Pikka oil project will provide no state production tax revenue until 2034
Anyone looking for a small example of why Alaska’s oil tax system needs repair can find it in the latest state analysis of the Pikka oil project, set to begin producing up to 80,000 barrels of oil a day in 2026. It won’t begin producing state production tax revenue until 2034.
The Anchorage Daily News had this detailed account about how Pikka is expected to generate about $200 million a year for the state, mainly from royalty oil.
Most of the $200 million is to come from the sale of state-owned royalty oil, which exists because the discovery was made on state land by industry maverick Bill Armstrong. There are also private leases on land owned by the Arctic Slope Regional Corporation. The state and ASRC will get paid for the value of 17 percent of the oil from the project.
There is a state oil production tax that comes into play, but that is structured in such a way that it will provide no revenue to the state from Pikka oil production until 2034.
The production tax will be cut to zero over the first eight years of production because of various tax deductions on the $3.1 billion project.
All of the oil companies will say that this is the wrong time to talk about raising oil taxes. Five years ago the oil industry spent $25 million to fight an oil tax ballot measure, with its “One Alaska” group claiming that defeating the ballot measure was a way to “save jobs and the PFD.”
Defeating the ballot measure did not save the PFD. And it is always the wrong time to talk about raising oil taxes, the companies always say, because any tax increase, even a small one, will always be fatal to future prospects.
Under our system, “All costs incurred before production begins lead to reduced future state tax revenue, since losses can be carried forward and deducted against production tax accrued after production start-up,” the state analysis of Pikka says.
The companies will deduct the amount they have spent and will spend on developing the oil field. They will deduct carried forward annual losses and other tax credits.
Here is the full report. Check the text on page 8 for more on the “complex interaction” of the various elements of our system, which is based on net profits, not on gross oil production.
There are other forms of oil taxation, such as a property tax and a corporate income tax, but an oil production tax that is zero until the oil field begins to decline in 2034 is not in the state’s best interest.
The lack of a simple gross production tax is the biggest flaw in our excessively complicated tax system, the SB 21 package that former Gov. Sean Parnell said was so simple.
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