Alaska oil industry launches campaign against proposed tax hike

JUNE – Alaska’s oil and gas trade association has launched a campaign against a Senate bill that would raise taxes on the industry as a way to help cover the state’s structural deficit.

Senate Bill 114 would reduce tax credits paid to oil companies, thereby increasing their overall tax burden. Private oil companies such as Hilcorp, the operator of Prudhoe Bay, would also be required to pay corporate income taxes. When combined with the tax credit reduction, both proposals are projected to raise $1.3 billion in the first year, up to $783 million by the end of the decade.

There may be enough votes in the Senate to move the 42-page bill forward, likely during next year’s regular legislative session. But the measure faces greater odds of passage in the Republican-led House of Representatives, with key members of the leadership expressing concern about the potential impacts a tax increase could have on industry investment.

Late last month, Republican Gov. Mike Dunleavy discussed with reporters his yet-to-be-seen state sales tax proposal and the need for a long-term tax plan. In response to a question about whether he might support an oil tax increase, Dunleavy said, “Everything is on the table.”

The Senate Finance Committee held several hearings on the oil tax bill last week, but it did not advance to a full Senate vote.

Bill Cline, chief executive of GaffneyCline, the Legislature’s oil and gas consultant, told the committee that the proposed tax increase would likely not reduce Alaska’s existing production, which rose slightly last year to an average of 483,000 barrels per day. There would also be limited impacts on current investments and opportunities, such as the Willow and Pikka oil projects, but there would be some downside risk that a tax change could discourage “substantial new investment” in the future, Cline said.

Anchorage Democratic Sen. Bill Wielechowski, who introduced the bill and has long called for the state to raise more revenue from its resources, said the measure would be a “reasonable” tax increase. He said it was necessary as the state has struggled to pay for essential services amid a worsening fiscal outlook.

The Alaska Oil and Gas Association, a 14-member industry trade group, announced last week its strong and unanimous opposition to all provisions of the Senate bill. The association launched Defend Alaska’s Future, a website and digital ad campaign encouraging lawmakers to reject the proposed tax increase.

“Senate Bill 114 is a massive tax increase that threatens to cripple Alaska’s oil and gas industry, and all Alaskans will feel the impact,” the website says.

Kara Moriarty, president and CEO of AOGA, said the association did not expect an oil tax bill to be introduced this year. The online campaign is the extent of AOGA’s efforts to educate Alaskans about the potential risks to jobs and investment if SB 114 passes, but the campaign could expand if the project of law is moving forward, he said.

Moriarty told the Senate Finance Committee that oil and gas remains “the state’s biggest economic driver” and that the current tax regime is working as intended.

Provisions in SB 114 that would have prevented ConocoPhillips from reducing some of its tax burden to build the massive Willow oil project were removed. A separate measure, Senate Bill 122, which would change the way Internet-based companies are taxed, now includes the same provisions to levy income taxes on private oil producers like Hilcorp.

At a committee hearing Friday, top executives from Alaska’s oil and gas industry spoke strongly against both Senate bills.

Todd Griffith, president of ExxonMobil Alaska, which has stakes in some of the North Slope’s major fields, said a tax increase would cause oil companies to reexamine their investment strategies in Alaska. ConocoPhillips, the oil giant behind the Willow project, made similar statements.

“Make no mistake,” Griffith said in opposition to the Senate bill. “It’s a major change in policy.”

Luke Saugier, senior vice president of Hilcorp Alaska, said increasing taxes could cause the Texas-based producer to reduce investment in the oil patch. It’s unclear how much Hilcorp would pay in corporate income taxes if the Senate proposal passes, but estimates are around $100 million a year.

Hilcorp warned Railbelt utilities months before the Senate oil tax bill was announced that it would not automatically sign new contracts to supply gas after 2027. Saugier said the tax increase would “adversely affect” Cook Inlet gas production and that the company was seeking solutions for the impending gas shortage in south-central Alaska.

“These solutions include significant new capital investments, new commercial agreements, new Cook Inlet platforms, advancing North Slope natural gas options and exploring opportunities to repurpose existing infrastructure for renewable energy,” a Hilcorp spokesperson told through a statement prepared on Friday.

Wielechowski said Alaska is very profitable for oil and gas companies, and he understood why executives are fighting hard against tax increases: They have a fiduciary duty to their shareholders. He said he did not buy arguments that higher taxes would reduce Hilcorp’s investment in Cook Inlet, adding that “they are not producing now, even with all these cuts and tax breaks, they refuse to sign new contracts. “

Proponents of higher oil taxes, such as longtime oil and gas attorney Robin Brena, told the finance committee that the world’s five largest oil companies recently reported record profits. He said giving billions of dollars in tax credits to operators of the state’s mature and most profitable oil fields made no sense when relatively little investment was being made to increase production.

“That’s messing with your money,” Brena told the finance committee. “I’m sorry. I didn’t mean to swear, but it is what it is.”

Brena was one of the main figures behind a 2020 ballot initiative to increase state oil taxes, which was roundly rejected by Alaska voters. Oil industry funding in opposition to the initiative topped a record $25 million.

Much of the finance committee’s discussion of the Senate oil tax bill focused on the state’s current oil and gas tax system, implemented through the bill 21 of the Senate in 2013, and if it provides Alaska with its fair share of its resource revenues.

Since 2013, Alaska’s average annual crude production has fallen from 544,000 barrels a day to 483,000 barrels last year. Alaska’s oil production peaked at 2 million barrels per day in 1988.

Former Gov. Sean Parnell’s administration had a goal in 2012 that Alaska would produce 1 million barrels a day within a decade under a new SB 21 tax system. Dan Stickel, chief economist for the Treasury Department, said to the finance committee that the 1 million barrel target had been aspirational. Industry players, such as Moriarty, said it was a success for oil companies that they have since stabilized declining Alaskan oil production from aging fields.

After several hearings last week, the Senate Finance Committee shelved the bill on Friday. It’s unclear whether he will appear again for a full Senate vote this session; then the measure would advance to the House.

Wasilla GOP spokeswoman Cathy Tilton, echoing other members of the GOP leadership, said at a news conference Friday that she was concerned about the potential Cook Inlet gas shortage and said the growth of the economy of the state should be a priority.

“I think we need to be cautious in our approach to changing or looking at oil taxes,” he said.

The Senate bill likely won’t pass this legislative chamber this year, but the groundwork has been laid for work on it next year, Wielechowski said. He added that some in the Senate would like to pass the measure in the House if lawmakers would commit to debating it in a meaningful way. The governor who supported it would also help, he said, “because it has to go through all the bodies.”