In Alaska, plan to cut oil taxes hits a wall

Oil long has been king in Alaska, but the state's Republican governor is having trouble finding support for a tax break he believes is critical to ensuring it remains so.

With a stunning defeat in the state Legislature this week, Gov. Sean Parnell has failed twice since last year to reduce production taxes on oil companies, a strategy he believes is crucial to bringing in new companies and ensuring those already here invest more and boost North Slope production. That would ensure Alaska's financial lifeline remains healthy for years to come.

Oil accounts for roughly 90 percent of unrestricted state revenue in the resource-rich state. It has helped make possible yearly dividend checks that Alaskans get just for living in the state. And recent flush years have created budget surpluses.

What's unusual in Parnell's defeats is that lawmakers from both parties, particularly this year, showed little stomach for his plans, albeit for differing reasons. Some saw the recent tax-cut plan as a corporate giveaway or unneeded by oil companies that consistently post huge profits; others, including some in his own party, say Parnell's bill was ill-conceived or poorly explained.

The latest setback came Wednesday, when Parnell abruptly announced in a rare live appearance on a TV newscast that he was removing his oil tax bill from consideration by lawmakers. The surprise move — unprecedented in Alaska — came just eight days into a special legislative session that he had sought mainly to deal with the issue.

He blamed the bipartisan-controlled Senate, which he said appeared incapable of passing "comprehensive oil tax reform."

After sometimes combative hearings, especially in the Senate, lawmakers in both chambers said the administration hadn't made their case. To many, it remained unclear, for example, how many barrels of new oil the state would see produced under Parnell's plan, or when Alaska might break even on any tax breaks it gives.

While the bill was aimed at boosting oil production over time, the near-term impact on the state's economy also came into play. While Alaskans have enjoyed a healthy state budget in recent years, due in part to the high price of oil, Parnell's budget director said the state could find itself in a deficit as early as next fiscal year under his plan, and would need to dig into its reserves to maintain a certain level of spending. A legislative consultant said Parnell's approach would wind up giving oil companies "quite a lot" of money for projects that are profitable to do today.

Anchorage Republican Sen. Lesil McGuire said she agrees philosophically with Parnell on the need to make Alaska a more competitive place for industry investment, but in a hearing called his plan "half-baked" and predicted the special session would end in a "train wreck."

In an interview, Parnell said he still believes strongly in the need for tax changes but decided to pull oil taxes from the special session call "to give folks a breather and let calmer heads prevail across some more time and make the case again down the road."

When asked how much time, he said he didn't know.

"We need to change some minds or change some people, either way," he said. Nearly all legislative seats are up for election this year.

Oil's relatively high price has helped to mask a decades-long decline in production. An average of 609,000 barrels a day has coursed through the trans-Alaska pipeline this year. At the peak, in the late-1980s, 2.1 million barrels a day flowed through the 800-mile line.

It likely would take billions of dollars in additional investment a year by oil companies just to begin to stem the decline curve, and officials from the North Slope's three major players say Alaska's current tax structure discourages new investment.

The system, a legacy of former Gov. Sarah Palin, features a 25 percent base tax rate and a progressive rate triggered when a company's production tax value hits $30 a barrel. The idea behind it was that the state would help oil companies on the front end with things such as tax credits and share profits on the back end when oil flowed and prices were high. But companies say the surcharge eats too deeply into profits.

Sen. Bill Wielechowski, D-Anchorage, pointed to a recent earnings report from ConocoPhillips, one of the Big Three, that he said showed Alaska to be a "highly profitable place to produce oil." The company reported $616 million in earnings in the state during the first quarter of 2012. That's $7 million a day, and "blows a hole" in Parnell's argument to lower taxes on existing producers, Wielechowski said.

ConocoPhillips acknowledged it makes money in Alaska, but said it also paid the equivalent of $13 million a day in taxes and royalties to the state for the quarter.

"Our current profits are from significant investments we made in the past where we took the risk," spokeswoman Natalie Lowman said.

The Senate spent two months during the regular session delving into the oil tax issue but an overhaul of Alaska's tax structure stalled in the Senate's bipartisan majority during the last days. A major stumbling block was how best to address legacy fields like Prudhoe Bay and Kuparuk, the mainstays of Alaska's oil industry, where production has been declining.

One of the concerns was with giving too much money to oil companies, particularly for oil they would have produced anyway.

Senators instead put forth a bill providing a tax break on oil production from new fields, saying it would lead to a rush of independent companies to Alaska.

Parnell borrowed from that in crafting his new plan but also included tax cuts on existing fields, where much of the oil and money is — provisions more in line with a bill he pushed last year that stalled in the Senate. He insisted he wanted a "comprehensive" approach, even though the best the Senate had been able to come up with dealt only with new fields.

While industry spoke in favor of Parnell's proposals, saying they represented meaningful change that would lead to potentially billions of dollars in new investment, that position was viewed warily by some senators who said they would expect industry to support the lowest-tax possible and that there's no way the companies can guarantee they'll invest more here.

Despite the defeat, Parnell maintains that the "economic issue of our time is declining oil production and what we do about it."

"I will not stop sounding the warning bell of declining oil production and what that means for lost opportunities for Alaskans, nor will I stop looking for solutions that Alaskans can agree on," he said.