Alaska Grants a Tax Break to Oil Companies

HOUSTON – Hoping to reverse two decades of declining oil production in Alaska, the State Legislature in Juneau has granted oil companies an estimated $750 million in annual tax relief to increase investment in the giant North Slope oil field.

The tax change, approved on Sunday, was a major victory for Exxon Mobil, ConocoPhillips and BP, which had lobbied hard for years to repeal a tax system put in place by former Gov. Sarah Palin in 2007 that made state oil taxes among the highest in the nation. The companies have long claimed that high operating costs and taxes in Alaska encouraged them to move their investment dollars to other states with lower tax rates, like Texas and North Dakota, where oil and gas exploration and production have been booming in new shale fields.

The Alaskan economy runs on crude; about a third of employment is dedicated to the oil industry. The state receives so much royalty money that there is no need for a state sales tax or income tax, and residents receive checks from the Alaska Permanent Fund, a corporation largely financed by oil revenue, that roughly totals $5,000 a year for a family of four.

But that largess is at risk. Since Alaska’s oil production peaked in 1988 at 2.02 million barrels a day, the state’s output has steadily dropped. Over the last two years, production has declined to 526,000 barrels a day, from 600,000, even as national production has risen by more than a million barrels a day.

The old tax system imposed a 25 percent per barrel tax when oil prices were at $30 a barrel, and a 0.4 percent increase for every $1 per barrel above that price. Since oil prices have hovered at between $90 and $100 a barrel in recent years, the effective tax rate has been about 50 percent per barrel.

The new tax will impose a flat 35 percent rate on the oil companies’ net profits, but whether that will increase investment and production remains challenging as long as there remain regulatory hurdles for drilling offshore and engineering limits to reviving aging fields on the North Slope.

“We are signaling to the world that Alaska is back,” Gov. Sean Parnell said in a statement, “ready to compete and ready to supply more energy once again.”

The Alaskan Department of Revenue has projected that the legislation will lower oil taxes by at least $3.5 billion over the next five years, although changes in oil prices and production rates could push that figure up or down.

Most Democrats in the Legislature voted against the tax change, arguing that it would force the government to cut more than $860 million to balance the budget in 2014, when the tax change will take effect. The tax rate had produced a windfall for the state in recent years, because oil prices were high. While other states were struggling with tax shortfalls, Alaska was able to put away $17 billion in a rainy-day fund.

But oil companies argued that the system was not sustainable. In recent testimony before the Alaska Senate Finance Committee, Dan Seckers, Exxon Mobil’s Anchorage-based tax counsel, said that the current tax structure “creates a major disincentive to invest in the high-risk, high-cost opportunities available in Alaska.”

Mr. Seckers noted that even as the industry invested more than $1 billion a year in Alaska’s fields, production had declined annually by more than 6 percent in recent years. He warned that “absent that continued investment, the annual production decline would likely be in the range of 12 to 15 percent annually.”

The decline in oil production poses a serious problem for the Trans-Alaska Pipeline System, by reducing the velocity that oil flows through the pipeline and allowing water to gather in the system. Oil executives have warned that the water could lead to more corrosion, ruptures and oil spills on the tundra.

Future exploration in Alaska faced a serious setback last week when ConocoPhillips announced that it was suspending plans to drill in Alaskan Arctic waters in 2014 because of uncertainties over federal regulatory and permitting standards. That decision followed Shell Oil’s decision to put off drilling this summer in Alaska’s Chukchi and Beaufort Seas after it was forced to remove its two drilling rigs from the area. The rigs were sent to Asia for repairs after a series of ship groundings, weather delays and environmental and safety violations during last summer’s drilling operations.

Oil company geologists say they believe the Chukchi and Beaufort Seas may become the country’s next great oil field, with billions of barrels of reserves, but exploration and production will be costly. Shell has already spent over $4.5 billion on its efforts, without completing a well.

Article source: http://www.nytimes.com/2013/04/16/business/energy-environment/alaska-grants-a-tax-break-to-oil-companies.html?partner=rss&emc=rss