Restoring oil flow requires huge investment, consultant says

JUNEAU -- Gov. Sean Parnell's goal of once again seeing a million barrels of oil course through the trans-Alaska pipeline each day would require an investment of $7.5 billion a year, the Legislature's oil and gas consultant Pedro van Meurs told two state Senate committees Monday.

And that's unlikely to happen, he acknowledged after his presentation to the Finance and Resource committees.

"That level of investment is not even closely in sight," he said to Sen. Tom Wagoner, a Republican from Kenai.

Wagoner, who co-chairs the Resources Committee, wants to craft a tax bill that would at least encourage North Slope oil production to stabilize at the current level of 600,000 barrels a day, which is down from a peak of 2 million barrels a day.

He wanted to know from van Meurs who needed to invest those billions to reach the governor's goal.

"Industry," van Meurs said.

But oil companies would only pour that kind of money into their North Slope leases if the state cut taxes much more dramatically than anyone is talking about.

"Then it's not their money," he said. It would, in effect, be the state's. And Alaskans would resist giving billions to the oil industry, van Meurs said.

Van Meurs, an international oil economist based in the Bahamas, is working under a contract with the Legislature to advise members on oil and gas issues. His two days with legislators this week is costing $14,200, and a session in December in Anchorage cost $19,500, according to Rep. Mike Hawker's office. Previously, van Meurs was a consultant to Govs. Tony Knowles, a Democrat, and Frank Murkowski, a Republican.

He hasn't advised Parnell.

"The goal of the governor and the reality of Alaska are so far apart," van Meurs said. "Can you reach the million barrels a day? Yes. But you are talking about a totally different Alaska."

Even if the governor's proposal to roll back oil taxes, House Bill 110, passed the Senate, the effect on production wouldn't be what's envisioned by Parnell, van Meurs said. The Revenue Department has estimated the measure would cost the state $8 billion in lost production taxes over five years but officials say some of that would be recovered if there's more oil produced, and therefore more to tax.

Parnell remains committed to his strategy.

"We are not going to give up before we start. We need to get Alaska back in the game. Status quo is not acceptable," his spokeswoman, Sharon Leighow, said in an email.

In his calculations, van Meurs said he was not taking into consideration plans for Arctic offshore development, in particular by Shell. Under current federal law, the state doesn't reap taxes from oil produced miles offshore in federal waters.

It's not clear whether the governor's 1 million-barrel goal includes offshore oil. He hasn't specified, said Revenue Commissioner Bryan Butcher.

Wagoner said the state should lower its sights.

"I don't want to get 1 million barrels," Wagoner said. "I want to get a steady production of 600,000."

"Your point of wanting to do this gradually is well taken," van Meurs replied.

The Parnell administration says oil taxes must be cut in order to ramp up declining production. About 90 percent of the state's general fund budget comes from oil revenue. The governor's bill passed the House last year but stalled in the Senate.

Senators are working on their own version of a new oil tax, using Senate Bill 192 as a starting point.

Van Meurs told the Finance and Resource committees on Monday that Alaska's taxes aren't out of line for conventional, light oil in existing fields.

In Alaska, the total government take of oil revenue -- counting federal, state and local taxes -- is 72 cents out of every dollar in profits, which compares favorably with other Arctic jurisdictions, including Canada and Norway, he said.

The Parnell administration, by contrast, maintains the numbers are out of whack.

"We're still going to be taxing higher than anybody else in North America" if the governor's bill passes, Deputy Revenue Commissioner Bruce Tangeman told the Senate Resources Committee later on Monday.

The current oil-tax regime increases the rate at higher oil prices, so the state gets a bigger share of oil profits when prices are high. But the state also shares in the risk when prices are low, senators noted, because then the tax rate falls.

Where is the system broken? Sen. Bill Wielechowski, D-Anchorage, asked. "At what point is the share no longer fair?"

Department officials didn't know where the line was but said they would do some work on that.

Senators from both parties expressed frustration that the Revenue Department didn't come with more detailed information.

These details matter, said Sen. Joe Paskvan, D-Fairbanks, the co-chair of the Resources Committee. He told Butcher, the commissioner, that the department needs to define the problem.

"So that we get into 'ready, aim, shoot' as opposed to 'ready, shoot, aim,' " Paskvan said.

Van Meurs, through his analysis of tax regimes around the world, is giving senators a couple of starting points.

Alaska tax credits for oil exploration are too generous, he said, but credits for projects to get new oil into production aren't big enough.

He also said the state needs to tax different types of oil differently. The current tax structure is fair for conventional lighter oil at existing fields like Prudhoe Bay, he said.

But the taxes should go down for everything else: new sources of light oil, thick heavy oil, ultra-heavy oil and shale oil.

Parnell's office responded that van Meurs would make the system more complicated.

"Bigger bureaucracy is not the answer," Leighow said.

The joint hearings with van Meurs continue today.

Reach Lisa Demer at ldemer@adn.com or 907-500-7388.