Alaska oil and gas issues: legislature reluctant to lower taxes.

• Author: Bradner, Mike
• Position: Special Section: OIL & GAS

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State oil and gas taxes were the subject of intense discussions in the State Legislature this spring. Industry has complained for some time the high rate of tax is discouraging investment. A steady decline in the drilling of new exploration and production wells since 2006, the year major changes in the State tax were made, seems to bear this out.

The matter has some urgency because production from the North Slope oilfields is declining at about 5 percent a year. Unless there is new production coming from somewhere in a few years the Trans-Alaska Pipeline System will be approaching a level of low oil "throughput," and mechanical problems will begin affecting the pipeline.

COMMISSIONER GALVIN'S VIEWS

Alaska's revenue commissioner, Pat Galvin, acknowledges the problem of declining production, but he doesn't believe the tax is to blame. Galvin argues that industry investment overall has actually increased in recent years, and that a generous investment tax credit mechanism in the law that pays a good share of exploration costs--with cash rebates in some cases--has brought new companies to Alaska to explore.

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Who is right, the industry or the commissioner? It's quite likely both are right. There is some evidence indicating the high tax rate discourages companies from long-range, high-risk exploration ventures where companies hope to find large oil deposits. Galvin is correct, however, the tax credit incentives are encouraging new exploration. Independent companies are exploring--even if their targets are relatively near the existing large producing fields where the likely new discoveries will be modest in size.

Legislators should be forgiven if they respond cautiously in sorting out these conflicting claims and in understanding the State's complex petroleum tax structure. They have the responsibility of deciding what the right tax rate is, one that doesn't discourage development, but also has the people of Alaska receiving a fair share of the production benefits from State-owned lands.

TAX HISTORY

Some history is in order: Alaska modeled its original oil and gas production taxes on those commonly used in other states. The tax was typically, and still is, a percentage of the "wellhead value," or the value of the oil at the point of production. In the Lower 48, where oil and gas is bought and sold at the field level, these market prices are easy to establish. In Alaska, little, if any, oil or gas is sold in the field, so other ways must be found to establish an accurate value for the...