Outside editorial: Murkowski's oil tax appropriate

Posted: Tuesday, February 01, 2005

This editorial appeared in Sunday's Anchorage Daily News:

Frank Murkowski and Ken Thompson are good character witnesses for the $150 million-a-year tax hike the governor recently ordered on Prudhoe Bay satellite fields. Neither has previously been accused of a punitive attitude toward the state's biggest industry.

The governor has been conspicuously friendly to the oil industry throughout his career. He has made oil and gas development the biggest piece - as it must be - of his resource development vision of Alaska's future. He has pushed through tax credits and regulatory streamlining for the industry. He's looking into a costly state road on the North Slope that would open new territory for exploration.

If Gov. Murkowski believes the industry should pony up on the Prudhoe Bay satellite fields, it's certainly not because he's antagonistic.

Mr. Thompson is an even friendlier witness. As president of Arco Alaska in the 1990s - precursor to Conoco Phillips, now the biggest oil producer in Alaska - Mr. Thompson worked these battles from the other side of the fence. Now he acknowledges that when he first arrived in Alaska, he was shocked to find some profitable fields paid no production taxes at all.

An argument has been brewing in Juneau for years about whether the Economic Limit Factor is still operating as intended. The ELF was rewritten in 1989 for two reasons: 1. to protect the tax take from the highly profitable Prudhoe Bay and Kuparuk fields, and 2. to give the industry a production tax break on more marginal fields - to encourage drilling and development in cases where it might not be affordable otherwise.

But with prices at historic highs over the past year, legislative Democrats are increasingly restive over whether the state is still getting its fair share. Some have pressed for a wholesale review of ELF and the state tax structure.

A more "progressive" system makes sense for everybody. That means the state and the industry should share both the riches when prices are high and the shortfalls when prices are low. The governor's decision on Prudhoe Bay satellites, made on his own regulatory authority, accomplishes some of that. By both his and the industry's calculations, it would bring about $150 million a year in new state revenue. And the change would treat Prudhoe Bay and its satellites the same way for tax purposes as the industry treats it for development purposes - as one large field.

The move is right on policy grounds: That revenue properly belongs to Alaskans, not the producers' shareholders.

The governor got a chilly reception from an industry conference Thursday, and the industry has rattled sabers about withdrawing planned investment in Alaska. It's unlikely, however, that the industry will act irrationally. More likely it will act, as it should, in its own best interests: If there's a decent profit to be made in Alaska, the producers will pursue it. If the major producers like BP, Conoco Phillips and Exxon have better opportunities elsewhere, then the way should be cleared for smaller independents and wildcatters to make a play. And if a proper tax take from highly profitable fields is the marginal difference that precludes new investment, then the ELF obviously is not working because the industry expects subsidies it shouldn't have.

Mr. Thompson understands all this very well. Of the governor's decision to combine Prudhoe Bay and its satellite fields for tax purposes, he said, "The governor looked out for the Alaskan shareholders, just like the companies have to look out for their shareholders."

That's been every governor's obligation since statehood. Gov. Murkowski very likely caught the industry by surprise and may need to work further diplomacy to build or maintain relationships. But he deserves support for upholding Alaska's interests. That's his job.

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