While she became a champion for lower taxes and “Drill baby, drill!” during her tenure in Alaska, Sarah Palin actually managed to raise taxes on the energy industry. The so-called Palin Levy — while great for residents of the state — wasn’t too kind for those E&P firms wanting to drill in Alaska’s rich energy market.
The severity of the progressive tax managed to stifle drilling and production in the state, and Alaska has actually fallen behind.
However, after months of fighting, the Alaskan state government has put forth a bill that remove the Palin Levy and move the royalty fees towards a more “fair” system. For energy stocks and investors, that’s a huge win.
An Alaska Flat Tax
The problem with Sarah Palin’s energy taxes in Alaska was that scheme of rising levies that would increase when the price of oil would surge. Initially, the tax was set at 25%. However, as oil prices have risen, that tax rose to as much as 75% per barrel. The original idea was that the extra revenue would be used to grow Alaskan jobs and shore up the state’s permanent fund.
The tax scheme worked well as oil royalties made up nearly 92% of Alaska’s unrestricted general fund revenue in 2013. Unfortunately, if you’re an energy driller, that high 75% royalty rate isn’t so good.
As with most of the country, all the easy oil in Alaska has been found. That means the opportunities in the state are of the unconventional kind — i.e. very expensive to tap. With such a huge tax on production, many of these unconventional opportunities are just too expensive and unprofitable for most energy stocks to undertake. As such, CAPEX spending by the energy firms in Alaska has only measured around $2 billion annually since the tax was first created.
The lack of spending on new drilling opportunities has caused Alaska to quickly fall behind other states in terms of energy production. Alaska now sits behind Texas, North Dakota and even California in terms of daily oil output.
In order to combat this shrinking and stagnating production, current Governor Sean Parnell signed into law a new royalty scheme that will cap the tax that E&P firms pay to just 35%. By removing the tax, analysts estimate that Alaska’s production will rise by more than 90,000 barrels per day — not including expansion of existing fields — for the next few years before taking off as new aggressive projects take shape.
Some of those projects are already beginning to take shape, as Alaska has exports of both oil and liquefied natural gas (LNG) on its mind. So, which energy stocks are poised to profit on this news?
Three Winners In Alaska
With nearly 3.82 billion barrels of oil — the nation’s second-largest reserves — trapped in Alaska, the removal of the Palin Levy could be big win for a variety of energy stocks. While it could attract some smaller players like EOG Resources (EOG), many of the biggest winners are already in place in the state.
For starters, take beleaguered BP (BP).