Lines drawn in Alaska's oil tax debate

The Anchorage Daily NewsFebruary 15, 2012 

JUNEAU — Battle lines are hardening in the Legislature over oil taxes, with Gov. Sean Parnell saying Tuesday that he remains firmly committed to his legislation rolling back taxes, and state senators just as sure that they are right to reject his strategy.

Parnell's measure, House Bill 110, cleared the state House last session but faltered in the Senate, where senators said they needed more information and time. Now the senators are working on their own bill.

The governor says he wants to reduce taxes to encourage more oil production and reverse the decline in oil flowing from North Slope fields through the trans-Alaska pipeline. Oil revenue makes up 90 percent of the state's general fund and pays for many public services in Alaska, from roads to schools to law enforcement.

Asked on Tuesday if he was still supporting House Bill 110, the governor left no doubt.

"Of course I am," Parnell said in a briefing with news reporters on Tuesday. "That's the only plan on the table that is actually a road map towards a million barrels of oil a day. It's the only plan on the table where industry has said where they'll put at least $5 billion of new investment on the table in the next three years. So of course, I'm going to stick with that plan."

The governor last month announced a 10-year goal of returning production through the trans-Alaska pipeline from the current level of 600,000 barrels of oil a day to a million barrels a day.

That's ambitious, and some senators have questioned whether it is realistic.

Parnell told reporters he's focused on oil development on state lands. That generates more state revenue. But producing so much more oil may require development on federal lands and in federal waters, areas with huge political hurdles and sticky legal challenges, including the Arctic National Wildlife Refuge and offshore in the Beaufort and Chukchi seas, according to Natural Resources Commissioner Dan Sullivan.

It would take an investment by industry in the tens of billions of dollars to generate that much oil, Parnell acknowledged, spending that would be partly offset by tax credits and deductions.

The governor's bill won't accomplish his goal anyway, the Legislature's oil and gas consultant, Pedro van Meurs, told the Senate Finances and Resource committees this week.

Van Meurs has proposed some alternatives, including a "new architecture" that would let the state set different tax rates for different types of oil -- such as more-costly-to-produce thick, heavy oil -- as well as for natural gas.

Under his proposal, oil companies would get a hefty tax deduction, or allowance, for producing more challenging types of oil, as well as for natural gas. But he says the state should cut in half the current tax credits for exploration, now at 40 percent.

State Sen. Hollis French, D-Anchorage, asked van Meurs what would have happened had the Senate passed the governor's bill last year.

"A disaster," is how van Meurs responded, according to Senate President Gary Stevens, R-Kodiak.

Senators now have reports in hand from van Meurs and other experts. Combined with their own analysis, those reports show that "House Bill 110 was not the way to go," French told news reporters Tuesday. "That's just crystal clear from the evidence that we've taken up."

The wait of a year "was very, very wise," French said. "I'm just thankful we haven't made a final decision. I'm thankful we have 60 days to work."

For his part, Parnell criticized the Senate approach, saying it's "going three different directions."

The Senate needs to pick a course, the governor said.

"The paralysis of analysis," Parnell said.

The governor's proposal would cost the state $8 billion over five years in lost production taxes, though his aides say some would be recovered with more oil to tax.

Sen. Bert Stedman, R-Sitka and Finances co-chairman, said senators are proceeding carefully. It's unlikely a complete overhaul of such a complex system can happen this year, he said.

He expects the Senate to focus on a few key areas, including the way the current oil tax system ups the state's take when oil prices are high. Oil companies say the state takes too much and doesn't leave them enough to invest.

Stedman said he will again push to separate the state's oil and gas tax systems so that the two are not taxed together. Or maybe the Senate will try a different approach suggested by van Meurs, he said.

As it is, low natural gas prices can reduce the value of oil for the purpose of taxation. That hasn't been an issue because natural gas is not being produced off the North Slope. But if it is, the state will be in a pinch.

Stedman also expects the Senate to address tax credits. Van Meurs said the state gives away too much money to explorers who may never produce the oil they find.

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