Senate's oil tax bill takes shape but it may come too late

The state Senate’s proposal for state oil tax changes is slowly taking shape. An early version of the bill appeared April 3, but Senate Finance Committee co-chair Sen. Bert Stedman, R-Sitka, who is in charge of the bill, said key parts are unfinished.

The Finance Committee will wrap up its work over the weekend of April 7 and 8, Stedman said. Senate President Gary Stevens, R-Kodiak, said he would work to get the bill on the Senate floor and to the House quickly.

There is about a week left until the Legislature’s required adjournment on April 15, but the oil tax work could put lawmakers into overtime.

Major North Slope producing companies were to present their views to the Senate committee April 5, but they would likely comment on an incomplete bill. Stedman said the committee is still working on a section vital to the producers that will lower taxes on the large legacy fields of the Slope, mainly the Prudhoe Bay and Kuparuk fields.

In an April 3 briefing by Senate leaders, Stedman outlined provisions that are now in the bill to include a form of “tax holiday” for new development outside the existing large fields, and a change in the progressivity formula so that when oil prices reach $130 per barrel to $150 per barrel the increases in the tax caused by the formula are modified.

The effect of this is to level, or freeze, the “profit split” between the state and industry in these oil price ranges, so that the percentage of profit going to the state in taxes is stabilized, as will the percentage going to industry.

“This is a substantial change,” in the overall tax, Stedman said.

However, there is no change planned in the progressivity formula for current oil price ranges of $100 per barrel or below, he said.

“Our consultants have told us that it is north of $100 where we experience problems,” in the current tax, Stedman said.

The progressivity formula is seen as the key problem in the tax because it ratchets up the tax rate sharply as crude oil prices rise.

A major section of SB 192 left unfinished include a section to provide incentives for new oil produced in the large fields, the senator said.

“If we want to get new oil (quickly) we have to go where the oil is, and we have not yet got our hands around this,” Stedman said.

Another unresolved issue is a “floor” in the tax, a mechanism that would help guarantee revenues to the state in case oil prices drop. One way proposed to do this is a gross-revenues severance tax, which is less sensitive to oil prices changes than the state’s current net-profits tax.

The mechanism hasn’t yet been decided on, Stedman said.

There are also likely to be changes in the oil development tax credits now in the state production tax when SB 192 is finished, the senator said.

The current tax credit structure puts the state at risk in certain situations. There are scenarios where so much of the tax credits could be applied that the state would wind up owing companies who develop new projects.

Stedman said the Legislature’s consultants, Pedro van Meurs and PFC Energy, “have told us that there is no other place on the planet with the kind of (financial) exposure we have. Part of our job is risk-management,” Stedman said.