Gov. Frank H. Murkowski's announcement of the Department of Revenue decision to apply the Economic Limit Factor (ELF) in a way which recognizes the actual changes in operation and administration of six fields satellite to the Prudhoe Bay field has put the spotlight on a portion of our tax laws that is much talked about and little understood.
The purpose of the ELF was to encourage companies to continue to operate low oil wells in situations in which, absent this incentive, they would be shut down or perhaps never drilled because of the well's economics.
Because it is this administration's goal to get Alaska oil to market, we support the intended purpose of ELF to enable companies to produce sufficient oil to recover costs from an individual well before taxes are paid to the state on the remaining oil. ELF policy is to make certain that taxes are never a reason to shut down a well.
However, ELF was never intended to provide tax breaks to profitable wells. This decision does not change ELF; just its application to six fields near Prudhoe Bay that now are being operated as one.
Borealis, Midnight Sun, Orion, Polaris, Point McIntyre and Aurora are not remote satellite fields. They are integrated into the Prudhoe Bay Production facilities and are collectively managed and viewed by the oil companies as a single robust field. Gov. Murkowski's approval of the Department of Revenue decision simply mirrors how the oil companies are treating these fields - as a single production unit. Other fields such as Kuparuk and Alpine are not affected by this decision.
It has been 15 years since ELF was last modified. Reflecting his concerns the governor directed a review of how ELF was operating under existing statutes. Gov. Murkowski met with the producers in November to ask that they negotiate changes in the application of ELF. Their trade organization, Alaska Oil and Gas Association, responded in a letter dated Dec. 16, 2004, that there should be no change. In light of this, he determined that this administrative change was appropriate.
The governor has a responsibility to the Alaskan people to ensure Alaska is paid its fair share of resources that are extracted. The producers are not without recourse. The governor has offered several times that the department would correct any errors in the action the administration has taken. Moreover, there is also a formal administrative appeals process for those who do not agree with the decision.
No one likes increased taxes. We estimate for fiscal year 2006 the change in tax payments on each field as follows: Midnight Sun, $3.9 million; Aurora, $13.6 million; Borealis, $32.4 million; Polaris, $4.8 million; Orion, $12.5 million; Prudhoe Bay, $39.4 million; Point McIntyre, $40.8 million, for a total of $150.1 million.
So you will hear complaints. However, at current prices there is absolutely no excuse for shutting down a well based on our action. The first satellite field, Point McIntyre, began operating in fiscal year 1994, when oil was $14 per barrel. Oil is currently more than $40 per barrel. Alaska is a competitive investment target. The recent decision to update ELF does not change that. The governor did the right thing.
Steve Porter is the deputy commissioner for the Alaska State Department of Revenue.
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