Energy & Mining

After a lengthy debate, the Alaska Senate narrowly passed a bill that would overhaul the state’s oil tax regime. The changes are projected to give oil companies a break of at least $600 million per year.

“The bill we have in front of us is an historic gamble with the people’s money,” said Sen. Gary Stevens (R-Kodiak) during the floor debate.

He wasn’t the only one to describe the bill in betting terms. With oil production on the decline but no firm commitment from companies to bring more projects online, opinion was split into two camps: those who felt the stakes were too high to change the tax system, and those who argued it was a necessary risk.

“He’s right when he says it would be a crapshoot and a gamble, but I think that I have the opposite opinion of just what that gamble would be,” said Sen. Lesil McGuire (R-Anchorage) in response to criticism.

Right now, Alaska has a windfall profits tax that requires producers to pay more when oil prices are high. The bill the Senate passed gets rid of that, all while putting in a higher base tax that’s offset by a $5 per barrel tax credit.

Just one amendment was made to the bill. A measure setting the base tax rate on oil at 35 percent passed with the support of 11 members of the majority. An earlier version of the legislation would have kicked that tax rate down by a couple of percentage points after 2016. That would have meant an extra $300 million in state revenue lost at forecasted levels of oil production.

In a late-night press conference following the Senate floor session, Anchorage Democrat Johnny Ellis suggested that amendment was needed to appease Click Bishop, a Fairbanks Republican who was seen as a swing vote.

“They didn’t have the 11 votes until amendment number one passed,” said Ellis.

Majority leadership denied that this was the case.

The bill ultimately passed 11-9. Opposition was primarily led by the Democratic minority, with Sens. Gary Stevens, Bert Stedman, Dennis Egan, and Donny Olson breaking with their majority caucus to vote against the measure.

Under a procedural rule, the bill will be kept in the Senate today and could get another vote before it moves to the House.

 

Watch the Floor Session on Gavel Alaska

Part 1

Part 2

Part 3

 

*This story has been edited to correct the date in the last sentence from tomorrow to today.

Shell’s Kulluk drill rig is almost ready to leave Alaska waters.

The heavy lift vessel that will take the damaged oil rig to Asia for repairs arrived in Unalaska on Sunday afternoon. The Xiang Rui Kou was escorted to its anchorage in Captains Bay by three tugs.

The Kulluk has been in Unalaska for about two weeks, waiting for the 700-foot heavy lift ship to sail in from China. Marine pilot Carter Whalen says it will take about seven hours to load the Kulluk onto the Xiang Rui Kou this Tuesday. The lift vessel will fill its ballast tanks and sink below the Kulluk, and tugboats will pull the Kulluk into position on the deck of the Xiang Rui Kou.

After that, Whalen says work crews will spend a few days securing the Kulluk. The vessels are expected to leave Unalaska toward the end of the week.

Shell spokesman Curtis Smith says the company doesn’t have any comment on the operation at this time.

Juneau members of a state-wide group calling for an overhaul of oil production taxes say they liked the later rewrite of a bill more than Governor Sean Parnell’s earlier version.

Bill Corbus of the Make Alaska Competitive Coalition said the measure approved by the Senate Resources Committee (just before it was later amended in the Senate Finance Committee) included a 65-percent effective tax rate with slight progressivity. Progressivity is the government’s portion or take that increases as the price of oil goes up.

“In my opinion, it’s an improvement,” Corbus said.

Corbus said the current system of tax credits is not really successful with a billion dollars paid out by the state. But the latest bill corrects that perceived flaw by tying credits more to production rather than exploration.

According to charts he showed to the Chamber of Commerce during Thursday’s luncheon, Parnell’s latest bill – as introduced this session – called for a decreasing average government take during high oil prices. That’s in contrast with the current tax regime, called ACES or Alaska’s Clear and Equitable Share, which includes progressivity as oil prices exceed $80 a barrel.

Corbus said oil production of 2,000,000 barrels a day in 1989 has declined to 550,000 barrels a day today. It’s expected to decline to 338,000 barrels a day in ten years.

Meanwhile, he estimates at least 10-billion barrels of reserves remain untouched on the North Slope.

Corbus said critics of the Parnell’s tax reform efforts have valid questions. Such as, do lower taxes guarantee more production?

“I guess the real answer is that there is no ironclad certainty that they will do it,” Corbus said. “But there are a lot of reasons why they should do it.”

He said the 10 billion barrels of reserves is economically recoverable. Continued development of North Slope would also be part of producers’ efforts to maintain diversified resource portfolio of fields around the world. Including Trans-Alaska pipeline, he says the industry already has $70 billion invested into the state.

“It just doesn’t makes sense that they’re gonna walk off and leave that there,” Corbus said.

