most generous investment incentives in the world to encourage production – credits that effectively reduce the tax rate substantially in a company invests in Alaska. But we don't reduce tax payments for companies that send their profits Outside. That's just smart policy.

What about the "onerous" progressive tax rate you hear about? It's actually a slow progressive tax increase as oil prices rise, so the state can share in windfall profits for oil Alaskans own. But the progressive increase doesn't kick in until a company has first netted $30 in profit on their oil production. That is, the tax remains at 25 percent for the first $30 in profit.

So, hard to develop fields pay a much lower tax than easy fields with low lifting costs. If a field is profitable at $15 per barrel, the tax rate remains at 25 percent until prices hit $45 per barrel. If a heavy oil or other challenging field has $80 lifting costs, the tax remains at 25 percent until oil hits $110 a barrel.

Now – the correction that needs to be made from an editorial run by a group pushing to lower Alaska's oil tax, which calls itself "Make Alaska Competitive." In a recent AM talk radio tour, and on its website, and in an op-ed here, they chose to go after myself and Sen. Hollis French. Their facts, and unfortunate accusations, were inaccurate. We should all strive to do better.

Why the attack? Well, many of us believe it is unwise to give away $8 billion – as the governor proposes – in exchange for no binding promise that this money will create new Alaska investment in needed exploration.

In fact, BP and Exxon both testified they won't likely do any new exploration when they receive the governor's tax giveback. The governor's proposal lets companies invest only in what they were going to do already, and take that $8 billion out of Alaska to give to executives and shareholders. So "Make Alaska Competitive" chose to get personal, and depart from the merits of the debate.

Their widely spread mis-assertion? A few weeks ago Sen. Hollis French noticed two new BP land-based drilling rigs on their way to Alaska. Sen. French and I noted that this was good news for Alaska, and showed the current tax credits and deductions – which a company can only receive if it invests in Alaska – helped bring the $250 million in more effective rigs up here.

Some lobbying folks immediately sent out e-mail and web claims that the rigs were contracted for in 2007, before BP knew about the 2007 adoption of our new oil tax law. They spread the assertion, and unflattering things about myself and Sen. French on AM radio, arguing that had BP known the current law was going to be adopted, it would have never made this investment.

Fishy, we thought. Our staff did some research.

In fact, these rigs were ordered in 2008, after ACES passed. It's not surprising BP knowingly made $250 million in needed investments under a tax law that has earned the corporation over $7 billion in Alaska profits since 2007, and that provides handsome tax credits for new Alaska investment.

Where'd we find the facts? First, there is Parker Drilling's 2008 annual report. Parker, which built the rigs in question, states in its "2008 Highlights" section that, "BP subsequently awarded Parker a new contract to build and operate two new arctic class land rigs for development and drilling in Alaska."

Newspaper accounts, including one from the Houston Business Journal on May 6, 2008, also noted this 2008 contract, stating "Parker Drilling Co. has won a five year drilling contract valued at $250 million" for these land rigs, "awarded by a subsidiary of BP...."

But for a week the "Make Alaska Competitive" folks went on the radio with the incorrect claim, and less than favorable statements about Sen. French and myself for, um, telling the truth. I guess that's politics.

A few more facts. Contrary to industry claims, jobs on the North Slope are near a record high. We're not losing jobs. Instead, companies have effectively limited job opportunities for Alaskans by hiring far too many non-Alaskans on the North Slope. That's wrong. And those jobs are largely in production and development, not pipeline maintenance as some have tried to claim.

We do need more exploration in new fields. But BP and Exxon specifically testified they likely won't explore for new fields when they get Gov. Sean Parnell's valuable tax rollback. That should make you worry.

There are smarter proposals out there. It's one thing to do as I and others have proposed – increase our tax credits for new exploration in new units, and for new processing facilities needed to put new oil in our pipeline. We'd also offer companies a credit if they increased their North Slope drilling investments. But Gov. Parnell's proposal is too flawed. It requires no new investment in Alaska beyond what a company was going to do anyway, and it doesn't target new exploration in new units. Nor does it solve the biggest problem on the North Slope – the expense of building a new processing facility to put new oil into the pipeline.

Finally, what about the governor's proposal to lower the tax rate? We've gone down that road before. In 2006, 15 of 19 fields on the North Slope paid a 0 percent, or less than 1 percent production tax, and any field that wasn't gargantuan got a 0 percent rate. What was the result of the low tax? Annual 6 percent declines in production; 40 percent fewer oil and gas jobs; and over 30 percent less in capital investment.

We can increase Alaska investment by letting companies buy down their tax rate with in-Alaska investment. You can't do that by simply offering a lower tax rate, and hoping companies spend their extra profits in Alaska. And you can't make major headway by increasing the credit on in-field drilling the companies are likely to do anyway – they have a financial incentive to maximize their existing investments in fields they are already drilling – as state officials testified in 2007 (there's already a 20 percent credit for in-field drilling).

That's why our proposal is more effective. And it's why an accurate debate is more helpful than an inaccurate one.

Let's debate. But let's do it accurately.

Rep. Les Gara is an Anchorage Democratic Member of the Legislature. You can send him comments, or reach him, at rep.les.gara@legis.state.ak.us, or at (907) 269-0106.