Alaska’s Clear and Equitable Share, or ACES, oil production tax may have seemed equitable to those at the collection end of the tax revenue stream but has clearly been viewed as less than fair by tax-paying companies who produce oil within the state. For, although companies exploring for oil and gas have praised the ACES tax credits available for exploration expenses, oil producers have complained that ACES tax progressivity — the way in which the tax rate increases with rising oil prices — undermines incentives to develop new oil resources.
In a speech to the Resource Development Council on Oct. 15, Alaska Gov. Sean Parnell signaled sympathy with the oil producers’ position by announcing his intent to encourage new oil development by eliminating the ACES progressivity at higher oil prices. Parnell also said that his administration wants to introduce tax credits for technically challenging oil fields, such as those involving heavy oil.
“We can be more competitive in oil exploration and development,” Parnell said. “More oil means more jobs for Alaskans, more long-term revenue to the state, and lower TAPS tariffs per barrel. These resources, such as heavy oil, can serve as the primary new production source to stem the decline in North Slope production and potentially increase production above today’s level.”
Point Thomson
Parnell also said that, with the state viewing a North Slope gas line as a key future contributor to the Alaska economy, his administration is working to resolve ligation between the state and ExxonMobil over the huge Point Thomson gas condensate field — natural gas from Point Thomson will be critical in the economics of the gas line.
“I’ve been personally engaged in discussions to resolve that litigation and I’m positively optimistic that we’ll get there soon,” Parnell said. “We all understand the importance of Point Thomson gas to any pipeline project.”
Once the Point Thomson litigation is resolved and there are firm agreements between a pipeline sponsor and prospective gas shippers, the state will consider fiscal issues associated with the gas line, he said.
Asked to respond to Parnell’s statements, David Eglinton, spokesman for Point Thomson operator ExxonMobil, told Petroleum News Oct. 18 that ExxonMobil is continuing a dialogue with the state.
“We are continuing to work with the State of Alaska to resolve outstanding issues but more work still needs to be done,” Eglinton said.
Parallel with tourism
In announcing his tax proposals Parnell drew parallels between the state’s policies towards the oil industry and the state’s tourism agenda. The cutting of taxes on tourism, the introduction of more sensible environmental regulation and the active marketing of Alaska as a tourist destination have all started bear fruit, with Princess Cruises, for example, announcing the addition of another ship to its Alaska-bound fleet, he said.
“This travel industry template for success, I believe, can be used to bring more oil exploration and development jobs to Alaska,” Parnell said. “… I have personally communicated with companies my willingness to move forward with positive changes on ACES.”
However, Parnell said that he also needs to see the oil companies testify publicly on how the tax changes will improve Alaska’s competitiveness as an oil province.
“If Alaska business owners and employees join with other taxpayers, much like the Alaska travel industry did, we can create more jobs for Alaskans in the oil patch,” Parnell said. “The only thing I require is that the industry, in the public forum of the Legislature, joins me in making the compelling case for competitiveness and jobs for Alaskans.”
Parnell told Petroleum News that his administration is still working on the specifics of the tax changes, with a view to filing proposed legislation in the coming months.
“I’m starting this discussion right now,” Parnell said. “I want this discussion to be had now so that we’re ready for it when the legislative session comes.”
According to the Alaska Department of Revenue, the base rate for the ACES production tax is 25 percent of a company’s net profit on oil production, with a surcharge on profits in excess of $30 per barrel. Currently, the surcharge increases the base rate by 0.4 percent for each additional dollar in profit, dropping to 0.1 percent per additional dollar at profits in excess of $50 per barrel. The tax rate tops out at 75 percent.
Taking aim
Parnell’s tax announcement came part way through a belligerent speech in which the governor took aim at the federal government and environmental organizations for what he said was “an unprecedented assault … to lock up Alaska’s resources.”
With the federal government facing a massive fiscal deficit, Alaska has a wide array of resources, ranging from oil and gas to renewable energy sources, fishing and tourism to “lead the nation out of the sea of red ink,” Parnell said.
But a one-size-fits-all approach to environmental regulation, and over-zealous permitting, have hit the brake pedal when it comes to resource development.
“Alaska’s future is at stake,” Parnell said. “If we give up the right to responsibly develop our resources without a fight, we surrender our state sovereignty and our economic potential. We must develop our resources and we will.”
And Parnell cited the impasse over the permitting of oil development in the National Petroleum Reserve-Alaska; the outer continental shelf drilling moratorium; potential wilderness designations in the Arctic National Wildlife Refuge; the slowdown in the environmental impact statement preparation for Point Thomson; “thousands of Endangered Species Act protections”; and the designation of thousands of square miles of ESA critical habitat as examples of federal roadblocks to Alaska development.
“Every day some federal agency seeks to shut us up and lock us down, preventing that job growth that we so desperately need,” Parnell said.
However, the state is successfully fighting back, he said, commenting that he doesn’t apologize for any of the lawsuits that the state has filed against the federal government.
Endangered Species Act
Parnell said that the state is adopting a two-part strategy to address Endangered Species Act listings and their possible impacts on resource development.
Firstly, the state is being vigilant in identifying species that are potential targets for listing — as necessary the state is adopting its own protective measures, while also working with federal officials to develop agreements over species protection. Secondly, the state is facilitating ESA-related communications by ensuring that federal regulators have access to state information and expertise, while the state works towards the down-listing or de-listing of listed but recovered species, Parnell said.
Alaska has been recruiting allies in other states to address ESA questions. And the state administration has proposed an increase in the Department of Law budget, to deal with ESA issues, Parnell said.
Permitting
When it comes to permitting, ConocoPhillips could receive its needed U.S. Army Corps of Engineers permit, to move forward with its CD-5 development in NPR-A, if the Environmental Protection Agency can accept the views of local villages, the Native tribes, the Native corporations and the state on the single permitting issue that is obstructing development, Parnell said.
And the Department of Interior needs to give the go-ahead to Shell’s planned drilling on the outer continental shelf.
“We need swift action by Secretary Salazar to approve drilling permits,” Parnell said. “We need the Environmental Appeals Board to approve their air permits.”
And meantime the state is moving ahead on projects to build access roads for resource development, including a road to Umiat in the Brooks Range foothills.
It will take everyone “getting in the game” to grow the Alaska economy through tax changes, improvements in the permitting regime and improved land access, Parnell said.
Expedited hearing on Arctic moratorium
The U.S. Court for the District of Alaska has agreed to an expedited hearing in the State of Alaska’s lawsuit against the Department of the Interior’s ban on oil drilling on the Arctic outer continental shelf.
The state has taken legal action over the drilling ban on the grounds that Interior has imposed an Arctic drilling moratorium without going through a legally required public process, without consulting the state and without considering the economic actions of the ban. And the state has requested an early decision in the case, so that Shell can make a timely decision about whether to proceed with its planned Alaska Arctic offshore drilling in the summer of 2011.
In an Oct. 15 order the court said that it requires responses to the request for expedited judgment by Nov. 5, with replies to the responses due by Nov. 12.
