JUNEAU, Alaska - Between bites of vodka salmon at the swankiest hotel in town, Alaska lawmakers got food for thought from oil company executives doing business in the state: Leave oil taxes alone.
Two days later, industry leaders repeated that call at a conference of the Alaska Support Industry Alliance, warning that future investments in the North Slope may be at stake.
"We ask ourselves, is Alaska really and truly open for business?" said Steve Marshall, president of BP Exploration (Alaska) Inc.
The oil industry had been riding high on North Slope crude prices - now at $43 per barrel - and the mood was celebratory, said Alaska Oil and Gas Association Executive Director Judy Brady.
Then an announcement came that yanked the plug out of that jukebox.
Beginning Tuesday, Alaska will change the way production taxes are calculated for six satellite oil fields near Prudhoe Bay, the largest field in the country.
The state Department of Revenue said the satellite fields are operating interdependently with Prudhoe Bay and should be taxed as one unit. The satellites now pay little or no production tax because of a formula called the economic limit factor, or ELF, that was meant to encourage the development of small or marginally profitable fields.
The change imposed by Republican Gov. Frank Murkowski means a tax hike which estimates have placed between $150 million and $190 million per year at current prices for the five oil companies that own the Prudhoe Bay field.
The change sent a shock through the state's oil industry.
"It's seeming to feel less like a celebration and more like a survivor game," Brady said. "We don't want to play a survivor game here. The industry can't afford it."
Supporters of the tax hike, and those who say additional changes are needed, contend the industry is crying wolf and that as long as the companies are pulling oil out of the Alaska tundra at record profits, they're not going anywhere.
At an AOGA luncheon last Tuesday at Juneau's Baranof Hotel, executives from big and small companies told a gathering of Alaska lawmakers and their staff the effects of the change would be entirely negative.
Changing the structure without due process, industry officials contend, will threaten the viability of affected satellite oil fields and could send exploration money elsewhere.
The change may even crimp contract negotiations now under way for Alaska's Holy Grail - a $20 billion gas pipeline from the North Slope.
Executives from the state's top three oil producers - BP, ConocoPhillips and Exxon Mobil - who are directly affected by the tax change aren't the only ones opposed. Smaller companies also are worried that their fields' taxes may bese changed in the future without warning.
"An increase in taxes will mean less investment," said Mark Hanley of Anadarko Petroleum Corp.
Murkowski says he has no plans to rescind his decision, and he is encouraging the Legislature to further examine production taxes and the ELF.
But he appears to be giving the industry some wiggle room, saying Thursday that he would honor earlier agreements preventing some other satellite fields from being aggregated like the Prudhoe Bay satellites.
He also said he would consider appeals for the six affected satellite fields if the companies can prove the tax will make those fields unprofitable.
"I've had this discussion, and I said we'll take a look at anything that is questionable with regard to the application of the law," Murkowski said. "And further, I said specifically we're not going to allow any production to be terminated as a consequence of this tax application."
Robert W. Baird & Co. oil analyst George Gaspar said Alaska has to compete with the rest of the world when it comes to new development, and Murkowski's "tax application" makes the state less attractive.
However, Gaspar said, oil companies have already sunk billions of dollars into the North Slope and want to protect and keep those investments.
Gaspar said he believed the change could affect negotiations for the gas pipeline project, a longtime goal of the state and a project seen as replacing the state's declining oil production in the future.
Oil companies have said in the past the $20 billion project is too risky, but high gas prices have spurred negotiations with the state, and a fiscal contract proposal could be presented to the Legislature this year.
"I think that this tax maneuver creates gas development indigestion. I don't know how else I can say it," Gaspar said.
But, he said, it shouldn't be a deal breaker if an airtight long-term fiscal contract can be negotiated.
"I don't think that any company is going to be willing to step up to the plate on that Alaska gas pipeline deal unless they are absolutely guaranteed certain parameters of cost structure and taxation," he said.
Under the proposed legislation, taxes would increase $1 billion a year on top of Murkowski's boost, under current prices. Democratic Rep. Les Gara said those calculations may be altered considering Murkowski's hike.
Sponsors of the bill say the goal is to make the partnership between the state and the oil companies more equal. As it stands, they contend, Alaska is a junior partner in the deal.
High oil prices highlight the inequity, the contend. When oil is $43 per barrel, oil companies receive nearly 50 percent of the total oil revenue, according to Department of Revenue calculations. Alaska gets 26 percent. The balance goes to the federal government.
Under Murkowski's change, that industry-state split would be about 48-28. Under the proposed legislation, the difference shrinks to 40-39.
Gara said there is no need for Alaska to undersell its oil, and he did not put much stock in the ELF complaints from the oil industry.
"It's a little bit of crying wolf to say, 'We are taking $5 billion of profits and we can't afford for you to ask for a fair share,"' he said.
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