Alaska's Revenue Commissioner Gets Tough Questioning From State Senators

JUNEAU, Alaska — "Same pig, different lipstick."

That's what one Alaska State Senator said Friday after a hearing in which the Department of Revenue described the Governor's new tax plan to the Senate Resources Committee.

The colorful comment was meant to convey a singular fact: Governor Sean Parnell's new tax plan does not differ greatly from one that the Senate thoroughly rejected during the regular session. To get an idea of just how similar, if the governor's new plan were in effect today, it would be only 2% less generous to the oil companies than his old plan was. Oil that would have been taxed at 59% tax rate under House Bill 110, would have been taxed at 61% under Senate Bill 3001.

That's still way too generous according to Senator Hollis French, a democrat from Anchorage. And to get an idea of just how generous to oil companies the governor's new plan is, all you had to do was to look at an overhead projection screen in the hearing. It showed a Department of Revenue slide which indicated the governor's new tax plan would bring in $1.4-billion fewer dollars next year than the current tax plan known as ACES. (The Department of Revenue assumes that oil will average $110 per barrel in Fiscal 2013).

French did a quick calculation. That's a tax break of $4 million a day. French later told a reporter that would be enough, after just 12 days, to fund a new High School in Alaska. It would also be enough to fund a pre-kindergarten class for every Alaska school child.

What bothered Senators the most was that Revenue Commissioner Bryan Butcher had, in their eyes, failed to make a compelling case on how such an oil tax cut at existing fields would help to boost the ever-diminishing flow of oil in the Trans Alaska Pipeline.

When Butcher was asked to cite an example of any state that had boosted its oil production through tax cuts, he could not. When he was asked to share the computer models that D.O.R had based its projections on, he could not. When asked to cite a specific oil field that would have a production increase, he deferred telling the senators to ask the oil companies.

 A polite but exasperated Senator Lesil McGuire (R-Anchorage) said to Butcher,  -"because this is the economy of our state we're talkin' about -- this *isn't* the way to do it. And we all know it's gonna be a train wreck.

Other Senators chimed in. Senator Bert Stedman (R-Sitka) remembered the Elephant Field known as Kuparuk -- the second greatest conventional oil field in all of North America. It's been the source of billions of barrels of oil, first light oil and and heavy oil. Yet, as great a field as Kuparuk was and is, for years the state saw very little revenue from it. Up until 2006 Alaska collectedless than 1% in taxes on it. Stedman and others believe that lawmakers got bamboozled in tax negotiations over Kuparuk -- and it's a mistake he doesn't intend to repeat.

"How *effectIve* drivin' our severance tax to *zero* was!" (in Kuparak) Stedman said in a frustrated tone to Butcher (Butcher was not the head of the Department of Revenue at the time Kuparuk was negotiated).

Senator Bill Wielechowski (D-Anchorage) said he also feels frustrated every time he thinks of Kuparuk. "We had Kuparuk at a *one percent* tax rate! In 2006" Wielechowski fumed to Butcher,  "and an 8 percent *decline* in Kuparuk. 

Wielechowski does not believe that tax cuts spur increased oil production in existing fields. He believes profitability does. And Alaska's Elephant Fields are still highly profitable. Department of Revenue Statistics show that ConocoPhillips makes $15 of profit (per barrel of oil) on its fields in Alaska while its fields in the Lower 48 only provide $8 of profit from the same barrel.

Nevertheless, Butcher insisted before the committee that substantially lowering taxes on existing fields as well as on new ones would help re-fill the Alaska pipeline. The pipeline today was pumping about 555,000 barrels of oil, about one third of its 1989 peak of nearly 2 million barrels a day.

Butcher told the committee, firmly and emphatically, "We're not getting the kind of investments you see in North Dakota -- almost all jursidictions you look at. Alberta, we're not getting it."

But Butcher's comparison of Alaska's tax rates to Alberta Canada and to North Dakota are not the entire story.

If you look at Butcher's own figures, you will find that the estimated cost of getting one barrel of Alaskan crude out of the ground is $37 per barrel (Alaskan crude sells for $120 per barrel).

Yet the average price for getting a barrel of crude out of the tar sands of Alberta (where steam must be injected into the ground to free the oil) is $50 per barrel (according to a January 2011 article in the Economist Magazine). This is 30% higher than the cost of extracting a barrel of Alaskan Crude.

And in North Dakota, where a process called hydraulic fracturing is needed to free the oil, the price of getting a barrel out of the ground is $60 (according to the website PlainsDaily.Com) This is 60% higher than the price of Alaskan crude.

So if North Dakota and Alberta have lower oil taxes than Alaska, their exceedingly high costs of extraction are likely a key reason.

Whatever the case, in Day 3 of the Alaska Legislature's Special Session, the oil tax issue appears to be as ornery as ever.

Lawmakers have 27 more days to sort this issue out.