Analysis: Oil tax fight looms as legislative session nears end, Ill-timed with pending shortfall in natural gas

The close of a state legislative session is always messy. Late-session controversies always erupt unexpectedly. It’s no different this year.

In recent days a major increase in taxes on the state’s petroleum industry is being put forth that could hit oil and gas producers with a billion-dollar tax bill next year.

The legislation was introduced in the state Senate earlier this year. Similar bills have been put forward in other years but the issue has momentum in 2023 because it could fill a lot of holes in the state budget, including money needed for a large $2,700 Permanent Fund Dividend.

But there will be downsides. A tax increase of this magnitude could dent the new momentum in the petroleum industry with the big Pikka project now under way on the North Slope and the possible approval of Willow, another major project.

Of more concern for Southcentral Alaska, however, is that part of the legislation targets Hilcorp Energy, the major natural gas producer in Cook Inlet as well as a major North Slope oil producer.

This could prove ill-timed. A shortfall in natural gas supply in Southcentral Alaska is expected as early as 2027, according to the state Department of Natural Resources. Natural gas fuels space heating, through Enstar Natural Gas Co., and most electric power, through Chugach Electric Association and Matanuska Electric Association.

The utilities are working on plans to deal with the shortfall with more renewable energy, which helps in power production but not space heating. There’s more natural gas to be found in Cook Inlet, too, but it will take more drilling.

Hilcorp has plans to spend $1 billion exploration and development of new gas with new wells and a new offshore platform. But the tax increase proposed in the Legislature on Hilcorp could amount to $190 million next year.

There is no way that cannot affect the company’s plans to find new gas.

The Hilcorp tax comes about because of the company’s corporate structure that is different than other oil producers. That is entirely legal but because of it the company enjoys certain tax advantages. The legislation proposed would end those.

Another change proposed is to reduce a per-barrel production tax credit allowed to North Slope producers including Hilcorp. The change would be from a tax credit of $8 per barrel to $5 per barrel.

The per-barrel production tax credit was part of a major overhaul of the state oil and gas production tax made in 2013 when the Legislature repealed a previous tax law that put the state in a very incompetitive position.

Changes made in 2013 changed that and led to a burst of new drilling and oil discoveries that have resulted in North Slope production being held even with small increases seen in some fields.

The 2013 law was controversial because some people felt it gave away too much, although its defenders point to the discoveries and new production in the last 10 years as proof of its effectiveness.

That debate has continued and today it underlies the move to increase taxes.

Most feel it’s unlikely that the total tax package will pass in the remaining days of the 2023 legislative session but the debate will continue next year, in the 2024 session.

Meanwhile, it is possible that the Hilcorp tax, which can be separated from the per-barrel tax credit, might pass in a separate bill in the rush of final legislation. The effect of this on Hilcorp’s efforts to find new natural gas are an unknown, but they won’t be good.