Oil industry cries foul at tax proposal

ConocoPhillips exec.: 'You have destroyed the balance ... in the bill'

Posted: Thursday, March 16, 2006

Alaska's biggest oil companies reacted strongly Wednesday against a tax proposal they see as a shortsighted money grab by state government that may ultimately speed the decline of the North Slope's oil fields.

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The Alaska House Resources Committee's changes to Gov. Frank Murkowski's net-profits production tax bill will hurt the investment needed to slow the decline on the North Slope, industry representatives told the committee Tuesday.

Companies aren't going to want to sink their money in long-term projects under a tax system that takes too much from the industry and scales back the incentives included in the governor's original tax bill, they said.

"You have destroyed the balance previously represented in the bill," said Brian Wenzel, a vice president for ConocoPhillips Alaska Inc. "If we lose confidence in our ability to make big, long-term investments here in Alaska and don't continue to maintain those assets, we will see our production decline, the state will see production decline, the state will see decline in state revenues, and ultimately ... in jobs."

North Slope production in February averaged 846,000 barrels per day, compared to 948,000 barrels per day the year before. The rate of decline could be slowed by developing new fields or new finds in existing fields.

The House Resources version of the bill would keep that tax rate at Murkowski's proposal of 20 percent until West Texas Intermediate, an oil price benchmark, reaches $50 per barrel. After that, the state's tax rate would increase by 0.3 percent for every $1 increase per barrel.

The committee also cut back the governor's proposed transition period, which would have given the industry a $1 billion tax break over the next six years, and reduced a $73 million annual tax-free allowance for every company.

"Almost every proposed change in this (bill) amounts to an increase in take from the industry from the previous proposal," said Angus Walker, commercial vice president of BP Alaska.

Besides ConocoPhillips and BP, officials from Exxon Mobil Corp., Chevron Corp., Anadarko Petroleum Corp., Pioneer Natural Resources and Talisman Energy Inc. all testified Wednesday against the committee's changes.

Committee members were skeptical that by lowering oil companies' taxes, the companies will automatically invest more to develop Alaska's remaining reserves of oil.

Rep. Paul Seaton, R-Homer, said the companies pay little production taxes now under the current system and that hasn't led to investment levels needed to slow the rate of production decline as much as it could.

"You weren't doing those investments," Seaton said. "I'm having a real hard time with ... 'Oh we have lower taxes, we'll invest,' when that's not been the demonstration."

The reason the Legislature is looking for a tax fix is the current system allows most North Slope fields to escape production taxes, with an overall effective production tax rate of about 5 percent.

The governor's proposal - a 20 percent tax rate with a 20 percent credit on investments - would create an effective production tax rate of 12.4 percent, according to legislative consultants.

That is in line with what companies have historically paid in Alaska production taxes before oil production began to decline and skewed the complicated formula used to calculate those taxes.

Among the changes, the oil companies listed first their opposition to the "sliding scale" above $50 per barrel.

Walker said BP had shifted its position from a grudging acceptance of Murkowski's bill to calling for a tax rate below 20 percent.

The only thing that matters for the state is getting more oil in the pipeline and higher taxes won't do that, he said.

House Resources Co-Chairman Jay Ramras, R-Fairbanks, said the $50 threshold for the sliding scale was carefully considered. To not cut the state in for a bigger piece of the profits above that high price is a mistake, he said. At what point does the oil industry want to share the wealth?

"I think industry is making a mistake to stand its ground on this point because I think you will lose the goodwill in this building, and I mean that sincerely," Ramras said.

North Slope crude was at $59.92 on Wednesday. Walker said BP begins to make a profit when the price of oil is $22.50 per barrel. Alaska also has benefited from the high prices, anticipating a $1.4 billion surplus this year. But lawmakers say that the state is not getting its fair share of oil profits when prices are high.

House Resources Co-Chairman Ralph Samuels, R-Anchorage, said some of the comments made sense. One, relayed by Anadarko and Chevron officials, was that natural-gas tax rates should not be pegged to oil tax rates when oil is above $50 per barrel, and the sliding scale kicks in.

If oil prices increase drastically because of a disaster and gas prices are unaffected, it would create a heavy tax burden on gas producers, he said.

Samuels said the committee will hear amendments to the bill on Thursday and move it to the House Finance Committee.

The Senate Resources Committee is considering its own version of the bill, but has not yet released a committee substitute.

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