Alaska Oil Tax Cut

Brian Hicks

Written By Brian Hicks

Posted April 16, 2013

Alaskan oil may be ready for a comeback.

In a move that aims to heighten Alaskan oil production, the state Senate voted 12 to 8 for multi-billion dollar tax breaks on oil on Sunday. The House voted in favor of a similar bill before the Senate.

The bill would establish a 35 percent tax on net profits, replacing the established rate of 25 percent tax per $30 a barrel, with a .04 increase for every one dollar above the $30 mark, as reported by Businessweek.

Alaska oil pipelineThe government has a 25 percent benchmark in mind, but Governor Sean Parnell of Alaska said the tax rate could be as low as 14 percent. In addition, the state would allow a $5 tax allowance per barrel for new oil production and 20 percent in gross income exclusions. Companies suffering from high royalty fees would also qualify for a 30 percent tax reduction.

Critics of the bill have gone on record in saying that the bill could cost Alaska up to $4.7 billion until 2019. In the short-term, Senator Kevin Meyer (R-Anchorage) contends that the new bill would cause a shortfall of $600 million in revenue by next year. And House and Senate Democrats believe the government would have to use more than $860 million in savings to balance the budget in 2014, according to the New York Times.

There is also concern that the bill could usher in a personal income tax and loss of dividends from the Alaskan Permanent Fund Corporation.

Many Alaskan families receive assistance from the Alaska Permanent Fund, a state corporate entity that derives a large portion of its revenue from oil profits and other investments. Families normally receive $5,000 per year in assistance from the APFC. There is no income or state sales tax in Alaska because of royalty income and taxes from the oil industry.

The government will certainly lose oil revenue, but the Republican-controlled Senate believes more investment and drilling activity would make up the difference.

Governor Parnell hopes to revive Alaskan oil activity, which has been on the decline since the 1980s.

Supporters of the bill counter that the bill would save $1.6 billion next year and a savings of $1.7 billion in Prudhoe Bay and Kuparuk.

According to the Alaskan Department of Revenue, the bill could lower taxes in the area of $3.5 billion in the next five years, pending oil barrel prices and production volume.

Alaskan Oil

Alaskan oil was once the crown jewel of the industry. Prudhoe Bay first went into production mode in 1977, and Alaskan oil reserves were estimated at 9.6 billion barrels.

Prosperous results continued throughout the 1980s — a time when many oil regions in the lower 48 states suffered from drastic declines. By the mid eighties, the North Slope produced a third of America’s oil needs.

A combination of failing technology, drained reserves, and federal land restrictions has since lead to a decline of the Alaskan oil boom. By 1998, oil production in the North Slope declined by 40 percent, according to the American Petroleum Institute.

Since then, Alaska was never able to fully catch up with the rest of the country.

From the Chicago Tribune:

“Oil production from Alaska’s North Slope peaked in 1988 at over 2 million barrels per day, led by the Prudhoe Bay field which averaged 1.6 million bpd that year, according to state Department of Revenue statistics. Production in 2012 averaged 579,400 bpd, with Prudhoe Bay production down to 265,200 bpd.”

Tax relief efforts by the state government could be helpful in attracting new and old investors to Alaska.

Tax Relief

The new bill would save oil companies billions of dollars — allowing them to save on operating costs and drilling campaigns. Oil companies such as BP (NYSE: BP), ExxonMobil (NYSE: XOM), and ConocoPhillips (NYSE: COP) have long lobbied to do away with former Governor Palin’s old tax system.

Because the price per barrel hovers between $90 and $100 per barrel, this has caused oil companies to often pay 50 percent or more in taxes.

The old plan brought in $17 billion to government coffers, but many maintain that the status quo is killing investment and innovation in Alaska. Oil companies have moved major operations from Alaska to Texas and North Dakota.

It could be a hard in feat in drawing more investment back to Alaska, especially since North Dakota and Texas are leaders in the shale oil boom, but chances are higher with more tax incentives.

Alaska does have shale deposits in the north, and these could be quite successful undertakings for any company that chooses to invest more in Alaska.

Tax relief may be one thing, but it could take a while for companies to catch up with the Midwest oil boom. With older fields, rugged terrain, harsh weather, and landowner rights, companies that fund more drilling exploration in Alaska may have some challenges to overcome.

No one can know for sure if Alaska will become an oil heavyweight again, but with enough investment, the state has vast potential.


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