Oil tax reform legislation the top story of 2013


Published:

The state Legislature action to revamp the state’s oil production tax in its 2013 session ranks as the top Alaska news story for the year. Senate Bill 21 will replace the current oil tax, called ACES, on Jan. 1.

The bill overhauls what had become an obsolete tax. There was wide agreement that ACES was “broken” but sharp disagreements in the Legislature over how to repair it. Generally, Gov. Sean Parnell and Republicans in the Legislature wanted a complete makeover, while Democrats leaned toward minor band-aids at most.

The makeover, in SB 21, involved major structural changes, however, and the Democrats and other critics howled.

After SB 21 passed and legislators went home last April critics organized a referendum drive to repeal the tax change. Sufficient signatures were gathered and the question will now appear on the August 2014 primary election ballot.

Basically, SB 21 makes two important changes and a number of smaller ones. Most important, it eliminates a “progressivity” formula in the ACES tax that ratchets up the tax rate as oil prices rise to high levels when prices reach $110 per barrel or above.

In those price ranges the effective oil tax rates in Alaska were some of the highest in the world. Alaska’s high costs, distance from markets and harsh climate conditions were challenges enough for industry, but the high tax rate made most new Alaska oil investments uneconomic under ACES.

Industry investment in new oil projects lagged, while it boomed in other U.S. states. Meanwhile, the decline in North Slope production continued at rates of 6 percent to 8 percent yearly.

SB 21 changed that structure. At the higher price ranges it would constitute a tax reduction for companies (at lower prices it works in reverse, raising taxes higher than ACES), but what’s most important is that SB 21 is simpler than ACES, which was so complicated companies could not predict its results in their planning for projects, which is very important.

Since last April, when the law change was made, the companies have stepped up with substantial new investments on the North Slope. About $4.5 billion in new projects are planned, and possibly more, which are expected to result in about 55,000 barrels of new oil production by 2018.

— Tim Bradner

2. Anglo American pulls out of Pebble project

The decision by mining company Anglo American to pull out of the giant Pebble copper/gold project near Iliamna Lake southwest of Anchorage was another major news story this year.

Anglo American’s withdrawal leaves Northern Dynasty Minerals, its previous partner, as the sole owner of Pebble. Northern Dynasty says it is attempting to bring a new partner to the project to take the place of Anglo American.

Mining industry sources said Anglo’s departure had little to do with the political controversy surrounding Pebble. The company has faced difficulties with other projects it is working on and was forced to retrench, eliminating several prospective new mines from its inventory of prospects, with Pebble being one of those.

The agreement with Northern Dynasty, which owned the state mineral leases at Pebble, was for Anglo American to invest in the project and eventually earn a 50 percent interest by spending $1.5 billion.

The company did invest about $600 million and with about $180 million invested by Northern Dynasty, the partners were able to do extensive drilling to confirm the size and scope of the project and conceptual engineering and planning for a mine, as well as extensive environmental research.

The goal had been to complete the conceptual engineering needed to define a possible mine plan and to submit permit applications to federal and state agencies by the end of 2013.

In November, Northern Dynasty said it is close to finishing the mine plan but will likely hold off on submitting the applications for permits to agencies until it has a new partner. However, if the U.S. Environmental Protection Agency follows through with a threat to preempt the federal permit process under Section 404 of the Clean Water Act, Northern Dynasty may proceed to file permits on its own, the company said.

If Pebble were developed it would involve a massive construction project that would build major new infrastructure in the Iliamna region including a road from a new port needed on lower Cook Inlet, a slurry pipeline from the mine to the port, and major power generation facilities.

Natural gas has been examined as a source of energy for the mine, which would probably be delivered as liquefied natural gas sourced either from Cook Inlet or imported.

Once the infrastructure for the mine is built it would likely be extended to communities in the region, which now depend on oil-fired electricity and space heating.

Just as Northern Dynasty vows to continue working on the mine development, opponents to Pebble say they will not give up their fight. The mine is located in a major sports fishing region and local lodge owners, fearful that development in the area will detract from its pristine reputation, have organized a coalition with Native groups in the Bristol Bay region west of Pebble to continue working against the mine.

State officials feel the Pebble developers should be allowed to submit their mine plans through the existing state and regulatory process, which is rigorous.

— Tim Bradner

3. LNG trucking project keeps AIDEA busy

Putting a plan in place to get liquefied natural gas to the Interior was a top priority for the Legislature and the Alaska Industrial Development and Export Authority in 2013.

The Interior Energy Project, as it has come to be known, took its first big step April 12 when legislators passed Senate Bill 23 to provide financing for the project. In total, $355 million in loans, tax credits, bonds and capital appropriations were approved for use by AIDEA to make the Interior Energy Project happen.

The money from SB 23 was designated for a North Slope gas liquefaction plant and build-out of a distribution system in and around Fairbanks.

Ultimately, the goal of the project is to start trucking gas down the Dalton Highway from a 9 billion-cubic foot, or bcf, liquefaction plant to Interior by late 2015 as a means to lower energy costs for residents who heat primarily with fuel oil. The average Fairbanks household pays about $5,7000 per year for fuel oil at a price of $4 per gallon — studies indicate a conversion to natural gas could cut that cost in half.

The prospect of improved air quality in the region is an equally important benefit to the project.

