May 01, 2006
Monday

Ketchikan, Alaska - Representative Ralph Samuels (R) of Anchorage began his presentation to the Greater Ketchikan Chamber of Commerce last Wednesday by reading Article 8 of the State Constitution stating "It is the policy of the State to encourage the settlement of its land and the development of its resources by making them available for maximum use consistent with the public interest".

Rep. Ralph Samuels Photo by Marie L. Monyak

Co-Chair of the House Resources Committee, Samuels thanked the Chamber for the opportunity to speak and attempt to make some sense of the current Petroleum Production Tax (PPT) Bill currently under consideration. "I'm going to give you some of the policy calls that the legislature is grappling with right now," Samuels said. "You've been inundated with the ads on radio, and the newspaper just like everybody else has. I think it's very important to get away from some of the rhetoric and try to get to some of the choices."

"The Governors proposal says that we're going to take some risks at the low end and we're going to take some rewards at the high end," Samuels stated. He explained that as we try to maximize the revenues from our natural resources we have a trade off to make. "You can raise the tax rate as high as you want, they [oil companies] can't leave, they've got too much infrastructure here. Production is going to drop off.the pipeline isn't going to get built up anymore, so do you take the money now and run? Or do you encourage more [production], incentivise well production and use that pipeline for the long run?"

Samuels explained this basic choice and its relationship to the maximum use provision of the constitution. He then quoted Daniel Johnston, en economist he had heard on the radio that said with all the exploration we have on the North Slope and with the three major players we have, nobody is coming to our state, knocking on our door saying I want to drill in Alaska, I want to find oil and I want to ship it. It's that same philosophy that caused the Governor to create the second part of his proposal which was to have a tax credit that looked to the future by encouraging more exploration by offering a tax break.

Samuels gave a perfect example of how the tax credit would work when he said, "If you find oil, we're going to tax you but if you look for oil, you get a tax break. If you spend 10 million dollars to drill for oil, we're going to pay 2 million dollars and if you don't find oil, you can sell that 2 million credit to someone that's already producing." This was just the basic concept behind the tax credit as Samuels explained it, then he put a question to the audience, "How do you balance the short term? You can get money right nowit's $70 a barrel right now, or you can try to balance that out by looking to put more oil in the pipeline, so how are you going to grapple with the long term?"

In speaking about the long term, Samuels reminding the audience of 1986, when the price of a barrel of oil dropped to $9 [barrel], Samuels said, "One in twelve homes in this state was in foreclosure, the state cut 600 million in spending and on and on." Trying to find just the right balance between the short and long term could prevent that same economic catastrophe from reoccurring. No one expects the price of oil to remain at its current rate for long.

Samuels next described the two options the state currently has as a means of receiving royalties from the oil companies. The companies can take the state's portion of the oil and sell it or do as they wish with it and send a check to the state, currently 12 12 % according to Samuels. The state's other option is to take the oil in kind and sell it to a refinery such as Flint Hills in Fairbanks, thereby creating an industry and jobs. The state may switch between these two options every 60 days. Samuels stated, "That's the way we currently do it and we're not changing anything with royalties. It still comes off the top."

Explaining the oil industries costs was next on Samuels's agenda. In the Governor's proposal, he said that the oil industry had spent about a billion dollars a year that led directly to increased amounts of oil which we, the State of Alaska, are now going to tax at a higher rate. The Governor felt this was unfair and provided a way for the industry to recoup some of these costs from the past 5 years by setting up a system that would allow the companies to recover their costs over a 6 year period only if the price of oil remained high. Further explaining the Governor's plan Samuels stated, "What the Governor proposed and the legislature did not change, the fundamental part of this entire deal; before we tax youwe are going to make sure you are whole. If you want to come and spend money in Alaska, we are going to make sure you recoup your money before we take a percentage of it and currently we do not do that."

Knowing exactly what these costs are and trusting the oil companies to report them correctly is a huge concern of the legislators according to Samuels. "We are dealing with the most sophisticated companies in the history of this planet. The state has to come up with a system of auditing these companies to make absolutely sure the costs are what they say they are," Samuels flatly stated. "Those three companies [ConocoPhillips, BP and Exxon] don't trust each other any more than they trust me or I trust them. I think the dynamics at the largest field plays well for us and I think we can keep up." Samuels stressed that he felt the state needs to spend more money on auditors to ensure that "these guys aren't gaming us on their costs."

