World Energy Reports: Multibillion-Dollar Tax Break for Big Oil in Alaska Could Leave Smaller Companies Out in the Cold

Controversial oil tax bill moves forward, while some say it is tainted by conflicts-of-interest and even supporters admit it's a gamble of public funds

Protestors have been covered by the Anchorage Daily News

ANCHORAGE, Alaska--()--A multibillion-dollar tax break for big oil supported by Alaska Governor Sean Parnell is nearing reality as a Republican-dominated Alaska Legislature nears the end of its session.

Meanwhile, some smaller independents feel slighted by the bill that they say further slants the playing field in Alaska's prolific North Slope toward the majors.

Parnell, a Republican who was employed as a lobbyist for ConocoPhillips before taking office, says the massive tax break will fuel the majors to produce more oil on the North Slope to fill the trans-Alaska oil pipeline. The pipeline is currently in jeopardy because throughput has declined and it was designed to operate with far greater flow.

Recently the majors have complained that the state's existing Alaska's Clear and Equitable Share tax system which increases the state's take when oil prices rise, makes additional production uneconomical.

The three majors – ConocoPhillips, BP, and ExxonMobil are eager for the SB 21 windfall, but have offered no guarantee that it will add any new oil to the equation. Indeed, some at Exxon and BP have said the bill doesn't do enough to move the needle for them, placing the hope for the State's oil and gas future on a single company – ConocoPhillips.

In recent testimony independents have voiced concerns and suggested changes.

“The Proposed SB 21 Oil & Gas Production Tax Legislation will negatively impact Savant’s ability to maintain or grow existing production, both in the Badami Unit and on its leasehold outside of the Badami Unit.” Greg Vigil, President Savant Alaska LLC

“The current bill as it stands before does not help our current funding request as the contemplated tax regime makes this new project (Nuna) less attractive than under ACES when viewed as a stand alone incremental investment project.” J. Patrick Foley, Pioneer Natural Resources

Even Senator Kevin Meyer, a supporter of Parnell's proposal, reportedly said it's "a crap shoot;" alluding to the fact that the bill's impact may not be all that was hoped for. Some fear the bill may be a bust for state programs such as health, infrastructure, and education.

Glaring Conflicts

The bill could also be seen as tainted because the governor and key legislators have ties to big oil.

Sens. Peter Micciche and Kevin Meyer are ConocoPhillips employees. House Resources Committee member Mike Hawker, who works as an analyst for ConocoPhillips, also voted for the bill. Other legislators are married to employees that either work for the majors or are tied to service companies that benefit from spending by the majors. While not illegal, none have declined to vote on the floor or in committee, despite the colossal windfall to the major oil and gas companies – estimated at $4.5 billion to $20 billion over the life of the bill.

Another critic of the bill is former Anchorage Borough mayor Jack Roderick who was deputy commissioner of Natural Resources in the early days of the industry in Alaska, and authored the law establishing oil and gas leasing. Roderick is also the author of “Crude Dreams” which is a best selling book on the State's main industry.

Roderick criticized SB 21 in a late March public hearing on the bill.

Roderick thinks the bill is too complex, and that the conflict-of-interest issue is a scandal in the making.

"If this bill passes, in almost any form, I think the national media will get a hold of it and the result will be another chapter in the Bill Allen-Veco corruption tale in Alaska, and that, I will take personal offense at,” he said. “ I've been here 60 years involved in public affairs and the oil business and this is the most important decision you people will probably ever make, and you shouldn't make it this way."

"I think it's bad legislation," Roderick said. "You're dealing with the largest and most powerful corporations in the world and you can't take it simply on a handshake. My recommendation is to put this aside. I'd wait for more information to come to you, particularly a guarantee from the companies that they will do what you want them to do."

However SB 21 went though committee hearings in both the Senate and the house. At press time, the bill is slated to be heard on the House floor and it appears likely that the governor's bill will pass and that big oil will reap additional profits at the expense of the state treasury.

77-7 Plan, offering a new solution

Meanwhile, a group of independent companies have offered a proposal that they feel would attract new investment to the state and result in more production and income for Alaska.

Their proposal, dubbed the 77-7 Plan, would provide incentives to both the majors and independents equally. The plan hopes to attract new companies to explore on the North Slope and help to create a more competitive balance. One Independent said, “Under 77-7, Alaskans themselves might form companies to drill for new oil and gas.”

Under this plan the funds would remain in the state treasury until Alaska's stated goals are achieved. If companies do not step up to meet the state's objectives, the 777 Plan would not cost the state.

The authors of the 77-7 Plan have broken it down into three basic components:

1. Adopt a simple, voluntary 77% exploration and production credit for any investment outside existing units that is based on clearly delineated expense schedules. This would avoid lengthy audits and subjective judgments by state employees – capped at $77 million per company per year with a seven-year sunset;

2. While leaving a fixed state royalty in place, provide a seven-year exemption from taxes for all new production outside of the existing participating areas;

3. Leave the existing ACES tax – including progressivity – as is for all existing participating areas.

The majors have been able to sustain steady profits from the North Slope oil for years while independents have struggled to enter the market area. The three majors control the infrastructure they have built including: feeder-lines, conditioning facilities, the trans-Alaska oil pipeline and tankers. The list of barriers to independent goes on: high bonding and permitting costs in excess of those in other states, cumbersome regulations, ambiguous statutes which allow arbitrary decisions by regulators, and of course the high cost of doing business in a harsh and distant location.

Proponents of the 77-7 Plan claim they have had difficulty getting a fair hearing in the Legislature, in part because SB 21 with its complicated structure has already burned hours of time at the Capital. Legislators are anxious to end the session and return to their homes. The fatigue of the busy 2013 session has set in and the path of least resistance is to pass SB 21, a bill that is certain to be signed by the governor.

However, 77-7 Plan proponents feel they are gaining traction but the eleventh hour is approaching. They are looking for an intrepid legislator to propose the requisite changes to SB 21 before the legislature adjourns.

Once the legacy fields on the North Slope tail off the majors will leave the state regardless of tax incentives. Smaller companies with lower cost structures that specialize in late stage development will take over the fields.

Likewise, smaller companies are the key to discovering and producing prospects that are too small for the majors.

To insure a thriving oil and gas industry going forward, Alaska must attract and nurture independent oil companies. Proponents of the 77-7 plan say it can do that by providing incentives, and avoiding the appearance of favoritism in its regulations and dealings with all companies.

As the legislative session comes to a close it remains to be seen if the 77-7 proposal or the other suggestions from independents will be added to the bill making it more attractive to smaller producers or if it will remain highly focused unfairly the Majors.

Contacts

World Energy
Richard Loomis, 713-626-5369

Release Summary

While SB 21 appears to be on its way to the Governor's desk, Alaska's Oil and Gas Independents still seek changes.

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Contacts

World Energy
Richard Loomis, 713-626-5369