Bradners'

Alaska Legislative Digest

November 15, 2007     

Oil and Gas Bulletin

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

Senate bows to pressure on tax; “standard deduction” fight set

The Senate Majority yielded to pressures from the House and Gov. Sarah Palin yesterday afternoon and compromised on key elements of Palin’s oil tax legislation. Last night the Senate Finance Committee adopted a 25 percent net profits tax rate in its version of the bill, up from 22.5 percent it proposed in a work draft. The committee also adopted a progressivity formula (which raises the tax rate at higher oil prices) somewhat similar to that in the bill passed last Sunday by the House. The committee did not, however, include a standard operating deduction (a freeze on operating cost deductions) that is a priority for House members. The bill goes to the Senate floor today. We’re told the operating cost freeze and other changes will be proposed through amendments on the floor. The House will consider whatever the Senate passes on Friday. The special session must adjourn at midnight Friday.

Industry is sharp in comments on tax: Slope investment will be reduced

The financial effect of the latest version of the legislation is unclear but it is no doubt in the billion-dollar-plus/year range in terms of added tax. Oil and gas producers had sharp comments yesterday in a session with the Senate Finance Committee: Claire Fitzpatrick, BP’s commercial manager said, “We will go back and look at every decision. This is not an on-and-off switch. There are a lot of things we have to do and a lot of things we will still want to do, but this will impact my business plan for 2008.” Kevin Mitchell, ConocoPhillips’ vice president for finance and administration, said advice legislators have gotten from consultants that higher taxes will not diminish investment “is very misleading.” Investments will be affected, he said.

Mitchell said estimates by Econ One, the Legislature’s consultants, show the government “take” on marginal (new) projects will reach high levels, up to 85 percent of net revenues in the Senate Finance bill. This will change in the new version of the legislation but Mitchell’s point is that taking so much of the upside, the profit at high prices, will inevitably discourage exploration. That is because in modeling prospects explorers will reduce estimates of profitability of potential discoveries, which will make prospects less attractive. Mitchell also said the freeze on operating costs (the “standard deduction” in the House bill) limits the ability to deduct costs for new production activities in the large fields, particularly high-cost ventures like heavy oil. “It encourages a ‘harvest’ mode (in operating the producing fields) instead of a ‘growth’ mode (making new investment) if increased operating costs can’t be deducted,” he said.

Bernard Hajny, a BP tax manager, said the “hidden taxes” scattered through the bills could add “tens of millions” of taxes to producers’ costs, perhaps $100 million or more. Tom Williams, a BP tax attorney, singled out new authority for the revenue department to define “allowable lease expenditure” deductions through regulations. “The problem this creates for us is we won’t know what is allowed and there are huge penalties” if there are underpayments. ConocoPhillips’ Mitchell said the underpayment penalties were extremely severe: A $10 million underpayment of estimated tax triggers a 10 percent penalty of the underpayment; a $20 million underpayment triggers a 20 percent penalty. For ConocoPhillips these dollar ranges can be 1 percent of the company’s monthly estimated tax payments, Mitchell said. Given the lack of regulations defining allowable cost deductions inadvertent underpayments are virtually certain. Note: the tax underpayment penalties were in the House-passed bill but not the Senate Finance substitute. Mitchell said if costs are disallowed it amounts to a hidden tax increase. He estimated that a 5 percent reduction in allowable deductions equates to a 1 percent increase in the effective tax rate.

Negotiations pick up to find compromise and avoid another special session

The pace of negotiations between House and Senate leadership increased yesterday as the Senate Finance Committee pressed to complete its committee substitute. By late in the day supporters of the House-passed bill expressed confidence they can garner enough votes on the Senate floor today to pass a bill “acceptable” to the House. Governor Palin met with legislative leaders Wednesday. She threatened to call another special session if the Legislature doesn’t finish its work by the Friday midnight deadline, which influenced the pace of negotiations.

The Senate Bipartisan Working Coalition (9 Democrats and 6 Republicans) met Wednesday afternoon. Most of the Senate Republicans in the coalition oppose the House-passed bill but most of the Democrats in the coalition support it. Democrats pressed their Republican colleagues to compromise with the House and avoid a floor fight, we hear. Meanwhile, four of five members of the Senate Republican Minority expressed support for the House bill. The fifth member, Senator Con Bunde, is scheduled to return Juneau Thursday. (Bunde has been out of state on family matters.) Although Bunde has been an advocate of the 22.5 percent tax he has not indicated how he will vote on the bill. The scenario we hear is Senate Democrats joining Minority Republicans creating 11 votes necessary for passage of a bill “acceptable” to a majority of House members (essentially a bill with major elements of the House bill). The Wednesday night actions by the Finance Committee, amending some House priorities into its bill, indicate that supporters of the House bill have the votes on the Senate floor.

Senate President Lyda Green said Wednesday the Senate should pass the legislation Thursday. The bill will then be transferred to the House for its concurrence, or rejection. Both House and Senate leaders say there is not enough time for a conference committee to iron out any major differences between a House and Senate version. The key point of contention now appears to be the standard deductions clause (fixed operating costs).

Note: The special session must adjourn by midnight Friday, November 16.

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.