AIDEA interviewed three firms — Pentex Alaska Natural Gas Co., Spectrum LNG and MWH Americas Inc. —vying to partner with the state authority on the North Slope plant at a November board meeting. Pentex is the parent to Fairbanks Natural Gas LLC, which provides gas to about 1,100 customers in the city’s core with gas trucked north from Southcentral. Spectrum has partnered in a small gas utility on at Deadhorse on the North Slope in the past.

Interior utility Golden Valley Electric Association submitted a plant proposal to AIDEA in February, but withdrew from consideration. Golden Valley has a gas supply contract with BP and co-op president and CEO Cory Borgeson had said the utility would likely be an “anchor tenant” gas customer.

The AIDEA board is expected to decide on a plant partner in mid-January.

To assure gas keeps flowing to homes during the coldest winter months when the Dalton Highway may be closed, the Interior Energy Project has been modeled with a minimum of five days of peak-use storage. FNG is in the early stages of building a $35 million, 5.25 million gallon LNG storage facility in Fairbanks to supply its current distribution grid.

State Department of Transportation and Public Facilities officials have said the Dalton Highway has never been closed for longer than three days for any reason.

— Elwood Brehmer

4. Salmon harvest sets record

Alaskan fishermen netted the strongest salmon catch ever this summer.

Fishermen caught 272 million salmon, the most on record, according to the Alaska Department of Fish and Game, or ADFG.

The catch was worth $691.1 million, according to an ADFG estimate based on ex-vessel prices, making is the second-most valuable on record. The value is likely to rise further after postseason price adjustments to fishermen from processors.

The 2013 numbers were driven largely by pink salmon — 219 million of the little, prolific fish were hauled in throughout the state, worth an estimated $277 million, according to ADFG.

The strong pink runs helped propel Southeast Alaska to be the most valuable fishery in the state, worth $219 million. The catch in that fishery included 89.2 million pinks, worth $124 million, and 10.2 million chums, worth $43.6 million. Southeast also had the most valuable king fishery, with a catch of 200,000 worth $17 million.

Sockeye, however, contributed the most value to the fishery statewide, with an estimated value of $284 million. Bristol Bay, fishermen netted 15.4 million reds, valued at $138 million. Cook Inlet had the next largest sockeye catch — 2.7 million, worth $38.4 million.

The Prince William Sound catch, including 91 million pinks, was the second most valuable, at a total of $162 million for all species. Pinks were the primary driver, but the sockeye catch also contributed $31.6 million to the total.

According to an announcement from ADFG, the postseason adjustments could push the 2013 value to the most valuable ever, depending on how bonuses and price adjustments play out. The final 2013 value will not be known until 2014. The most valuable salmon harvest on record was $724 million, in 1988, which is considered a historic anomaly.

Not every fishery, however, performed as well as pinks. King runs were at record lows on some rivers, and fishermen targeting other species on the Yukon and Kuskokwim and in Cook Inlet were restricted to protect the kings.

In an effort to provide more opportunity on the Yukon, the chum fishery was prosecuted with dipnets, a move that allowed some harvest of chums, but still left a significant amount of fish in the water. Now, the Board of Fisheries has indicated that it will consider using dipnets were there are king concerns on other rivers in the state, including on the Kenai and Kuskokwim.

While the harvests in the northernmost part of the state, the Arctic-Yukon-Kuskokwim region were not as strong across the board, Kotzebue fishermen did see large chum harvests.

— Molly Dischner

5. Fairbanks wins fight over F-16s

After nearly two years of battle with Alaska’s congressional delegation and Interior residents, the Air Force announced in October that nothing was happening with its F-16 fighters stationed at Eielson Air Force Base.

The Air Force’s plan to relocate the 21 18th Aggressor Squadron fighters to Joint Base Elmendorf-Richardson near Anchorage was met with stiff opposition because of the detrimental effects it was feared the move would have on the Fairbanks area.

When the inaction was made formal Oct. 2, the state’s congressional delegation said the announcement was good news for the entire state.

City leaders in Anchorage had said the city’s tight housing market indicated it could not handle the 1,500 people that would move south with the planes.

After the Air Force performed a Strategic Asset Assessment, Rep. Don Young said keeping the fighters at Eielson was “recognized as a long-term benefit for the state of Alaska and for the mission” of the U.S. military.

A draft environmental impact statement, or EIS, released by the Air Force in May projected a statewide loss of 3,100 jobs associated with the squadron move —1,200 of those coming within the Fairbanks North Star Borough.

The EIS estimated the move would save the Air Force $227 million over five years. An average of $90 million per year has been spent on Eielson work over the past decade. Without the F-16s, that number would drop to about $45 million, according to the EIS.

Immediately following the release of the EIS, Sen. Lisa Murkowski and Young sent a joint letter addressed to Secretary of the Air Force Michael Donley and Air Force Chief of Staff Gen. Mark Welsh. The letter highlighted the potential adverse economic impacts the transfer could have on Fairbanks area and possible social and environmental burdens placed on Anchorage.

Fairbanks Economic Development Corp. President and CEO Jim Dodson called the EIS “an embarrassingly incomplete document,” at the time.

In a May 31 statement from his office, Sen. Mark Begich said, “Some pencil-pusher in the Pentagon cooked up the idea of ‘warming’ Eielson based on phantom cost-savings. Alaskans should be aware that (the) Eielson EIS is not a decision document.”

The delegation is now working to get a squadron of F-35s moved to Eielson.

— Elwood Brehmer

Add your comment: