New Tax “Architecture” Presented to Senate

The Senate today finished a two-day seminar on petroleum taxes – focusing on Alaska’s place in world markets and a plan for what it will take to increase the amount of oil produced on the North Slope.   The proposal calls for a massive re-write of the state’s tax regime that lawmakers see as too much for dealing with in the sixty days left in this year’s session.

Pedro Van Meurs  says oil companies doing business in the state are “Harvesting” their investments in Alaska.  By that, he said he means that the companies are taking cash that would grow development here, and they’re transferring it to other states and countries.  He says it would normally take fifteen dollars a barrel to maintain level production.  But producers on the North Slope are only spending about four dollars to produce a barrel of oil.  The term “harvesting” comes when you consider that they aren’t paying it all with their own money.

VAN MEURS:  By the time you take all the take all the tax deduction off,  the net investment is about a dollar – after tax.  So four dollars before tax the gross is one dollar after tax net.

OTHER VOICE:   Who pays the other three dollars?

VAN MEURS:  The State of Alaska.   Not “Pays.”  The State of Alaska “Contributes” it through the reduction of income.

Van Meurs warned lawmakers not to contribute too much to oil development – at least not to the point where the state loses money.   He calls the condition a “negative PPT.”  PPT refers to the Production Profit Tax that he helped shepherd through the legislature under Governor Frank Murkowski.  On the other side of the equation, though, he warned against excessive tax rates on oil produced when prices are high.  That’s called progressivity – and he said that money that used to be invested in Alaska is going to counties that have less progressive taxes.

Most investors around the world accept some price progressivity.  But if it is too price progressive, then it becomes a very strong disincentive for new investors to come.  Because new investors will see there is no “upside” as they call it.  Because if the price goes up, there are no profits to be made in Alaska while there are extra profits to be made in other countries.

Van Meurs presented what he called a new architecture for an oil tax regime – one that separates all the elements of oil and gas production,  more emphasis on new oil production through lower tax rates,  no change in tax on existing production or on exploration.  He also called for an end to the links connecting oil and gas taxes.  Lawmakers call that “De-coupling,” but Van Meurs refers to using the barrel of oil equivalence as the link.

Senate Finance Co-chair Bert Stedman said the plan is too big and complex for one session.  He said the Senate could deal with decoupling, with the progressivity issues and, perhaps with some tax credits.  But the whole rewrite will have to be an ongoing issue.

One of the takeaways I took from his presentation yesterday was that it may be advantageous for the state to have some structured terms with gas and with other hydrocarbons – maybe heavy oil,  shale oil.  We should have some skeleton on the table to see if we can attract some interest.  He made that point very clear that Alaska is an anomaly in the world in that we have no plans for that.  But that bridge might be a little too far this year.

Governor Parnell said the Senate is being inconsistent – and he still prefers his bill (HB110) the House passed last year offering tax cuts to oil producers – saying it offers a complete plan to increase oil production.