Dear Friends and Neighbors:

Last night the Governor released his latest oil tax rollback bill. It maintains the worst part of last year’s bill, and makes it even more draconian. The largest part of the bill massively rolls back state revenue, and oil company taxes, with no commitment that companies spend that “reward” in Alaska. We’ve tried that before. Until 2006 our Production Tax was nearly 0% on almost every field on the North Slope, and what did we get for lower taxes that didn’t require Alaska investment and more Alaska production work? We got oil production that was declining between 5 – 8% a year, and 40% less investment in the North Slope than we have today. And a fraction of the new companies are exploring for new oil on the North Slope today.

We are still reading through the bill, but its accompanying paperwork is written in something close to hieroglyphics. I have parsed through most of it because I was, and I don’t want to brag about this, trained in classic Hieroglyphics in grade school. Or I was shown a book with a hieroglyphic in it. I can’t remember.

While I agree with the Governor on some things – like efforts to push a large capacity gasline to Valdez to get us cheaper gas and needed revenue – I can’t agree with his latest oil tax bill, and will work on better proposals that tie reasonable breaks to new oil investment and production as I have in the past. The current bill’s biggest provision rolls back taxes for the largest oil companies in the state by over $1 billion (by 2016 according to the Governor’s analysis, which for many reasons is likely a very low estimate). It lets them take that money and spend it anywhere in the world they want, and not in Alaska if they choose.

That is poor policy. That money will leave Alaska, and create an Alaska “fiscal cliff”. It will result in teacher, law enforcement, construction and other sector job losses. It will hamper our ability to provide strong university, job training and public school education. It will hurt our efforts to come up with plans for energy cost relief. It will bring the budget problems other states face to Alaska, for the “privilege” of letting companies take that money and spend it outside Alaska if they choose.

The biggest part of his bill eliminates Alaska’s windfall profits tax, which allowed the state to share with oil companies in the massive amounts of revenue that flow from oil sales at high prices. Why did we want to share in windfall profits? The cost of producing oil stays relatively stable no matter what the price of oil is. When prices spike to $110, $120, and $130/bbl, oil produces massive amounts of wealth, and Alaskans should share fairly with oil companies in those free, sometimes billion dollar or more bonuses.

By 2016 the reduction in revenue to Alaskans because of this newest bill proposal is over $1 billion, and at higher prices, likely over $2 billion, though we have to wait for a better analysis of this bill to get exact numbers.

What are the chances we’ll get Exxon, Conoco and BP to explore for needed new fields? Well, last year BP and Exxon testified they won’t explore new fields under the Governor’s bill, and ConocoPhillips was non-committal. Don’t believe that? Well, here’s their testimony from the House Finance Committee in 2011 that the Governor’s bill would not get them to explore for new fields in Alaska:

Rep. Gara: "...why should we believe that reducing taxes is going to cause you all of a sudden to do your first exploration well since 1992?"

Dale Pittman, Exxon Production Manager: "...I can't promise you it would lead to increased exploration."

Rep. Gara: "...BP doesn't do what was referred to as traditional exploratory wells...?"

Claire Fitzpatrick, BP Alaska Development CFO: "If your question was are we intending to do more exploration, it is not in my current plan."

ConocoPhillips said nothing different, though under current law they’ve started and committed to work in the National Petroleum Reserve – something they are doing without tax changes, and Exxon has, because of litigation, been forced under current law to move ahead with production at Point Thompson.

Want some more bill details? If not, there’s no need to read on. But if you want the skinny, here is as much of it as we can understand at this point until, as Ricky Ricardo used to say – they do some more ‘splaining.

The biggest part of the bill eliminates our share of windfall oil profits when oil prices are very high. Currently our tax rate is 25% of a company’s profits. It remains 25% of profits until a company is earning $30 of profit on each barrel of oil. That’s fair.

After a company has earned more than $30/barrel on a field, the tax slightly rises so that at increasingly high prices companies and the state both earn increased revenue as high oil prices lead to higher profits. That rule has helped us build a needed $15 billion surplus and pay back our debts beginning in 2006 when the current law came into effect.

The bill also takes away a 20% credit we give companies to encourage them to make “capital investments” in Alaska. That has helped cause an increase in investment in Alaska by about 40% since ACES was passed in 2006. And by taking it away, companies are not rewarded for investing in new facilities, and new field work.

The Governor’s “fiscal note” on this bill seems to suggest that this spending in Alaska will fall if his bill passes. Then again, that note is very confusing and has caused at least one veteran reporter to sternly say this analysis needs to be redone more competently and more transparently. On the flip side – by not rewarding new field work in Alaska, the state will save money – and cut the loss suffered to Alaskans to closer to the $1.0 million - $1.5 million range – or far more - depending on oil prices. Then there’s the next problem which might prove the bill costs Alaskans even more money.

It seems the Governor’s statement of revenue loss to Alaskans is might very well be understated by about 30%. Why?

Well, the same Revenue Department folks who estimated future production in the Fall of 2011 and Spring of 2012 in their semiannual production projections publications, radically reduced their oil production estimates in the Fall, 2012 production projections. Were it true that production is going to fall by nearly 80,000 barrels a day more than they have ever projected before – a questionable proposition – then lowering taxes on lower production and lower revenue will reduce the amount of revenue loss by lowering taxes.

I have questions whether they adjusted these production forecasts just to make the revenue loss from the Governor’s bill appear smaller, but don’t know that for sure. All I know is that the latest report is vastly inconsistent than the reports the Department has been issuing in recent years, and recent months.

The bill also creates a much lower tax for new production in existing fields – which companies already have an economic incentive to expand, and in new fields, no matter how big or profitable they are. That tax break is indefinite, as opposed to a Senate plan last year that offered a lower rate for the first 10 years. And that rate applies to new fields.

And the bill takes what was called a development tax credit, and simply delays the date new entrants into Alaska (but not existing producers) companies get to claim it. I need to look at these latter provisions more closely. This provision has a minimal financial impact.

In the end, I believe reasonable tax reform should grant fair tax breaks if new or existing companies work to put new oil into the pipeline. I call it work for pay. Giving away money on a hope, wing and prayer that companies won’t spend their tax breaks in Iraq, Libya or other places Outside is poor policy.

I and others are working on legislation that strongly ties more reasonable (not “fiscal cliff”-creating) breaks to work at new oil production IN ALASKA.

As always, call with any thoughts, or if we can help.

My Best,