Following the announcement that the Biden administration had approved the Willow project on the North Slope—which is being hailed as the next big era in Alaska’s love affair with oil—the less-than-good-news hit: That under the state’s current oil tax structure, the early years of development could actually end up costing the state money.
Referencing a white paper produced by the Department of Revenue earlier this year, many pointed out the project was expected to cost the state more than $1 billion in its early years because ConocoPhillips can deduct the cost of building out the project against its production taxes in other fields. The project, under that projection, wouldn’t be cash positive to the state until 2040, which isn’t exactly good news for the state’s ongoing shaky financial picture.
Legislators got some good-ish news on Thursday with an updated look from the Department of Revenue, finding the hit in those early years would be closer to $360 million and the project would be cash positive to the state by 2030. So we’re all good and stop wondering if changes to the state’s oil tax regime will be needed?
Not really.
The downward impact is the result of the state’s updated revenue forecast—which projects lower oil prices and, thus, lower oil taxes overall—and a revision to how the state’s minimum tax provision is factored in. Basically put, the combination of how the expenses can be written off and how the lower oil tax prices work mean ConocoPhillips would be expected to settle in on that minimum tax floor… as long as oil prices in the late 2020s and beyond come in on projection (which they don’t).
And that’s not taking into factor other risks with the project coming online.
“There’s significant uncertainty in many of these assumptions, often elevated above historical levels,” Tax Division analyst Owen Stephens told the Senate Finance Committee. “We see uncertainty in project risk and timing. Environmental groups are currently suing to prevent field development. We see uncertainty in costs, inflation, supply chain disruptions, labor disruption and increasing industry activity. We see higher volatility in oil price follow last year’s Russian invasion of Ukraine and the covid-19 pandemic.”
The updated analysis is based on oil sitting at $70 per barrel during that time. With prices up around $90 per barrel, Senate Finance Committee co-Chair Sen. Bert Stedman pointed out during Thursday’s hearing that the initial losses on the project would be back around that $1 billion number in the original projection, if not a little higher.
Stephens said that was a fair reading of the analysis, though he noted that overall the state would still see more revenue under that situation because of the higher oil prices.
Members of the House Finance Committee were similarly wary of the updated report, asking questions about how ConocoPhillips—or any other oil producer for that matter—could use the state’s current tax regime that permits applying expenses from one field against the production taxes of another to pay as little taxes as possible.
The Department of Revenue economists didn’t outline just what steps a producer would need to take to minimize their tax bill but said the absolute worst-case scenario would be if ConocoPhillips made significant investments into Willow but for whatever reason never put the field into production.
Given the Department of Revenue’s rosy revenue forecast from last year not coming to fruition, Rep. Andy Josephson asked how confident the Legislature should be in the analysis and how likely someone would be able to poke holes in the assumptions.
“Our confidence in the numbers is improved,” said Chief Economist Dan Stickel. “I view the analysis that we’re presenting here as new and improved version of the analysis we put out in February.”
Why it matters: While the Willow project is projected to be a net positive for the state’s revenue picture in the long run, the shine has certainly come off a bit as legislators start to grapple with how it may not be such bright news for the state’s treasury in the early years of development. The state is already facing down deficits throughout much of the next decade without factoring in things like additional spending on schools. The good news, though, is that the Willow project is still years away from becoming a reality and the Legislature could make changes to the underlying structure of the state’s oil tax regime, which was last changed in 2013 with the narrowly passed Senate Bill 21.
On that front, the Senate Finance Committee that’s helmed by legislators who were generally opponents or, at best, wary skeptics of Senate Bill 21 has today introduced legislation that would update the state’s oil tax regime. It appears to be largely targeting the provisions in the state’s oil tax structure that would make Willow’s development a hit to state revenue by implementing provisions that would limit where companies could deduct their costs against—known as “ringfencing”—and scale back some of the tax credits in the system.
Stay tuned.
