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If 35% Flat Tax Is Repealed, Higher Production Taxes Could Again Slow Oil and Gas Development

On August 19, Alaskan citizens will vote on a ballot that determines the taxing fate of the oil and gas production companies working in the state. The vote will happen at the same time as the primary elections.

Last year, the Alaskan Senate passed Governor Sean Parnell’s Bill 21, which took effect on January 1, 2014, and thus replaced Alaska’s Clear and Equitable Share (ACES), a progressive state production tax created by former Governor Sarah Palin became continuously more harmful to the oil and gas industry before House and Senate committees passed Parnell’s bill. Petrol Global News said that the “tax started at 25 percent and rose to as much as 75 percent as oil prices increased.”

The Alaska Journal reported that, thanks to ACES, “Doyon Drilling, one of the state’s major drilling contractors, saw two of its rigs laid off. Drilling activity dropped from 10 rigs working in 2006 to 8 in 2007 and to 6 in 2010. …As the drilling slowed, the decline in production continued at a long-term average of 6 percent per year.”

The current tax law that went into effect with Senate Bill 21, also known as the More Alaska Production Act (MAPA), replaced the old system with a flat 35% tax. If MAPA is repealed, Alaska will revert back to Palin’s 2007-enacted tax system. Reuters said that upholding MAPA could be “worth as much as $1 billion annually to North Slope producers like Conoco Phillips (ticker: COP), BP Plc (ticker: BP) and ExxonMobil Corp. (TICKER: xom), depending on oil prices.”

According to the Alaska Journal, besides the production tax that MAPA has changed, there are two other ways Alaska taxes the oil and gas industry: property tax on pipelines and facilities (the only state property tax), and a special state corporate income tax. The question of how much to tax the oil and gas industry is vital to Alaska, since 90% of the government’s funds come from said taxes. Thanks to the glut of industry taxes, Alaska has no income or sales tax. MAPA’s flat tax rate worries citizens that extra taxes on Alaskan residents will be enacted to make up for the losses.

MAPA supporters say it encourages investment and new projects, and is indicative of activity in the past eight months alone. On July 29, Bob Dudley, BP’s Group Chief Executive, said that thanks to MAPA, “We’re investing more and speeding up some of the work that we have been doing in Prudhoe Bay.” Supporters like Dan Anderson, interviewed by NPR, argue, “My economy is based on me having a job. And in Alaska, more jobs come out of oil than almost anything.”

Repeal supporters say MAPA is a “giveaway,” and that companies will take advantage of lower taxes to invest the profits in other states or countries. Alaska is an “owner” state by their constitution, and thus citizens are protective of their collective resources, as can be seen in Denise Roselle’s interview with NPR. Reuters also said MAPA critics fear Alaska’s forecasts, which “call for a drop from 536,000 barrels per day in fiscal year 2014 to 321,000 per day in fiscal year 2023,” invalidates any hopes of gaining more production, and thus the industry should be taxed while it still exists.

Kara Moriarty, who directs the industry organization Alaska Oil and Gas Association and assists in the campaign to support MAPA, describes the tax break as a trade-off, where there might be less state revenue per barrel but potentially more oil to tax. “Some think, you know, it’s a declining field, and there’s no way we’re ever going to get any more out of the ground, so we should have a high tax policy so to take what we can get before it’s all gone,” she said. “Well, that’s just not accurate.”

“We believe it’s important for continued oil and gas development in Alaska, where we have identified and are actively developing opportunities for growth,” Conoco’s Matt Fox, executive vice president for exploration and production, told analysts on July 31.

Exxon, BP and Conoco have put more than $10 million toward defeating the referendum. Those who want to raise taxes on oil companies are being outspent 40 to 1.

According to NPR, anti-MAPA Coordinator Nick Moe sees his camp as the underdog. “If we can pull off an upset here and win, we can show that there’s people power over money in politics.” He says if oil companies pay lower taxes, services could be cut or citizens might have to make up the gap.

Lawmakers also won’t go quietly. Some have said that if MAPA is repealed, they will enact another bill in its place.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.