Wednesday, October 03, 2007

Alaska Governor Sarah Palin Releases Draft "ACES" Bill To Raise Petroleum Profits Tax To 25%; Chances Of Passage Are Slim

Alaska Republican Governor Sarah Palin has finally released her draft bill proposing to raise oil taxes for the second straight year, setting the stage for a battle with major petroleum producers. Primary stories published in the Anchorage Daily News and KTUU Channel 2.

Palin calls her plan "Alaska's Clear and Equitable Share" (ACES). Department of Revenue Commissioner Patrick Galvin said Tuesday it is a better bill than last year's Petroleum Profits Tax. "PPT does not protect the state's interest," Galvin said. "We need the tools provided by ACES, the equitable share that will restore public confidence in our oil tax system and to provide a stable investment climate." The bill will be formally introduced in the House and Senate when the special session begins on October 18th in Juneau.

Major Highlights:

(1). Increases Alaska's net profits tax from 22.5 percent to 25 percent.

(2). Disallows tax deductions for equipment maintenance repairs that stem from an "unscheduled interruption of, or reduction in the rate of oil or gas production." The goal is to not reward inadequate maintenance.

(3). Proposes a 10 percent gross-based floor tax on some of the older or "legacy" fields on the North Slope.

(4). While the bill's effective date is January 1st, 2008 for the tax elements, a retroactive date of April 1st, 2006, the original effective date of the Petroleum Profits Tax, is set as it relates to BP writing off costs associated with replacing corroded pipelines.

Click HERE to view 46-page draft bill in PDF format.


(1). Financial - Current petroleum profits tax (PPT) has brought in less-than-anticipated revenues. While it brought in $1 billion more than the old tax during FY 2007, it was $200 million less than was predicted when the PPT was passed. Unless the tax is changed, rising deductions from the industry will bring $800 million less than predicted for the next fiscal year.

(2). Ethical - Three lawmakers instrumental in constructing the original PPT have been indicted, and one convicted on corruption-related charges related to behind-the-scenes manipulation. Former House Speaker Pete Kott was convicted of bribery last week. Former State Rep. Vic Kohring of Wasilla, who chaired the House Oil & Gas Committee last year when the PPT was formulated, will go on trial on similar charges beginning October 22nd. Former State Rep. Bruce Weyhrauch of Juneau is awaiting a trial date on corruption charges. In addition, Senate Rules Committee Chairman John Cowdery, whose office was searched by the FBI last year, said last month he will sit out the special session after his name came up in Kott's federal corruption trial. Cowdery has not been charged in the corruption probe.

Legislative Reaction: House Rules Chairman John Coghill (R-North Pole), said from what he's seen so far, he's generally OK with the tax proposal the governor has put forward. But many other legislators either think Palin is going too far or not far enough. So it will be a difficult challenge for her to get this bill passed in the upcoming 30-day special session. "I expect some kind of stalemate," said Fairbanks Republican Rep. Jay Ramras, who opposes Palin's oil tax.

Rep. Harry Crawford (D-Anchorage) said that means various objections to the governor's approach have not changed either. "Why I keep coming to these, I keep coming for the explanation of what it was that convinced the governor that a tax on the gross wasn't the best way to go and to go to a tax based on net profits. I didn't hear it last week, I didn't hear it this morning," said Crawford.

House Resources Committee Co-Chair Craig Johnson (R-Anchorage), who said it's too early to revisit a production tax passed last year, said the special legislative session starting on Oct. 18 could end up just being 30 days of information-gathering. "I'm not going to call it a total waste, because I think that would be good. Will we have a piece of legislation that comes out of it? Not quite so optimistic," said Johnson.

Sen. Johnny Ellis (D-Anchorage), who wants to see more of a hybrid gross and net tax, said he doesn't see a majority of 11 in the Senate and 21 in the House to do anything. "Not yet, and it's going to be a stretch to get there. A great deal of this depends on the governor's willingness to work with people to try to get a good tax for the state of Alaska and to get our fair share," said Ellis.

Industry Reaction: British Petroleum (BP) issued this statement: "One thing that is clear: this is another big tax increase. BP believes investment is what we should all be thinking about when it comes to the future of oil development in Alaska."

However, spearheading the industry opposition is the Alaska Oil and Gas Association, an industry trade organization whose members include North Slope lease holders Exxon Mobil Corp. and BP PLC. Executive director Marilyn Crockett said raising taxes jeopardizes the prospects of investment in North Slope fields at a time when production is at a 6 percent annual decline.

And on September 21st, Rep. Bob Lynn (R-Anchorage Hillside) met with representatives of ExxonMobil, who shared their concerns about Governor Palin's proposed changes. Here's a snippet of what Rep. Lynn recorded on his legislative blog:

Met today with the Alaska Production Manager of Exxon Mobil, and one of their lobbyists. They pressed their case for not rushing into any changes in the current PPT oil tax due to the current scandals of legislators indicted for accepting bribes, etc. They also claimed the current PPT doesn‘t need to be changed because it is doing what it was designed to do, and that lower net profits of producers, and accompanying lower tax revenue to Alaska, is due to added expense of more aggressive exploration that PPT was designed to encourage. This likely is the beginning of pushback from producers on the Governor Palin’s ACES plan that would replace PPT, if passed. The most provocative and interesting question posed to me was of how much of every one dollar profit made by the producers I thought should go to the state. I didn’t answer their question (and they said no other legislator had answered it either). Their arguments were professional, appropriate, and thought provoking.

While Bob Lynn is a Republican, he's a proven straight-shooter who's not afraid to break party discipline if necessary to vote for principle or for his constituents' interests.

Analysis: I predict that ACES will not pass in its present form at the upcoming special session. The legislative disagreements are just too great, and the industry has too many objections.

Particularly objectionable is the idea of "retroactivity". No tax should ever be retroactive. BP already paid a penalty for their carelessness in maintaining the pipeline; it is unfair to impose yet another penalty upon them.

Disallowing tax deductions for "unscheduled maintenance" also seems capricious and presumptive. Who makes the judgment as to why the "unscheduled maintenance" was necessary? This provision imposes a presumption of guilt; because BP was negligent before, they will alwsys be negligent. BP has no market incentive to continue being negligent in infrastructural maintenance.

The retroactivity and the tax deduction issue will have to be resolved before the industry will sign on to this proposal. In addition, the governor must make it explicitly clear that once the tax is set, it will remain set for the foreseeable future. The industry MUST have some degree of tax stability as an incentive for continuing investment. However, Governor Palin is not excessively dogmatic; she's likely to agree to any compromises which do not disturb the core element of her bill.

Most likely this special session will end up being little more than the "information-gathering session" envisioned by Rep. Craig Johnson.

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