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Low taxes for more oil: Will it work this time?

Legislators dispute basis of Parnell plan to boost production

Posted: January 29, 2012 - 1:09am
Gov. Sean Parnell talks about how he plans to increase the daily flows of oil through the Trans Alaska Pipeline System during a press conference on January 19.  Michael Penn/Juneau Empire
Michael Penn/Juneau Empire
Gov. Sean Parnell talks about how he plans to increase the daily flows of oil through the Trans Alaska Pipeline System during a press conference on January 19.

With Alaska’s Prudhoe Bay and other large fields running out of oil, Gov. Sean Parnell is proposing an oil tax reduction he says will boost production and pump the remaining oil more quickly.

A couple of examples of other oil and gas fields in Alaska are raising questions among legislators about whether it is oil taxes, or oil prices, that drive oil company investment and production decisions.

In the Cook Inlet Basin, which made Alaska a petroleum state even before Prudhoe Bay was discovered, oil production has declined 90 percent. And natural gas, which provided Anchorage with some of the cheapest energy prices in the nation for decades, was running out. Despite huge amounts of gas thought to be in the region, no one was spending the money to drill for it until recently.

“We didn’t get any investment, even though we had almost a zero tax rate,” said Rep. Paul Seaton, R-Homer, who has questioned Parnell’s oil tax reductions.

Then, when natural gas prices rose in Anchorage and the state began giving financial incentives for drilling, new production began coming on line.

The Cook Inlet basin is now going through a natural gas “renaissance,” acknowledged Dan Sullivan, commissioner of the Department of Natural Resources.

But he sees Cook Inlet as an argument in favor of Parnell’s proposal.

“I think it’s a good example of what some tax reductions can do in terms of spurring some activity when we’re looking at the bigger picture of what’s going to be going to be in front of the Legislature,” he said.

The drilling in Cook Inlet, and the big finds already announced, are part of a legislative effort in recent years to use tax credits to have the state pick up much of the cost of new exploratory drilling.

A similar effort on the North Slope has resulted in what Sullivan called “quite a busy North Slope exploration season” this winter.

Sen. Hollis French, D-Anchorage, cites the huge Kuparuk oil field on the North Slope, where he once worked, as another place where low taxes didn’t lead to more production.

From 1996 to 2006, the field was under a tax system called Economic Limit Factor that reduced production taxes for less productive fields. At Kuparuk, the second largest field in North America, the tax rate dropped from 12 percent to zero, he said.

“It was a 10-year, real-time experiment in dropping production taxes,” French said.

French said that what happened at Kuparuk then was not the big surge in production that Parnell has been promising if his tax reduction is passed.

“There was not a big jump up in production out of Kuparuk,” French said.

Instead, production continued to decline at 7 percent a year, which is standard for oil fields everywhere.

“It was behaving as oil fields do,” he said.

Department of Revenue Commissioner Bryan Butcher, Parnell’s point man on oil tax reductions, says a failure of the old ELF system to spur new production doesn’t mean that a reduction in ACES would not produce more oil.

At that time under ELF, oil companies may not have been investing in Alaska, but they weren’t investing anywhere else, either.

“That was a low-price environment, and there were things that were much different,” Butcher said.

Speaking to reporters after his State of the State speech, Parnell diminished the possibility of new exploration to provide the amount of new oil into the trans-Alaska pipeline he said Alaska needs.

Instead, he said, a tax reduction is needed to get the state’s oil producers to produce more oil from the state’s “legacy” fields.

“We’re talking about known quantities of oil at Prudhoe and Kuparuk were we can get, potentially get, a new slug of 100,000, and keep working at get another 100,000,” he said.

Another Parnell critic, Rep. Les Gara, D-Anchorage, said his tax cut is just a giveaway which repeats a failed experiment such as under ELF, when taxes on 15 of 19 North Slope fields were at or near zero, yet production was declining at a rate of 4 to 8 percent a year.

“That didn’t attract new investment,” he said. “We had 40 percent less oil and gas investment in jobs in Alaska” than currently under ACES, Gara said.

Sullivan said that in Cook Inlet, where new investment is producing new gas, it is not just high prices that are doing that.

“It’s a function of economic return, which is a function of taxes,” Sullivan said.

• Contact reporter Pat Forgey at 523-2250 or at patrick.forgey@juneauempire.com.

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