Homer Alaska - Business

Story last updated at 12:11 PM on Wednesday, March 7, 2012

Senate panel passes its version of oil-tax revision

By Tim Bradner
Morris News Service - Alaska

The Senate Resources Committee approved proposed changes late Friday to the state's oil and gas production tax, as part of an effort to attract more industry investment in declining North Slope fields.

House leaders and industry spokesmen said Monday the changes don't go far enough.

Sen. Joe Paskvan, a Democrat from Fairbanks and co-chair of the Senate committee, defended his panel's proposal. "The committee substitute makes significant changes in the state's oil and gas production tax," Paskvan said.

However, the other committee co-chair, Sen. Tom Wagoner, R-Kenai, opposed the bill and was one of two votes against moving the bill out of committee. The other was Sen. Lesil McGuire, R-Anchorage.

The bill has now moved to the Senate Finance Committee, where more work will be done.

Initial estimates are that the changes would reduce taxes on producers by about $250 million per year, but the Department of Revenue has not completed its analysis of the fiscal impact.

Alaska North Slope fields are declining at 6 percent to 8 percent a year and producers say the state's high tax rate is an impediment to new investment particularly in existing fields.

Industry spokesmen, who spoke to an earlier version of the bill Thursday, said that without a key change considered but rejected by the Senate Resources Committee Friday the bill, Senate Bill 192, isn't enough to bring new investment.

Damian Bilbao, head of BP's Alaska finance and new developments group, said that without the inclusion of a tax "bracketing" mechanism the change doesn't have sufficient financial effect for producers.

North Slope producers and Alaska Gov. Sean Parnell support a separate bill that has passed the state House and is now in the Senate, and that does include bracketing of the tax.

Senators, however, feel the House bill gives away too much to producers and want to push their own bill.

SB 192, as approved by the Resources Committee, would change a formula in the production tax that sharply increases the tax rate at high oil prices and also caps the tax at 60 percent of net profits. In the current law the cap is at 75 percent.

The committee bill added a new section that would further reduce taxes on "new" oil produced above a base rate of existing production in producing fields, and added a minimum tax based on gross revenues to protect the state as oil prices decline.

One other change separated the tax on crude oil from natural gas.

Under current law the two are joined with the tax imposed on the computed British Thermal Unit value of combined streams of oil and gas when the two are produced together in wells.

Consultants have warned the Legislature that because of the sharply differing values of crude oil and natural gas the combined tax could result in substantial losses of revenues from oil once commercial production of gas begins on the North Slope.

A change important to industry that was rejected by the Senate committee but may still be considered in the Finance committee is a "bracketing" of the tax, so that higher tax rates would apply to brackets of production as the crude oil prices rather than the entire stream of production as is the case in the current tax.

In an attempted amendment, McGuire proposed bracketing but the proposal was rejected on a 5-2 vote by the committee. Sen. Bert Stedman, Republican from Sitka and a member of the committee, said bracketing or something similar will be considered in the Finance Committee, where he is co-chair.

Tim Bradner is a reporter for the Alaska Journal of Commerce.