Bradners'

Alaska Legislative Digest

November 12, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

House passes billion-dollar-plus oil tax hike; sends to Senate

The House voted 27 to 13 to final action to approve its version of Gov. Sarah Palin’s oil tax bill Sunday evening. The tax increase is expected to net the state an additional $1.5 billion in revenue. As expected, an amendment on the House floor upped the tax rate of 22.5 percent in the House Finance bill to 25 percent and also adopted a very aggressive “progressivity” escalator that ups the tax rate substantially when oil prices are high. The House also adopted a minority amendment that caps operating expense deductions for the large fields at 2006 levels, but with a 3 percent increase allowed until 2010, when the question will be reviewed.

The House Finance Committee worked through the bill Saturday into the evening, sending the bill to the floor Sunday. The full House took up the bill Sunday afternoon and worked late. Senate Finance Committee cancelled its Sunday meeting, where a committee substitute was expected. Speculation in the capitol is that back-channel negotiations were underway between House and Senate leaders for the Senate to accept what emerges from the House, which could speed things and avoid a House-Senate conference committee. It is unknown whether what the House passed is acceptable in the Senate, however. The 30-day session must end on Saturday, Nov. 17. If a jam-up occurs Gov. Palin must order a new special session.

More production at risk than is assumed, industry says

Industry people told the House Finance Committee in Thursday hearings that there could actually be more production at risk from effects of higher taxes than is believed. ExxonMobil pointed out that in actuality 75 percent of the production in the Department of Revenue’s longterm production forecast over the next 10 years depends on the producing companies continuing to invest about $2 billion a year on new drilling and enhanced oil recovery programs. This doesn’t include major new projects like new fields. If investments taper off the fields will decline at about 16 percent a year which will put production at 130,000 barrels per day by 2016, too low to sustain the trans-Alaska oil pipeline. Assuming a moderate investment program that keeps the decline at 9 percent, production would still drop to about 300,000 barrels/day, a rate at which TAPS might be able to operate, but with challenges. To meet the full revenue department production forecast industry will have to double investment from $2 billion to $4 billion a year, or $40 billion over the next 10 years.

Legislators put faith in the results of an economic model of the large producing fields developed by consultant Gaffney, Cline & Assoc. that shows high profits even at high tax rates. Producers say the model is simplistic and considers only very low-risk in-fill drilling of production wells in large fields and not riskier enhanced oil recovery projects and particularly not major new fields.

House deals with side issues, also important, in the tax bill

In the House Finance meeting Saturday and the House floor session Sunday legislators dealt with a host of side-issues in addition to the big money items, the net-profits tax rate and progressivity formula. One House floor amendment modified a provision that would have allowed seismic and well data from wells drilled on private (Native) lands to be made public after two years on wells where state tax incentives were granted; the House passed an amendment putting investment tax credits into escrow for a company with an outstanding judgment (this is aimed at ExxonMobil); an amendment was added giving “public officials” (legislators) access to industry tax returns held confidential by the Dept. of Revenue (legislators must sign confidentiality agreements); language was retained in the bill that requires Dept. of Revenue auditors to make judgment as to when maintenance is faulty; language requiring core samples and physical liquid specimens to be supplied to the state from exploration wells receiving tax credits was modified; language was retained, though modified, giving the Dept. of Revenue authority to use “reasonable” transportation costs in allowing deductions (this essentially allows the department to use TAPS tariffs approved by the Regulatory Commission of Alaska for intra-state tariffs that are much less than those allowed by the FERC for interstate tariffs.

An amendment was offered but withdrawn that would have given 20 percent Investment Tax Credit for wages paid to Alaskan workers. Also, our understanding is that language that would have disallowed expenses for out-of-state purchases was taken out of the bill by the Finance Committee.

Monday’s schedule:

• 9 a.m. Senate Finance Committee
• 11 a.m. Senate floor session
• House is adjourned until Thursday

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.