Oil tax numbers wrong, consultant says

Posted: Sunday, March 05, 2006

Don't believe anybody's numbers - they're all wrong - but consider how the language in a net-profits tax bill could affect North Slope natural gas development, former Oil and Gas Division director Jim Eason said Saturday.

Eason, now a consultant for the Alaska Legislature, presented the Senate Resources and Finance committees with his concerns about Gov. Frank Murkowski's proposal to replace the state's production tax with one based on oil companies' net profits.

After nearly two weeks of presentations and analysis, there is just one certainty, Eason said: The numbers are wrong. Price and production forecasts, geological unknowns and varying cost assumptions make it clear the tax's effects can't be predicted at this point with any accuracy.

"I don't think it's bad the numbers are wrong. I think it's inevitable that the numbers are wrong," Eason said.

Instead of focusing on numbers, Eason cautioned the Legislature about setting up a tax system that looks good now but could leave the state vulnerable when a North Slope gas contract takes effect.

The gas contract between the state and BP PLC, ConocoPhillips and Exxon Mobil Corp. is considered an important step in making the construction of a $25 billion North Slope gas pipeline a reality.

Murkowski and the three producers have agreed in principle to the contract, but the governor has said the net-profits tax bill must be passed first, so that it can be incorporated into the gas contract, before the gas deal is presented to the Legislature for ratification.

But because the gas contract has not been made public, there is no telling how the tax bill may affect it. Particularly important is the point of production - which is where the state's obligations kick in - and whether gas facilities can be built under the new tax system to benefit the oil companies at the expense of the state, Eason said.

"I'm very concerned about the interrelationships and the linkages between what the terms of that (gas) contract may have on the interpretation and the administration of this bill," Eason said. "Without a full understanding of how the parties intend to administer that, as well as an understanding of how the facilities are intended to be designed and built for that, (it) leaves you very vulnerable, and it's an extraordinarily large cost."

Sen. Kim Elton, D-Juneau, asked Eason if that meant the Legislature needed to see the gas deal to get all the facts before passing the net-profits tax bill.

Eason said no, but the Legislature needs to get the information to resolve the issues that they don't know and haven't anticipated - especially if the tax system is going to be locked in for multiple years, as Murkowski has said he will propose.

"It is going to have some connection, at this point unknown and unquantifiable, to consideration for what comes next," Eason said. "What I'm really trying to tell you is that there's some imperfection around that decision making that could be costly for you."

Senate President Ben Stevens, R-Anchorage, said afterward that Eason was raising speculation about a contract that has not been seen. The net-profits tax bill the Legislature is now considering will only deal with oil and Cook Inlet gas, he said.

The North Slope gas question is an issue that will have to be dealt only when a contract is presented to the Legislature.

"Why raise skepticism over an issue that has no effect?" Stevens said.

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