Everyone likes a good tax break, and Alaska’s governor is courting the oil and gas, timber and mining industries with a legislative proposal designed to make the state as attractive as North Dakota.
On 29 January, Alaska Governor Sean Parnell proposed tax cuts at a legislative hearing.
So would tax breaks be enough to turn Alaska into North Dakota—to ensure an Alaskan Bakken?
Alaska’s economy is in trouble and oil and gas production are declining and explorers and developers complaining of too much red tape and prohibitive taxes.
According to the Senator in a commentary published in Alaskan media, “The volume of oil transported through the Trans-Alaska Pipeline System (TAPS) has steadily declined over the past few decades. Whereas 2,100,000 barrels per day were being transported in 1988, fiscal year 2012 saw a mere 579,100 bpd. That's a 71-percent decrease. Moreover, that volume is expected to further reduce to 552,800 and 538,400 in fiscal years 2013 and 2014, respectively. If current policies remain in place, the Department of Revenue expects the decline in oil production to continue at a rate of 5.5 percent per year through the next decade.”
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At the same time, Alaska's revenue commissioner has said there he has seen no evidence that existing tax credits to oil companies have led to increased production. However, he told the Associated Press that while he hasn’t seen such evidence that does not mean it doesn’t exist. Still, a direct connection has not been made.
Alaska used to be the darling of American oil production, but now even North Dakota has surpassed it. One problem is that companies have not been very interested in exploring for conventional crude oil reserves, with the focus more on unconventional shale. And while tax credits have helped somewhat to attract more exploration, it has only gone so far and legislators have yet to come up with a plan that would really focus on boosting oil production.
And this is where the proposed change to the tax rate comes in. If we can judge by the response of the industry to these proposals—they are making a very public show of support for the Senator’s efforts—then a tax rate that is more competitive could be the engine that helps ramp up production.
Related article: Alaska: Gas Rich, but No Longer Relevant
Alaska has fallen on hard times overall, especially since the natural gas boom has rendered its bountiful reserves less relevant. The state is hoping to cash in on US gas exports. It needs a new market for its gas—for which it is first and foremost eyeing Japan—but for now this issue remains controversial.
For now, export licenses are considered separately by the Department of Energy, which determines on a case-by-case basis whether it is in the country’s interest. The oil industry is out in full force lobbying for unlimited gas exports, while other industries, like chemical manufacturers, want to keep gas supplies at home to boost manufacturing.
Natural gas exports, though, would require massive investment in infrastructure, and this ties back to Alaska’s investment climate: the state’s tax environment isn’t attractive enough to lure the necessary infrastructure investment.
By. Charles Kennedy of Oilprice.com