As a fiscally conservative Republican, I have been surprised conservative voices have only focused on high oil price tax rates and revenue under the newly enacted Senate Bill 21. I haven’t heard a single concern about the enormous risk to Alaska at low oil prices and net operating loss. SB21 created risk for Alaska by giving any company with a North Slope oil or gas lease a transferable or reimbursable tax credit of 45 percent of their net operating loss from normal expenses related to their leases. After 2016, that credit becomes 35 percent. Read it yourself in the final fiscal note analysis #4 that accompanied the bill: www.legis.state.ak.us/PDF/28/F/SB0021-14-5-041213-REV-Y.PDF
SB21 creates two scenarios that are very dangerous for Alaska:
1. Companies without production operate at a net loss and generate “carried-forward annual loss credit.”
For new entrants, companies with no current revenue from Alaskan production, all related expenses generate a net loss. SB21 guarantees Alaska will pay at least 35 percent of their normal costs for the 10 years or more it takes to get oil or gas from a new field into the pipeline. Oil companies share these upfront risk and development costs by taking partners. Partners generally get the same ownership as their investment percentage and are repaid by profits when production starts. Under SB21, the 35 percent carried-forward annual loss credit makes us a “partner” in the expenses, but it disappears once profits start. The lower SB21 tax means we will never even recover our credit investment from all future tax on most “new oil” fields under SB21.
2. Companies are producing and profitable, but oil or gas prices drop.
We tend to look on the bright side, but fiscal conservatives usually plan, or at least calculate, for downturns as well. We are talking as if oil could never go below $100 per barrel, but energy dips have happened many times. The last oil crash was not that long ago, and natural gas unexpectedly did the same when we were planning the AGIA gas line. SB21 offers minimal protection if prices plummet because the per-barrel credit cannot reduce the tax below zero, but at that point the SB21 net operating loss credit would apply. Alaska would owe the producing oil companies 35 percent of that net operating loss when it’s carried forward. This tax system would basically force the state treasury to pay 35 percent of the expenses of oil companies because they did not make a profit. Even under the previous tax system Economic Limit Factor (ELF) with zero tax on many fields, we did not have to pay the companies to produce North Slope oil.
SB21 is not robust enough to effectively handle large variations in energy prices without exposing Alaska to tremendous risk. It is fiscal conservatives that should be objecting to SB21. No business owner I know would sign on to this sort of deal for their contractors. Tell the Legislature this tax reform needs to go back for a real fix. These provisions won’t be fixed without your action.
You have only one chance to protect your state’s economy — vote “yes” on Ballot Measure 1.
• Rep. Paul Seaton, R-Kenai, has represented the lower Kenai Peninsula since 2003. He has continuously served on the House Resources Committee and as co-chair in 2011-12.