"We all win if everybody makes money. A provision in the original bill said that the first 73 million dollars that a company makes is a tax holiday, there's no tax on the first 73 million. Now why would we do that," Samuels asked. He reminded everyone of the economist that he quoted earlier; there are no explorers in Alaska. "There's a lot of controversy about that in the legislature. People want the small companies. We want them coming up here spending money and if they hit oil, that's ok with us!"

What the public has been hearing about most is the tax rate itself. The Governor proposed 20% and on Tuesday the Senate came back at 22 12 % even after the consultants recommended 25%. Samuels said there's no right answer, "its crystal ball time. Years from now, 20% could be too high or 25% could be too low. What the Resources Committee did was introduce progressivity, similar to a federal income tax, the more you make, the more you pay, it's just common sense that the more you make the higher the percentage you pay." Samuels continued, "What we said is we'll stick with the Governor's number at 20% until oil is above $50 a barrel. When it gets to $60 a barrel, we would be at 22 12%, at a little over $70, we'd be at 25% and up and up."

"Someone questioned the [Governor's proposal] 20% tax rate and 20% tax credit, saying why bother, it's a wash. That's why I started reaching out to the communities to explain this. Just because the numbers are the same, it doesn't really matter, it doesn't work that way," Samuels said. Remembering that there are no more large pools of oil left, small explorers and wildcatters need to be encouraged and the tax credit does just that.

The transitional monies are the past costs incurred by the industry that led to the current production. In a last minute surprise move, the Resources Committee eliminated it entirely. Samuels stated, "I was the Chairman and I was as surprised as anybody else." The Senate made their own revisions providing for the industry to recoup their past costs only if they continue to spend money in Alaska. "I think the Senates idea, in some form, is going to prevail. That if you spend $2, you're going to recoup $1 [of the past costs]."

Total government take is defined as the percentage of all the government taxes combined and currently that percentage is 52. According to Samuels the Governor's bill is 57%. The House Resources Committee's plan calls for the same as the Governors' plan when oil is at $50 a barrel, but escalates to 60% when oil increases to $60 a barrel.

Samuels posed an interesting question to the audience, "Global average for total government take is 65%, so why wouldn't we shoot for 65%? We don't have the exploration here, transportation costs are out of sight, you have to pay the Trans-Alaska Pipeline. So the cost for new players in Alaska is very high, that's the reason why when you look at the total government take statistics, you don't look at it in a vacuum."

One thing both the Governor or legislators can not change and that's the amount of oil left in the North Slope. One factor that Samuels brought up is worthy of very careful consideration by the House Finance Committee. Samuels stated, "We don't have any Prudhoe Bay's left here. The geologists have determined that. BP and Exxon look for home runs, they have huge companies with huge expenses and they want large pools of oil and they're willing to go to Norway and spend a lot of money at a high tax rate because they want to hit another Prudhoe." Samuels suggested, "So what we need to do is incentivise some of the smaller companies that don't have Exxon's overhead to feed. If you're willing to look for a 400 million barrel field, we'll incentivise you to look for a 200 million barrel field. All of those factors come in to play when you start talking about the effective severance tax rate and the total government take." Samuels felt that it bore repeating from earlier when he once again said, "You cannot look at any of this in a vacuum."

Explaining the process involved in passing the Petroleum Production Tax Bill, Samuels said, "The House Resources [Committee] is done, the Senate is done, it will now move. The House Finance [Committee] will take the Senate bill, put some language in there, the Chairman will put some language in there, it will go over to the House floor and then over to the Senate to see if they concur."

Samuels said in closing, "I think it's very important that communities learn what the issues are, whether you agree or disagree with what the legislature has done. At the end of the day you have to understand the choices and why the Governor made the choices he did when he put the bill together and why we change things both politically and economically." It all comes down to the bottom line that Samuels stated very simply, "A lot of politics are involved in trying to help the little guy without leaving money on the table with the big guys."

At noon Wednesday, May 3rd, the Greater Ketchikan Chamber of Commerce is holding a special luncheon on board the Inter-Island Ferry M/V Stikine. The invited guest speaker will be Tom Briggs, General Manager of the IFA. The M/V Stikine will be at the IFA terminal located at 3501 Tongass Avenue. Lunch will be catered by Dockside Café of Craig and RSVP is requested by calling the Chamber office by May 1st, 225-3184.





On the Web:

Representative Ralph Samuels web page
http://w3.legis.state.ak.us/house/24/SAL.php

Constitution of the State of Alaska
http://ltgov.state.ak.us/constitution.php

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