Legislators hear pitch for oil taxes

Areas similar to Alaska which extract oil are getting a much bigger take

Posted: Thursday, January 19, 2006

Countries with progressive production taxes are seeing huge cash influxes at today's sky-high oil prices, and Alaska is missing out by holding on to its antiquated tax system, Gov. Frank Murkowski's top oil consultant told lawmakers Wednesday.

Legislation must be filed this session to change the state's production tax to one based on the net profits of oil companies operating in Alaska, Pedro van Meurs said.

Norway, for example, is comparable to Alaska in its wealth of natural resources, but Norway's take of oil taxes is much higher than Alaska's because of its progressive tax, he said.

"With the present system, wealth is slipping through the fingers of Alaskans, and Norwegians hold on to it. Norwegians are doing something right, and Alaskans are doing something wrong," van Meurs told the House and Senate Resources committees. "The oil prices are now so high and ... it's now become such an enormous loss for Alaska compared to what other nations will collect that are in a similar position."

Alaska's production tax now is determined by a complex formula called the Economic Limit Factor, or ELF, which lowers the rate for smaller and less productive fields.

While ELF was innovative back in 1989, it's antiquated today, van Meurs said. The problem is that the formula also allows larger fields, such as Kuparuk, the nation's second-largest oil field, to escape paying production tax.

"It's ridiculous to have a world-class oil field that doesn't pay production tax," van Meurs said.

The governor is proposing to scrap the ELF and base the tax on the oil companies' gross production revenue from their wellheads, minus their capital and operating expenses, and property taxes.

That means when the price of oil is high, the state's tax income is high. When the price is low, the tax is low.

Plus, the state would offer tax credits under the plan. The tax credits could be traded and transferred between companies, which van Meurs said would translate into increased investment in oil and gas development.

Van Meurs and Revenue Commissioner Bill Corbus said a bill would be introduced soon, and that the Murkowski administration considered passing the changes a critical first step to a deal with three oil companies for fiscal terms for a natural gas pipeline from the North Slope.

The gas negotiations and the production tax have been linked, although van Meurs said the tax change would be a stand-alone bill.

Neither van Meurs, Corbus or Murkowski spokeswoman Becky Hultberg could say when the bill would be filed or who would sponsor it.

Details on the state's specific plan, such as the tax rates, have not been released. That is still being negotiated with the three companies: BP, ConocoPhillips and Exxon Mobil.

"There is no agreement at this point in time between the industry and the state," van Meurs said.

Some lawmakers said they were dissatisfied with the lack of details. They also questioned whether taking public the idea of the oil companies' taxes was a negotiating tactic by Murkowski.

"Obviously the billion dollar question is, what are the rates?" said Sen. Hollis French, D-Anchorage, who along with Rep. Les Gara, D-Anchorage, has filed separate legislation to restructure production taxes. "I couldn't tell whether it's being used as a negotiating tool or whether it's actually being offered as a remedial measure to fix a broken taxation structure. I think that's an open question."

Corbus said the Murkowski administration would still propose the changes even if the gas negotiations were not ongoing.

Oil industry officials have declined to take a position on the proposed tax restructuring. BP spokesman Daren Beaudo would only say that predictability and stability are important components of the negotiations and he would not answer questions about the state's proposal.

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