Second big question: What about bridging the gap between the state budget expenses and lower revenues? Corbus says the $11 billion constitutional budget reserve and the $5 billion in statutory reserves could carry the state over until increased production kicks in.

Corbus served as Revenue Commissioner under Governor Frank Murkowski. He appeared before the Chamber along with Juneau attorney and Murkowski chief of staff Jim Clark, another member of the Make Alaska Competitive Coalition.

Clark said increasing demands of the state operating budget are already surpassing oil revenues.

“The revenues to the state are going to go down, and they’re going to go down whether we change the oil production tax or we don’t,” Clark said.

“If this works, we have a chance of catching ourselves and having investment go up and production go up. If we do nothing, (then) we just ride it down.”

Waiting until later could eventually endanger the state’s capital and operating budget since roughly 90-percent of the state’s revenues comes from oil production.

If the changes don’t work, Clark said there’s nothing preventing them from changing tax rates again.

As far as getting guarantees from producers to increase investment, Clark said that is pretty much impossible to administer.

Clark drew parallels to Alberta which he says increased tax rates to over a 65-percent threshold, and then lowered them again after companies left the province. He said the aim is to get Alaska producers to invest in legacy oil field development rather than just pipeline maintenance like they do now.

According to its website, the Make Alaska Competitive Coalition is devoted to crafting a competitive and balanced petroleum tax. It’s self-funded by Alaska individuals and businesses, but it does not accept contributions from companies devoted to oil production.

The Department of Interior has concluded its expedited review of Shell’s failed 2012 Arctic drilling campaign.

Before resuming activity in the Arctic Ocean, the company must undergo a third party review of its entire operation.

Secretary of the Interior Ken Salazar put it bluntly.

“Shell screwed up in 2012,” he said.

And now the company must follow new orders from the government before it can operate again in the Arctic Ocean.

Shell must produce an “integrated plan” for future work. The company will have to detail each facet of Arctic drilling – from marine transport, to emergency response, to demobilization.

The company also must allow an outside firm to review its Arctic practices.

Bureau of Ocean Energy Management director Tommy Beaudreau says the review will need to illustrate whether Shell is capable of overseeing the contractors it uses. He says the company continually failed to do so this year.

Shell contracted Superior Energy, a company with a long history in the Gulf of Mexico, to design its underwater containment system.

“Ultimately, Shell, working with Superior, was not able to bring that system online. They were not able to obtain Coast Guard certification for the vessel. The deployment test of the system itself failed,” Beaudreau said.

That’s why the Interior Department only allowed Shell to drill pilot wells last summer.

Beaudreau went on, saying Shell relied on contractors for emissions controls that could not meet government muster. That led to violations of EPA air permits.

And most recently, the company relied on contractors to tow the Kulluk, a rig that grounded New Year’s Eve.

“Taken altogether, this points to the need for strong operator oversight of the contractors they’re working with,” Beaudreau said. “Now these issues, based on our recommendations, are issues that are going to have to be specifically addressed, and we need to be told how they’re being addressed.”

Before the company can resume any drilling – regardless of the depth, Beaudreau says, it must prove the containment dome can operate correctly.

Secretary Salazar says the government reacted appropriately to Shell’s stumbles – that the various agencies in the Department of Interior successfully managed the setbacks.

“We were very much keeping coordinated,” Salazar said. “I was being informed daily on the activities relating to the US Coast Guard and on issues relating to oversight of the Arctic Challenger.”

Shell Alaska spokesman Curtis Smith says the company does not know which firm will conduct the review. Nor did he have an idea how long the review will take.

The company still says Arctic drilling is possible next summer.

“2014 is a possibility, but our future plans offshore Alaska will depend on a number of factors, including the readiness of our rigs and our internal confidence that lessons learned from our 2012 drilling program have been fully incorporated,” Smith said.

Shell sent its rigs to Asia for repair, and last month announced its suspending its drilling program this coming summer.

Conservation groups are disappointed. Michael LeVine is senior council with Oceana. He says Shell should be held accountable, but that’s only the first step.

“It is also necessary for the department of Interior to look inward and fundamentally reassess how and why it allowed an unprepared company to allow in unforgiving, harsh waters in Alaska,” LeVine said.

The Coast Guard is conducting its own review of the company. There is no time frame when that will be released.

The latest rewrite of a bill cutting taxes on oil companies is expected to bring down state revenue by more than $1 billion next year. That’s more than any version that’s been introduced so far.

The Senate Finance committee offered their adjustments to Gov. Sean Parnell’s oil tax bill on Tuesday, and the Department of Revenue weighed in on how it would affect the state’s treasury Wednesday morning.

