Legislature cuts oil taxes in final days
Rep. Mike Hawker, seated right, addresses reporters after the Alaska Legislature passed a bill in Juneau on April 13 meant to advance an in-state gas pipeline project. Seated beside him is House Speaker Mike Chenault. Chenault and Hawker were the prime sponsors of HB 4. Also shown standing from left are Reps. Lindsey Holmes, Pete Higgins, Charisse Millett, Steve Thompson and Doug Isaacson.
The Legislature approved a long-argued reduction of the state oil and gas production tax Sunday, 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 $325 million in state financing for a project to truck liquefied natural gas, or LNG, from the North Slope to Fairbanks, where residents and businesses now depend on fuel oil for space heating. Senate Bill 23, authorizing financing for the project, passed the Legislature April 12.
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 April 13.
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.
Senate Bill 21, which makes the changes, would reduce “total government take” of industry production profits from an average of 74 percent to about 61 percent for new projects, said Mike Pawlowski, a special assistant on fiscal policy to the state revenue commissioner. The total government take would range between 60 percent and 67 percent for existing fields, depending on the price of oil, Pawlowski said.
Taxes on industry would be reduced by about $450 million a year beginning in 2015 and increasing to approximately $800 million 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 by 2015, the analysis concluded.
Pawlowski said getting new rigs working in the existing fields is the quickest way to add production. The fiscal analysis that forecasts revenues from SB 21 exceeding losses by 2015 assumes four more rigs going to work in 2014 with each new well drilled producing 1,000 barrels per day, which is typical of new production wells.
The maximum production increase would be 60,000 barrels a day with total production of new oil estimated at 140 million barrels over six years, through 2019, the fiscal analysis said.
The bill 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 25 percent base tax rate in the current law, but the effective tax rate goes higher when the progressivity formula drives it up. In SB 21 the progressivity formula is eliminated and the higher 35 percent base rate is compensated for by the per-barrel tax credit on production.
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.
In a bid to help independent companies and small explorers, legislators also increased the amounts of losses that explorers could credit against taxes, or cash in with the state, to 30 percent and 40 percent in some cases.
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, and 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. Funds 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.
The separate 42-inch pipeline planned by North Slope producers BP, ConocoPhillips, ExxonMobil and TransCanada, would move 3 to 3.5 billion cubic feet of gas daily. This includes a large LNG plant at a Southcentral Alaska port site not yet designated.
If the larger project proceeds, 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.
The Alaska Industrial Development and Export Authority, the state’s development corporation that is leading the trucking project, expects trucking 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 several hardships on home and business owners there, said Senate Majority Leader John Coghill, a Fairbanks Republican.
“The Interior is finally going to see some short-term relief through trucking natural gas. 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 regasification facility near Fairbanks and for development of a natural gas distribution system for the community.
“The bill is a comprehensive financial package, a strategy that includes low-interest loans, gas storage tax credits, and state general funds for a movable liquefaction plant and a gas distribution system,” Parnelll said in his letter of introduction for SB 23. The North Slope plant would be built so that it can be moved and used elsewhere if a gas pipeline is built, the governor indicated.
The bill allows AIDEA to issue up to $150 million in bonds itself for the project and to provide another $125 million in funding in additional loans or guarantees. In addition, $50 million in a general fund appropriation is included in the FY 2014 state capital budget.
Tim Bradner can be reached at email@example.com.