Legislature will open healthy dialogue on oil taxes

Posted: Sunday, December 19, 2010

Few subjects provoke more controversy than oil taxes. If oil is taxed at too high a rate there's a risk that crucial investments don't get made in the state's most important industry. If oil is taxed at too low a rate then we fail in our constitutional duty to ensure that our oil resources are developed and used for the maximum benefit of all Alaskans.

Many people don't know how our oil tax system works. While the details are complicated, the general idea is pretty simple: as oil company profits go up, so does the tax. This type of net profits tax is still fairly new in Alaska. In 2006 the North Slope producers persuaded the Murkowski administration to propose a net profits tax as a part of their gas pipeline negotiations. The new tax was passed in 2006 and then modified significantly in 2007 under the name "ACES."

Let's look at two key aspects of ACES. The first is that, as a net profits tax, it self-adjusts to the economics of each individual reservoir. Some fields are highly profitable, like Prudhoe Bay, and for those fields the state gets a fair share of the profits. Other fields require more investment before coming on line, like those that contain heavy oil. ACES allows the higher costs for those challenged fields to all be subtracted from a company's revenues before a dime of tax is paid.

The other crucial aspect of ACES is the credits it allows against the tax. The credits are specifically designed to reward companies that invest their money here in the state, as opposed to shipping their profits out to Houston or London. The credits reduce the tax a company owes, or, in the case of a company with no production, the credit can be sold. There is big money involved here: in fiscal year 2009 the oil industry made over $2 billion in capital investment in Alaska that resulted in $540 million of tax credits that lowered their overall tax burden.

Is ACES working? For the state, ACES has meant the ability to put billions into savings, to forward fund education and to make sizeable investments in roads, harbors and school buildings. For industry, it's worth taking a close look at the numbers. Conoco-Phillips, the only major North Slope producer to release data on its Alaskan profits, continues to do very well here, reporting third quarter earnings in Alaska of $361 million. Compare that with the $202 million it made in the Lower 48, where, interestingly enough, the company produces twice as much oil and gas than it does in Alaska. Exxon's third quarter profits were up 55 percent from last year, though that is based on its world-wide performance. BP's overall profits, of course, were badly hurt by the costs of the Gulf spill.

Despite these generally positive reports, many industry experts persist in arguing that ACES fails to guarantee that sufficient investment is taking place on the North Slope to maintain the highest levels of production into the future. That is a claim that Alaskans should take seriously given our dependence on oil revenue. The difficulty is that, as BP's Alaska president recently said, "It's not always only about taxes." The most obvious example is the price of oil, which makes an enormous difference in a company's investment decisions. BP's history is a good example. During years of low oil prices (and low taxes), it failed to make adequate investments in its flow lines on the North Slope, which led to an enormous oil spill in 2006 when the lines began leaking.

It isn't good enough to simply lower oil taxes and hope for the best. A general reduction in oil taxes that does not work to produce greater investment in Alaska does nothing to promote a healthy long term industry here. Conversely, any reasonable tax relief proposal that will lead to more Alaskan jobs and more Alaskan oil will get serious consideration from the Legislature. We look forward to a healthy dialogue.

Sen. Hollis French and Rep. Les Gara are Democratic members of the Alaska Legislature.

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