The State of Alaska’s Department of Revenue is on a mission to educate Alaskans about Senate Bill 21, saying it’s “tax reform” and not a “tax break” for major oil companies. The effort to influence the public’s opinion on SB 21 comes ahead of an initiative on the 2014 primary ballot attempting to repeal the bill.
The House and Senate passed SB 21 during the 2013 session. Supporters of the bill, including Gov. Sean Parnell who introduced it, say SB 21 would spur economic growth by encouraging gas and oil production. Oil producer BP says SB 21 will create a better fiscal environment for oil production, a “prerequisite to advancing work on (a liquefied natural gasline).” Opponents say it’s a major giveaway of the state’s natural resources because it practically eliminates progressivity, an element of the current oil tax structure that allows Alaska to share in the benefit of high oil prices.
Mike Pawlowski, an oil and gas adviser for the Department of Revenue, says his department has been focused on figuring out how to implement the new law and how to explain to Alaskans why oil tax reform is needed.
“I think one of the biggest misunderstandings is that we described it a lot as oil tax reform. I think that’s very different than tax breaks,” Pawlowski said. He added, “There were some very basic problems in the system that had become apparent over time. It was through experience that we had seen how elements of the system were working and how elements of the system weren’t working and what behaviors they were encouraging.”
Pawlowski said that production declined under Alaska’s Clear and Equitable Share, also known as ACES, and that it hindered new oil production. He thinks the results of SB 21 — increased exploration, new jobs and increased economic activity — will be seen in the “immediate near-term.”
Data provided by a study commissioned by Gov. Sean Parnell’s administration shows production was declining long before ACES. The Econ One report shows a steady decline in all of Alaska’s major oil fields since production peaked in 1988. According to a Department of Revenue oil production forecast published last spring, current oil production levels of about 521,700 barrels per day will decline to 251,000 barrels per day by 2022.
Opposition to SB 21 comes down to whether you believe there’s enough oil to go around, Pawlowski said. He believes the constant development of new technology — like what’s being used to develop oil fields in North Dakota — will ensure that Alaska’s major oil fields are productive for years to come.
“Oil taxes in Alaska are often an emotional issue, and there are people that believe that you can’t do anything to stem the decline in production — that no matter what, oil is going to decline,” Pawlowski said. “I think, at the root, it’s really that assumption that drives a lot of the division.”
Juneau Rep. Beth Kerttula says that the decline in oil production is inevitable with current fields and that the solution is to encourage new exploration, not to give tax breaks to the major oil producers. She said bringing in smaller oil production companies will encourage competition and will give the state a more broad tax base.
“The decline of production is something that is geologic and it is going to happen,” Kerttula said. “The bottom line is that SB 21 was ill-conceived, it gives away way too much of Alaska’s resources and has no requirement for the production that we so badly need to have for the state.”
That’s not to say ACES is perfect. Kerttula said a fix to the state’s current oil tax structure that would adjust the progressive tax rate when the price of oil went extremely high would be more practical than operating under SB 21.
“We could have fixed that issue without doing away with progressivity altogether,” Kerttula said.
Progressivity, Kerttula said, is good for smaller companies because they’re not paying taxes until they turn a profit. She said having only a few large oil companies controlling the industry would not work as oil production continues to decline. She said the high oil prices in 2008 that allowed Gov. Sarah Palin to propose a $1200 energy rebate for every Alaskan couldn’t have happened under SB 21.
“The profits tax also, at high prices with progressivity, can benefit the state tremendously on a windfall,” Kerttula said. “I think the profits tax worked and it’s a shame we stepped backwards and put ourselves at tremendous risk in the next few years if we don’t change this back.”
While Alaskans are still deciding how to vote on the SB 21 referendum, legislators will likely take up the issue of natural gas taxes during the next session.
Currently, TransCanada is working with ExxonMobil, BP and ConocoPhillips on the large capacity gasline project created under the Alaska Gasline Inducement Act. Last month the group announced its choice of Nikiski as the terminus for an 800-mile-long pipeline that will start on the North Slope. The group also recently announced it would start collecting new geotechnical and environmental data in 2014.
The Department of Natural Resources released a study last week supporting the idea of the state taking a 20 to 30 percent equity investment in the gas pipeline project.
“If we do it right, direct state participation in the project can allow the other project sponsors to structure their business and financing in whatever way benefits them,” DNR Commissioner Joe Balash said in a statement. “That would leave us free to structure our share of the business in whatever ways maximize the benefits to Alaskans.”
Kerttula said she’s glad there’s already a conversation started about the state investing in the gasline.
“In the long run, if the state understands the business, if it understands the risk versus what the benefit to Alaska could be, potentially the gains are huge,” Kerttula said. “Not just for jobs, but also for long-range fiscal benefits for the state.”
• Contact reporter Jennifer Canfield at 523-2279 or at email@example.com. Follow her on Twitter at twitter.com/canfieldjenn.
Editor's note: In the original published version of this article we reported that a Department of Revenue oil production forecast said "current oil production levels of about 521.7 million barrels per day will decline to 251.2 million barrels per day by 2022." The forecast actually said current production levels are at about 521,700 barrels per day and will decline to 251,200 barrels per day by 2022. We've updated the online version to reflect the correct numbers. The Empire regrets the error.