Alaska oil industry launches campaign against proposed tax increase

JUNEAU — Alaska’s oil and gas trade association has launched a campaign against a Senate bill that would increase taxes on the industry as a way to help fill the state’s structural deficit.

Senate Bill 114 would reduce tax credits available to oil companies, thereby increasing their overall tax burden. Privately held 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 their first year, dropping to $783 million by the end of the decade.

There may be enough votes in the Senate to advance the five-page bill — likely during next year’s regular legislative session. But the measure faces longer odds of passing through the Republican-led House of Representatives, with key members of leadership expressing concerns about the potential impacts a tax increase could have on industry investment.

Late last month, Republican Gov. Mike Dunleavy discussed with reporters his still-unseen state sales tax proposal and the need for a long-term fiscal plan. In response to a question about whether he could 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 for a full Senate vote.

Bill Cline, executive director 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 increased 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 investments” in the future, Cline said.

Anchorage Democratic Sen. Bill Wielechowski, who introduced the bill and has long called for the state to collect more revenue from its resources, said that the measure would be a “reasonable” tax increase. He said that was needed 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 its staunch and unanimous opposition last week to all the provisions in the Senate’s bill. The association launched Defend Alaska’s Future, a website and digital ad campaign that encourages legislators to reject the proposed tax hike.

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

Kara Moriarty, president and CEO of AOGA, said the association had not expected 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 be expanded if the bill advances, she said.

Moriarty told the Senate Finance Committee that oil and gas remains “the single most important economic engine in the state,” and that the current tax regime is working as intended.

Provisions were withdrawn from SB 114 that would have prevented ConocoPhillips from reducing some of its tax burden from constructing the massive Willow oil project. A separate measure — Senate Bill 122 — which would change how internet-based businesses are taxed, now includes the same provisions to levy income taxes on privately held oil producers like Hilcorp.

In a Friday committee hearing, senior executives from Alaska’s oil and gas industry spoke forcefully against the Senate’s two 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’s bill. “It is a significant change in policy.”

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

Hilcorp warned Railbelt utilities months before the Senate’s oil tax bill was announced that it would not automatically sign new contracts to provide gas after 2027. Saugier said the tax increase would “negatively impact” Cook Inlet gas production and that the company was looking at solutions for Southcentral Alaska’s looming gas shortage.

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

Wielechowski said that Alaska is hugely profitable for oil and gas companies, and he understood why executives fight hard against tax increases — they have a fiduciary obligation to their shareholders. He said he didn’t buy the arguments that higher taxes would curtail Hilcorp’s investment in Cook Inlet, adding that “they’re not producing now, even with all these tax cuts and tax breaks, they’re refusing to enter into new contracts.”

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

“That’s pissing your money away,” Brena said to the finance committee. “I’m sorry. I didn’t mean to swear, but that’s what it is.”

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

Much of the finance committee’s discussions on the Senate’s oil tax bill centered on the state’s current oil and gas tax system — implemented through Senate Bill 21 in 2013 — and whether it provides Alaska with its fair share of revenue from its resources.

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

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

After several hearings last week, the Senate Finance Committee put the bill to one side Friday. It’s unclear whether it will reappear for a vote by the full Senate this session — the measure would then advance to the House.

Wasilla Republican Speaker Cathy Tilton — echoing other members of Republican leadership — said in a media session Friday that she was concerned about the potential shortage of Cook Inlet gas and said that growing the state’s economy should be a priority.

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

The Senate’s bill will likely not pass that legislative chamber this year, but the groundwork has been done to work advance it next year, Wielechowski said. He added that some in the Senate would want to pass the measure on to the House if lawmakers there pledged to debate it in a meaningful way. The governor coming out in support would also help, he said, “because it’s gotta get through all bodies.”