CSSB 305 Comment Letter

March 20, 2006

Re: CSSB 305 – Petroleum Production Tax

Dear Senator Wagoner:

On behalf of the Resource Development Council for Alaska, Inc., (RDC), I am writing to provide comments on the Committee Substitute to Senate Bill 305.

RDC is a private, non-profit business association comprised of individuals and leading companies from Alaska’s oil and gas, mining, forest products, fisheries and tourism industries. The association’s membership also includes construction companies, local communities, Native corporations, organized labor and a wide range of industry-support firms. RDC’s mission is to grow Alaska’s economy through the responsible development of the state’s natural resources.

There is a strong consensus among our oil and gas members, both large and small, that the Legislature is moving in the wrong direction with the Governor’s proposed petroleum production tax.  Even our members outside the oil patch fear the legislation would enact a new tax regime with massive potential long-term consequences to the well-being of Alaska’s largest industry, the state’s general fund and the economy. 

The proposed legislation targets the one industry already responsible for providing nearly 90 percent of Alaska’s general fund revenues through taxes and royalties during a time when the state is already experiencing budget surpluses and does not have a long-term plan in place to manage the money going forward.  RDC has been working with other business, community and social service organizations in advocating for the development of a long-term state fiscal plan for nearly a decade. We have argued the state must do more to bring recurring revenues in line with expenditures in order to achieve tax stability and create a positive and predictable business climate. How the state manages surplus revenues is as important as managing deficits when it comes to accomplishing these policy goals.

A major concern of our members is that the committee substitute appears to have an increasing concentration on short-term revenues for the state, but potentially at the expense of the long-term investment needed to slow the decline in oil production. By jeopardizing investment, the bill puts at risk long-term production and corresponding state revenues. Approximately half of the production currently forecasted over the next decade directly hinges on new investments yet to be committed by industry. Unless additional investments are made, the decline will continue at the current rate and state revenues will fall short of projections. Alaska needs more industry investment to slow the decline, not the same or less.

The tax regime ultimately approved by the Legislature will directly impact how attractive Alaska is for investment, and that in turn will have a direct impact on declining production. RDC believes it is in the best interest of Alaska to focus on production – growing the pie – rather than increasing the state take from a sharply declining production curve. Greater investment means higher production, which will result in increased revenues to the state over a longer period of time.

Almost every proposed change in the committee substitute amounts to an increase in government take on the industry when compared with the Governor’s original proposal and will not help attract the additional investment to maximize resource production.

In conclusion, RDC is concerned the committee substitute will put Alaska at a competitive disadvantage, given its challenged resource base, high cost environment, distance to market and the urgent need to attract very large amounts of capital to slow the decline in production. If enacted, the committee substitute will leave Alaska with the highest cost structure in the United States, when total government take (federal, state, local) and operating costs are factored into the investment equation.

The challenge for the Legislature is to strike the proper balance between Alaska getting its appropriate share of the wealth generated by its own resources and providing the fiscal certainty necessary to encourage the investment required to turn those resources into wealth. We believe the direction the legislature is moving with regard to the Governor’s original proposal will discourage investment and elevate the risk to long-term production and revenue.

Sincerely,

RESOURCE DEVELOPMENT COUNCIL
For Alaska, Inc.