Committees start work on Parnell's oil tax reform bill

JUNEAU — Gov. Sean Parnell’s bill to adjust the state oil and gas production tax was due to move out of its first legislative committee Feb. 8, and meeting are set for further hearings in the House and Senate committee beginning the week of Feb. 11.

The Senate Special Committee on TAPS Throughput has been holding “informational” meetings on Parnell’s proposal, and will attach a series of recommendations as it sends the senate version of Parnell’s proposal, Senate Bill 21, on to the Senate Resources Committee.

House Majority Leader Lance Pruitt meanwhile said the House Resources Committee, which has also held informational meetings, will schedule further hearings on its version of the bill, HB 72, in tandem with the Senate so that consultants can be used efficiently.

Parnell’s bill would eliminate the controversial “progressivity” provision in the current production tax, which drives tax rates up at higher oil prices, but also cuts a 20 percent capital investment tax credit in the law that allows companies to deduct one-fifth of capital costs. In effect, it allows companies to recover capital faster.

The combined effect of the changes would give companies more long-term profit but at the cost of the short-term benefit of the tax credits. Parnell hopes the changes will be enough to encourage companies to make new investments in new oil development. Under the current tax Alaska oil investments are not as attractive as those in other places, such as in many Lower 48 states.

Some legislators disagree with Parnell’s elimination of the 20 percent credit, however.

“The credits were designed to encourage these companies to invest in Alaska. If they invest, they lower their tax bill,” said Sen. Berta Gardner, D-Anchorage, who is a member of the special TAPS committee.

However, as it is now written the bill may not do enough to encourage new oil investment, a major North Slope producer told the special senate committee in a Feb. 5 hearing.

Bob Heinrich, ConocoPhillips’ vice president for finance, and Scott Jepsen, vice president for external affairs, said the bill does grant tax relief at higher oil prices but has the effect of increasing taxes at lower oil price ranges less than $90 per barrel.

North Slope oil is now selling at more than $100 per barrel, so if the tax were in effect now there would be a savings. However, most companies are conservative in planning investments and use assumed lower oil prices to make sure a project will be economic if there is a dip in prices.

What causes the effective tax burden to increase is the loss of the investment tax credit, Jepson said.

“The bill does not encourage investment relative to ACES (the current law) in a downward trending oil price environment,” he told the Senate committee.

Another problem is that Parnell’s bill also does not do enough to encourage new development in the older, large “legacy” fields, which contain most of the known oil resources that are yet to be developed on the Slope, Jepsen said.

SB 21 contains a provision for new “participating areas” to formed that would benefit from a new tax incentive for new oil, basically that 20 percent of income from new oil would be tax-free.

However, it would be difficult to establish participating areas within existing fields on known oil prospects that are not developed, for example an expansion of the West Sak viscous oil development in the Kuparuk field.

Jepsen said ConocoPhillips is developing some proposals to change the bill so that it would accomplish what Parnell wants, to induce more investment.

In other developments in the state capitol last week, school boards from around the state did their annual “legislative fly-in” to Juneau to press for more funding for education.

House and Senate leaders are resisting calls for an increase to the Base Student Allocation, the formula that governs how state education money is allocated to schools around the state.

No increase in the BSA to account for inflation has been made in several years, and school districts say that rising costs are eating into funding for classroom instruction. The Anchorage School District is having to consider layoffs of teachers, and is warning that the average classroom size may increase to 38 students, Senate Minority Leader Johnny Ellis, D-Anchorage, has warned.

Democrats in the state House have introduced a bill that would automatically “inflation proof” the BSA, with automatic adjustments, but Republican House leaders say they do not support the idea.

Last year the Legislature did approve special appropriations to pay some costs, such as for energy, but did not change the BSA formula.

In a briefing, House Speaker Mike Chenault said the House majority is developing a similar financial-aid package for schools this year but did not give details.

In other developments, State Department of Transportation and Public Facilities officials told the House and Senate Transportation Committees they are concerned with parts of the two-year extension of the federal transportation program.

They are particularly focused on new restrictions it places on money made available for the State Transportation Program, which is funded separately from funds for major highways designated as part of the National Highway System.

STP funds are mainly for local community and other state roads, and ferry terminals. The state used to get the STP funds in one big pot with flexibility to allocate the money, Jeff Ottesen, DOTPF federal programs manager said, but there are now sideboards.

For federal FY 2013, the current fiscal year, $108.7 million is allocated for the STP, but MAP-21 gives the state flexibility on only $47.7 million of this.

Large communities (Anchorage) are allocated $20.27 million; $15.74 million to medium-sized communities (Fairbanks gets half of this), and $21.2 million for small community roads.

There is $3.67 million allocated for bridges off the main road system, but bridge repairs on the roads must be paid for out of the $47.7 million that is part of the STP allocation in which there is flexibility, along with 1,600 miles of state roads not within municipalities.

Bridges are a concern, Ottesen said. DOTPF did enough work to get nine bridges off the deficiency list this last year, he said, but 14 bridges were added to the list because of continuing deterioration due to weather and use.

Tim Bradner can be reached at [email protected].

02/06/2013 - 12:04pm