Oil tax reduction unlikely to work, expert tells Legislature

Billions in tax cuts unlikely to spur production, critic of Parnell plan says

Posted: Sunday, March 27, 2011

After weeks of Parnell Administration and oil industry claims that lower oil taxes will bring Alaska more oil production, more jobs and more revenue, the Legislature last week heard a devastating rebuttal from an industry insider.

Michael Penn/Juneau Empire / Michael Penn/Juneau Empire
Michael Penn/Juneau Empire / Michael Penn/Juneau Empire

Rick Harper, a former ARCO Gas president and now an independent consultant, told the Legislature that the billions in tax reductions Gov. Sean Parnell is seeking are unlikely to spur the new production the state wants.

“The tax reductions in House Bill 110 are so large it would be almost impossible for Alaska to recapture the foregone revenue,” he said.

Harper, who has in he past worked for the Murkowski and Palin administrations in Alaska and numerous others elsewhere in the country, was brought to Alaska to testify on Parnell’s oil tax proposal by the House Democratic Caucus. Rep. Beth Kerttula, D-Juneau, leads the House Democrats.

Harper told legislators that Alaska’s ACES oil tax is already competitive with other jurisdictions and if the industry wants it lowered they should provide hard data on how those reductions are needed to bring new production.

“I don’t believe industry has made its case,” he said.

Ironically that may put Harper in agreement with the Parnell administration.

Gov. Parnell said when he proposed reducing Alaska’s oil taxes that he believed lower taxes would result in huge new oil production and refill the trans-Alaska oil pipeline, but that the oil industry would have to make that case.

Representatives of BP plc, ConocoPhillips Co. and Exxon Mobil Corp. the state’s big three producers, and others in the industry said they wanted lower taxes but made no pledges of new production, or even new developments attempting to get additional production.

Dan Sullivan, Parnell’s Commissioner of the Natural Resources, said the producers need to say they’ll do more if they want to get the tax reductions through the Legislature.

“If the energy companies can be a little more forward leaning on that, I think it would be great,” he said.

Harper told legislators that when companies take out leases they then have an obligation to develop them if it is reasonably profitable to do so.

What Alaska doesn’t need to do, Harper said, is compare its tax rates to other states and countries.

The industry makes decisions primarily on resource prospects, development costs and other factors, with tax rates playing only small roles in overall project economics,” he said.

“What’s not considered is the tax regime in other jurisdictions,” he said.

A skeptical Rep. Mike Hawker, R-Anchorage, wanted to know why oil companies weren’t developing their Alaska holdings faster if it wasn’t because of higher taxes here.

“Why then is our production dropping?” Hawker, an outspoken industry supporter, asked Harper.

Most of Alaska’s production comes from a huge field that has already produced most of its oil, Harper said.

“Because Prudhoe Bay Field, one of the largest fields in the entire world, is in decline. It’s a mature field, there’s no changing that,” he said.

Parnell’s proposal, he said, provided most of its benefits to existing producers for oil that is going to be developed anyway instead of targeting it to what might provide substantial new production.

Harper also challenged the contention that the state’s progressive oil tax, which raises the rate at high oil prices, is a key factor in investment decisions.

The most important factor, he said, was the expected investment outcome, followed closely by the worst-case outcome.

Alaska already used tax credits to directly affect the economics of exploration and development of the new fields Alaska wants, he said.

And Alaska’s progressive tax protects the companies at low prices and only comes into play in the best-case scenario of very high oil prices, he said.

Kerttula said that hearing from Harper showed that Alaska was already doing the right things to encourage more production while benefitting the state.

“Our generous credit system provides ample protection against low prices, so it’s appropriate that we benefit more in times of high prices and profitability,” she said.

• Contact reporter Pat Forgey at 586-4816 or Patrick.forgey@juneauempire.com.

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