Under current production forecasts, the new plan would cut taxes on oil companies by up to $1.3 billion dollars next year. The analysis goes out six years, and during that time, the total tax break would fall somewhere between $7 and $10 billion. For comparison, the governor’s bill is projected to cut taxes by $5 billion over that same period.

Sen. Lyman Hoffman, a Bethel Democrat who serves on the Finance committee, calls those numbers “truly staggering.”

“Too move this much cash across the table is going to have, in my view, detrimental effects to the state’s operating budget,” says Hoffman.

Representatives from the Department of Revenue say their analysis is preliminary and does not consider how the bill would change levels of oil production. Roger Marks, a tax consultant on contract with the legislature, projects that the finance committee bill would have a neutral effect on revenue if production increased by 70,000 barrels of oil per day over the forecast. If production were to exceed that amount, the bill would have a positive effect on revenue.

Right now, the state levies a variety of taxes on oil, including a profits tax that goes up with the price per barrel of oil. All versions of the oil tax bill that have been considered scrap that element of progressivity. The governor’s original proposal would just have oil taxed at a flat rate of 25 percent, while the finance rewrite ups the base tax by 30 percent with a $5 per barrel credit offset.

Joe Balash is a deputy commissioner with the Department of Natural Resources, and he says that the administration will be working with the finance committee to tighten the revenue projections.

“We’re anxious about that, but the Senate appears to be trying to find its own happy balance,” says Balash.

Balash adds that he’s happy to see that the Senate hasn’t reintroduced any sort of progressive mechanism to the bill.

The Senate finance committee will continue to review the bill this week.

At today’s prices, Alaska’s oil tax system can be compared to those of Norway, Russia, and Venezuela in terms of how much money it puts in state coffers. A plan introduced by the Senate finance committee yesterday would change that. It’s a new version of a bill Gov. Sean Parnell introduced earlier this session to bring down taxes on oil companies with the intent of curbing a decline in production.

Under the Senate finance committee’s substitute, companies would pay lower taxes on oil from the North Slope than they do on shale from the Eagle Ford formation in Texas, the Haynesville formation in Louisiana, or the Bakken formation in North Dakota. PFC Energy, a consulting firm, presented charts showing as much before the finance committee on Tuesday afternoon. Their analysis prompted a question from Co-Chair Kevin Meyer, a Republican from Anchorage.

“You’ve proven the point anyway that we’re competitive,” said Meyer of the new legislation before the committee. “Now, the next concern will be what’s it going to cost us to get there?”

Over the next few days, the finance committee will be working to figure just that out.

Their new bill in some ways is a mix of Gov. Sean Parnell’s initial bill to cut oil taxes and a rewrite done by the Senate’s resource committee in February. The finance version would bump the base tax rate on oil production from 25 percent up to 30 percent, instead of all the way to 35 percent like the resources committee wanted. But like the resources bill, it gives oil companies a $5 credit for every barrel they produce. And like both earlier versions of the oil tax plan, it scraps a mechanism known as progressivity, which increases taxes as the price per barrel goes up.

The new version of the bill also gets rid of a change to increase a tax break on oil from new fields. It keeps what’s called the “gross revenue exclusion” at 20 percent, like the governor initially proposed. But their bill does make it so the credit can be applied to new oil from fields that are already developed.

Meyer says that’s to encourage new production no matter where it happens.

“If it’s new oil that’s not currently being produced, then yes, it doesn’t matter to us if it’s coming from a legacy field or from outside the legacy field.”

That specific change prompted criticism from some Democrats. Sen. Bill Wielechowski of Anchorage has been stumping on the issue of oil taxes, and he thinks that tax break doesn’t need to be applied to legacy fields.

“In new fields, it’s a good thing. In new participating areas, it’s a good thing. You don’t need it in the legacy fields. The legacy fields are where 90 percent of our oil projections for the next decade are coming from. The Senate finance version gives them a massive tax break for oil they’re already planning to produce.”

Wielechowski also says any version of oil tax reform that passes the legislature should keep the progressivity mechanism intact, and he has concerns that the bill hasn’t been properly vetted.

The next step for the finance committee is getting an analysis from the Department of Revenue on what their bill does to the state’s treasury at forecasted levels of oil production. This week, they’ll also be taking testimony on the bill from the public and industry players.

Meyer says that because he hasn’t seen hard projections on just how their bill will affect production, testimony from oil companies will be especially important to him.

“Obviously, if we’re not going to have increased production then we’re kind of wasting our time here,” said Meyer before the finance committee. “But I know that’s a hard forecast for you guys to make, and that’s why I’d like to hear from industry.”

The governor’s office is still reviewing the finance committee’s version of the oil tax bill and does not have a comment on their proposal yet.

Finance is the third and final committee to hear the bill. Meyer says that a final version could be on the Senate floor as early as next week. After that, it will be sent to the House.