This week I wrote an op-ed piece for distribution to Alaska media regarding reform of Alaska’s petroleum tax system. This is one of the largest issues of this legislative session. In the article below I reiterate my stance on past and proposed reforms and highlight how the Legislature is currently moving forward on this issue. Here I post the full text of my letter; please note that some media may have printed an abbreviated version due to word count limitations.
Alaska’s current petroleum tax system, Alaska’s Clear and Equitable Share (or ACES, for short), was an ill-conceived policy pushed through by then Governor Sarah Palin in 2007. When ACES was voted on in the Senate, I was one of only five Senators who voted against it. My reason was simple: I felt then and I still feel that ACES is anything but “equitable” and that under ACES the government take at high oil prices is excessive.
Those who voted for ACES did so with the best of intentions and I don’t hold that vote against them. Instead, I have been working with my colleagues to convince them to reevaluate their decision. Progress is being made because there appears to be a growing consensus in the Senate that changes to ACES are necessary, but the Governor’s proposal in the form of House Bill (HB) 110 is not the answer.
The Administration has argued that we need to drastically cut taxes now to increase throughput in the Trans Alaska Pipeline System (TAPS). Declining TAPS throughput is a very real and serious concern for the state. Current flow rates are roughly 600,000 barrels per day and decreasing by three to seven percent annually. (It’s important to note here that the annual decline in TAPS throughput has been occurring since 1989 when production hit its peak.) Industry advocacy groups have suggested that without a significant reduction in taxes the shutdown of the TAPS pipeline is imminent and could become a reality at 300,000 barrels of throughput per day. This is a downright misleading scare tactic. A landmark case handed down by Alaska Superior Court Judge Sharon Gleason in December found that TAPS could continue to safely operate at levels down to 70,000 to 100,000 barrels per day and that the pipeline should remain economic until the year 2065. Judge Gleason also determined that there are still 7 to 8 billion barrels of proven reserves which she defined as economically, technically and legally deliverable between now and 2065. To put that in context, when the pipeline began operations 34 years ago, there were an estimated 9.6 billion barrels of proven reserves yet 16 billion barrels of oil have already been produced. Prudhoe Bay continues to be a world class hydrocarbon basin and remains one of the top ten largest fields in the world. Still, Prudhoe Bay is an aging basin with high operational costs and our tax structure needs to reflect that.
As for assurances offered by the Administration that the tax cuts proposed in HB 110 will result in increased industry investment and oil production, what we’ve seen thus far essentially amounts to the argument that a reduction in Alaska’s cruise ship tax led to an uptick in cruise ship sailings so reducing oil taxes must do the same for oil production in Alaska. This is an apples-to-oranges comparison that has little to do with petroleum economics.
Furthermore, the information the Administration has been using in its analysis is at best incomplete. A report commissioned by the Department of Revenue and conducted by FAST Enterprises found that “The Department of Revenue Tax Division cannot easily produce reports required by the legislature and policy makers because the current systems prevent timely, complete, and correct extraction of data. Reports can be inaccurate and misleading due to incorrect and incomplete data and human error.” Last year, the Senate Finance Committee appropriated $34.7 million to the Department of Revenue to undertake a multi-year effort to update and improve its tax management system.
In the absence of adequate information from the Administration, and in order to provide legislators with the information they need to make sound decisions regarding changes to Alaska’s tax policy, the Legislative Budget & Audit Committee, of which I am the vice chair, set about hiring energy policy consultants. This process began over a year and a half ago, even before Governor Parnell introduced HB 110.
Recently, the Senate Resources Committee heard from PFC Energy, a global consulting firm specializing in the oil and gas industry. Senior executives from PFC Energy testified that ACES’ progressivity feature, which increases the amount of tax owed by an oil producer as the price and profit from a barrel of oil increases, is the second highest among developed countries, making it one of the most aggressive progressivity taxes in the world. I believe that progressivity is where changes to ACES need to be focused and, working through the LB&A Committee, I have requested that PFC Energy develop a model to show how changes to specific features of ACES, features like progressivity, might impact our overall fiscal system and the state treasury. PFC Energy will present its model to the Senate Finance Committee later in this legislative session.
In mid-February, the Senate Finance Committee received a two-day presentation from Dr. Pedro van Meurs, a world renowned consultant on oil and gas fiscal systems who has a long history of working with Alaska and who has done extensive research into the competitiveness of Alaska’s oil tax relative to other oil producing regions. Dr. van Meurs asserted that while ACES has “serious deficiencies,” – namely it is too high, too complex, and under certain scenarios nonsensical – “HB 110 is not a viable alternative to ACES.” He criticized HB 110 for making an already complex tax system more complex and for setting tax rates unnecessarily low for oil being produced from existing legacy fields like Prudhoe Bay and Kuparuk. In short, it amounts to a giveaway.
So, while evidence is mounting that ACES needs to be fixed, it is also mounting that HB 110 is not the solution.
It would have been a huge disservice to Alaskans if the Senate had passed the Governor’s proposed tax cut in HB 110. We will continue to gather the information we need to make sound, reasonable and responsible decisions based on fact, not emotion. It is my belief that the Senate is poised to make calculated and well informed changes to ACES that is fair to both industry and the state.
Industry advocacy organizations such as the Alliance, the Alaska Oil & Gas Association, the Resource Development Council, and the State Chamber of Commerce are working hard to represent the financial interests of the oil industry. In the meantime, I will continue doing what I was elected to do: represent the interests of those who own the resource – all Alaskans.
-Bert Stedman
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