Balash talks tax policy, natural gas, permitting


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Alaska Department of Natural Resources Commissioner Joe Balash discussed a range of resource-related issues from his history with oil tax policy to wetlands permitting July 18 at a Commonwealth North forum.

With title to about 90 million acres of land, the State of Alaska is in a unique position among states in that it has a royalty interest to many of the natural resources within its borders, Balash said.

In regards to oil taxes, he said, “we need to understand how that production tax affects our underlying royalty interest.”

Balash declined to comment specifically on Ballot Measure 1, the referendum to repeal Gov. Sean Parnell’s More Alaska Production Act, or MAP, oil tax structure, because of his position as a state employee, but did recount his run-ins with oil taxes as the policies have evolved over the past decade.

As a staffer for the Legislature’s Budget and Audit Committee in 2005-06, Balash had access to the inner developments of the first net progressive tax structure known as the Petroleum Profits Tax, or PPT, passed during former Gov. Frank Murkowski’s administration. In late 2006, he joined Gov. Sarah Palin’s administration and watched firsthand as ACES, the second installment of a progressive oil production tax, took shape.

“I think a lot of people have an understanding of what ACES is today, but the differences between what was introduced and what passed are quite stark,” Balash said.

Palin’s version of ACES increased the base tax rate from 22.5 percent under PPT to 25 percent, but also originally decreased progressivity. PPT had a tax rate increase of 0.2 percent for every dollar increase of the value of oil, which kicked in when oil hit $40 per barrel. By the time ACES passed, that progressivity rate had doubled to 0.4 percent for each dollar increase.

Tied to the increase in production tax as oil prices rose was an increase in the opportunity for producers to claim tax credits on in-state investment, Balash said.

He described the theory that companies could improve their internal rate of return as well as the net present value on their investments to increase production in Alaska by making them when prices rose. Balash said it was a system that at the time appealed to him as an Alaskan and was something he defended.

“The thinking at the time was, well, having this tax rate move up and down depending upon how profitable you were and whether or not you made investments made sense,” he said.

Ultimately, ACES was supposed to spur investments through the promise of lower taxes when that money was spent.

Enacted in late 2007, it wasn’t until oil prices rebounded in 2010 and more so in 2011 that the impact of the policy was felt across the state, he said. Alaska was not keeping pace with the Lower 48 from an investment standpoint.

Balash said a conversation he had with a ConocoPhillips executive in 2010 caused him to have a production tax epiphany.

“He said the problem with (ACES) when you’re making an investment and you have to evaluate what the future will hold — of course you can see your revenue picture, the changes in price and cash flows that end up affecting those future revenues. But on those investments on the front end there’s virtually zero chance of predicting accurately what the price (of oil) is going to be in the month that you’re spending the dollars, or what investments you as a taxpayer have made,” Balash recalled. “So what is your tax rate going to be in the month or months that that expenditure is made? What is the value of your deduction?”

“It makes a big difference when you’re making an investment of a billion dollars or more.”

The consequences of ACES were “just mind-boggling” to him, he said.

Because the end tax rate was incalculable, producers planned investments using the 25 percent base tax rate for deduction purposes. In the end, the well-intentioned tax and credit system ended up doing exactly the opposite of what it was intended to do, according to Balash.

As a member of the Parnell administration, he has since been involved in the development of the current MAP flat tax system.

He said the biggest benefit of the current tax system is its elimination of the uncertainty brought on by progressivity for both the producers and the state.

Natural gas

On the prospect of exporting North Slope natural gas through the Alaska LNG project, for which Balash is the state’s point man, he said Alaska must to decide how it will take its share the gas.

Whether the state takes its royalty gas in-kind or in-value will greatly affect what prices the producers can get for the liquefied natural gas, prices on long-term supply contracts that could ultimately determine the feasibility of the project, Balash said.

Countries looking to buy LNG are willing to pay for energy security, he said. If the state takes its 12.5 percent royalty gas in-value, more gas would be available for longer term contracts and that increased length of security could drive the per unit price of gas up.

Additionally, he said the state’s ownership in the project under the Heads of Agreement, signed in January by ConocoPhillips, ExxonMobil, BP, TransCanada and the Parnell administration could drive down the price of transport tariffs, a large chunk of final gas prices.

By taking an ownership interest, the state can drive down the pipeline tariff, increase its royalty value and make the states share of the project more inviting for other parties looking to further gas development on the North Slope or otherwise, Balash said.

Permitting

The state’s inquiry into taking control of federal wetlands permitting is on hold, Balash said, as the Legislature did not fund the complex investigation.

The Clean Water Act gives states the option of assuming primacy over the Section 404 permit needed for any project that could impact wetlands; a common permit needed for development and infrastructure projects in Alaska. The regional U.S. Army Corps of Engineers office issues Section 404 permits for the Environmental Protection Agency.

Balash said the state taking control of Section 404 permits would move National Environmental Policy Act appeals to state District Court rather than instead of the U.S. 9th Circuit Court of Appeals under federal primacy. Additional appeals would stay in the state system, he said.

He emphasized that the state is trying to improve “timeliness and certainty” of its permitting system, without compromising its integrity.

“All of the things that we have undertaken and attempted to undertake are focused on process, not standard,” Balash said. “We are not willing to compromise our standard that would protect Alaska’s renewable resources for future generations.”

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