Special Session Likely As Lawmakers Battle with Oil Tax Reform

April 06, 2012|By Dan Fiorucci | Channel 2 News

JUNEAU, Alaska — A special session appears more and more likely to be in the Alaska Legislature's future Friday. The main reason: the marathon attempt to reform the state's complex oil-tax structure.

North Slope production continues to decline at a rate of 6 percent a year and lawmakers are struggling to put the right incentives into a new tax bill -- incentives that will help arrest the decline without giving up too much revenue for the state.

It's an extremely tricky process. Some years ago, when economic limit factor or ELF taxes were designed, the elephant North Slope field of Kuparak ended up paying little or no taxes. It was a situation that left Sen. Bert Stedman (R-Sitka), now chair of the Senate Finance Committee, feeling as though the state had been bamboozled.

"I don't want to sit here and make the mistake under ELF", Stedman told BP executives at a hearing today, "where we have the second largest oil field in North America paying no severance tax."

Stedman has spent the past three weeks working extremely hard to get the incentives right. He's fearful that a proposal by Gov. Sean Parnell -- which would give the oil companies $1.8 billion a year in tax breaks, at today's oil prices of $120 a barrel -- is too generous.

Parnell argues that in return for his tax plan, he has pledges totalling $14 billion in investment from Big Oil. On Friday, Spanish firm Repsol said it and its partners would also pledge billions more, although it was impossible to determine from the companies' letter to the governor how much of that total was already part of Parnell's $14 billion figure.

Stedman and other senators are highly skeptical of non-binding pledges from companies to spend billions in return for tax breaks.

One thing is clear. At today's prices, the governor's proposed break would cut the oil companies' tax burden by almost $5 million per day, a huge amount of money.

The Senate Finance Committee's proposal is far less generous, but still a substantial discount from current tax rates. The committee claims it would cut the oil companies tax burden by $750,000 a day at today's price of $120 per barrel, although oil companies say the Senate plan actually causes a slight increase in their taxes at today's price.

The reason for the difference is that the State of Alaska bases its revenue models on the average price of a barrel at the North Slope, while oil companies base their computer models on a proposed tax's impact on specific data from their various fields. Since the data is proprietary -- they don't share it with Senate Finance -- that makes it hard to be sure whose models are right.

Currently, North Slope oil production is down to 574,000 barrels a day, about a third of what it was in Alaska's heyday during the late 1980s. Back then, the North Slope -- the greatest conventional oil field in the history of North America -- was producing close to 2 million barrels a day.

Everyone agrees it will take billions of dollars in investments just to arrest the North Slope's decline. Bringing it back up to, say, 600,000 barrels a day will take billions more.

But Stedman is still angry over how little the ELF taxes yielded in Kuparak -- and he doesn't want to be pressured into making any mistakes with a future North Slope tax reform bill.

"I don't want to get up 10 years from now and find out that we gave Prudhoe Bay away," Stedman told Tom Williams of BP.

Williams, a tax and royalty analyst for the oil giant, carefully worded his response.


"I can understand concerns about the past," he said. "But the problem is not to fix the past here. The problem -- and the challenge -- is to fix the future."

It appears that oil tax reform won't be debated on the Senate floor until sometime next week. It's also likely that a special session is going to have to be called if the House is to have any hope of giving careful consideration to the Senate's work.

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