Ballot Measure 1: Hotly contested oil tax proposition is latest salvo in long-running battle over Alaska’s oil taxes

Alaskans have been arguing about oil taxes since the big North Slope fields went into production 43 year ago. The Legislature has hiked taxes several times when legislators felt the state wasn’t getting a fair share, and then backed off and modified the tax at other times to stimulate industry activity.

The latest version of this fight is a voter initiative on the November general election ballot. If passed, Ballot Measure 1 would more than double the state production tax on the three largest North Slope fields.

That may sound drastic, but the proponents of BM 1 argue these big fields are making money even at today’s low prices and that the state hasn’t getting a fair share since the Legislature passed a controversial change in the state oil production tax in 2013, in Senate Bill 21.

Oil and gas taxes are complicated and Alaska’s tax system is one of the most complex in the world, according to IHS Markit, an international consulting firm affiliated with Daniel Yergin, a well-known global oil analyst.

Opponents to BM 1 say it would make it even more complicated, mainly because much of the proposition is vague in its wording. There are many ways the language could be interpreted by both the state Department of Revenue and oil companies trying to comply with the tax.

This is a recipe for disputes and lawsuits, at least until the revenue department writes regulations or there are court decisions on how the law should be implemented. The regulation-writing process, and litigation, would play out for some time, perhaps several years.

What BM1 does

Here’s what the proposition does, among many things:

At current oil prices Alaska is under a minimum four percent gross production tax. That means the tax is paid on gross revenues as calculated at the oil field with no allowance for production costs or capital expenditures in the field.

BM 1 would increase the gross tax from 4 percent to 10 percent, and then 15 percent if oil prices increase beyond a certain threshold.

Proponents of the ballot measure say this would add about two dollars per barrel in costs for the biggest North Slope field, Prudhoe Bay. At current prices Prudhoe’s profits should be enough to afford that, said Ken Alper, a former state tax director who is advocate for BM 1.

Using data reported by Prudhoe Bay producer companies to the state, per-barrel “lifting” costs in the field were $17.11 per barrel in 2019, Aper said. If about $8 per barrel is added for transportation costs (for pipeline and tanker charges) to get oil to customers at West Coast refineries, the cost reached $25.13 per barrel.

“The producer also needs to pay property tax, which is about $1.50 per barrel, and production tax, which is 4 percent of gross (revenues), so that is about another dollar.

“That is your break-even cost for Prudhoe Bay production in FY2019. So comfortably, they should at least not be losing money at $30 per barrel,” Alper said in an email. Oil prices are now in the $40-per-barrel range.

Negative effects across the slope

Independent analysts say the per-barrel impact will be likely higher and they say there will be big negative effects across the slope on other fields and new prospects.

Parker Fawcett, oil supply analyst at Platts S&P Analytics, a Standard and Poor’s company, estimates the ballot measure would increase per-barrel taxes by two to five dollars a barrel and that it would make Alaska’s oil taxes the highest in the world. That in turn would reduce the ability of Alaska companies to attract investment for new oil development.

It would also create perverse incentives for companies to restrain production so that new fields being planned could not come under the tax, Fawcett said.

For example, ConocoPhillips would have an incentive to delay development of Fiord West, a medium-sized new project planned in the Alpine field. Although Fiord West could produce about 20,000 barrel per day, at peak, it is located within the larger Alpine field where the new tax would apply, so and all projects within the field regardless of their size would pay the tax.

Fawcett also said Hilcorp Energy would have an incentive to limit an expansion of its Moose Pad project in the Milne Point field because increasing its production to over 40,000 barrels per day, which is planned, would trigger the tax increase under BM 1.

The tax increase applies only to fields producing 40,000 barrels a day or more. For now, only the three largest fields on the slope would be affected. However, there are several proposed new initiatives besides the Moose Pad expansion/

ConocoPhillips’ Willow project, in the National Petroleum Reserve-Alaska, and Pikka, being planned by Oil Search near the Colville River, are expected to produce over 100,000 barrels per day each and would fall under the new tax.

Did SB-21 shortchange Alaska?

What fueled the BM 1 proposition was a feeling among many Alaskans than SB 21, passed in 2013, shortchanged the state. A particular point of controversy is a per-barrel production (tax credit) given producing companies as an incentive to produce more oil.

State Sen. Bill Wielechowski, an Anchorage democrat, argues the extra incentive isn’t needed and has cost the state about $1 billion a year.

Wielechowski has proposed bill for several years to repeal that section of SB 21 but the legislation did not pass.

“Our three major fields have been producing oil for decades without credits,” said Robin Brena, an Anchorage attorney who has led the effort on BM 1. “These SB 21 credits are simply corporate welfare. In the Prudhoe Bay Unit in 2018 alone, these welfare credits reduced our production taxes from $972 million down to $230 million or by $742 million,” he said.

The production tax credits, which aren’t really tax credits so much as a mechanism to reduce the tax burden as an incentive, shouldn’t be confused with another tax credit, the refundable tax credits paid to explorers and companies who are not producers as incentives to explore and find more oil.

The major producing companies are not eligible for the refundable tax credits and have never been paid for them, but there is confusion between the two among supporters of BM 1.

Brena and others say Republican leaders in the Senate bottled up Wielechowski’s bill, which is why his group decided to bypass the Legislature with a voter initiative. Signatures on petitions were gathered sufficient to get the proposition on the November ballot, and the effort also survived litigation aimed at disqualifying the proposition.