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New proposal would fix oil tax at 22.5%

Senate Finance version raises credit rate from 20 percent to 25 percent

Posted: Thursday, April 20, 2006

The Alaska Senate Finance Committee on Wednesday introduced a new oil and gas tax proposal that is more favorable to energy companies than earlier versions.

The new tax would replace the current production tax and with one based on oil companies' profits. That means higher taxes on industry when the price of oil is high.

The Senate Finance version of the bill would lower the proposed tax rate on profits to 22.5 percent, down from the 25 percent tax rate that was part of the Senate Resources Committee bill.

Plus, the new bill would raise the tax credit from 20 percent to 25 percent of the capital investments a company makes in a year. The 20 percent credit rate had been included in all versions of the bill - the Senate, House and Gov. Frank Murkowski's original bill.

The new bill would lessen the effects of a tax rate escalator that would kick in when oil reaches a certain price. The Senate Resources bill had the tax rate rise by .02 percent for every $1 per barrel increase over $40 per barrel at Alaska North Slope West Coast price.

ANS West Coast closed at $70.37 on Wednesday.

That escalator, or surtax, is now halved at .01 percent per dollar increase in the new version. It would kick in at $45 per barrel at the Alaska North Slope wellhead price, instead of ANS West Coast. The wellhead price is usually $7 or $8 lower than the ANS West Coast price.

Question of the Day:Do you agree with the latest plan to lower the proposed tax rate on oil companies' profits from 25 to 22.5 percent?Respond at JuneauBlogger.com/VOXBOX here...

In the new version, the surtax also takes effect only after costs are accounted for. For example, if it costs a company $12 to produce a barrel of oil, the surtax would not be effective until the wellhead price rose above $57 per barrel.

Another change the Senate Finance Committee version made in its version is to the tax on natural gas. That tax would be one-third the gross value at the point the gas is produced. So for every $3 in gas revenue, only $1 would be taxed at the 22.5 percent rate, creating a 7.5 percent tax rate on gas.

The gas provision would only affect Cook Inlet gas for now. Tax and royalty terms for developing the 35 trillion cubic feet of North Slope gas reserves are being laid out in a separate deal being negotiated with the state's largest producers, a deal that is being held until this tax bill is passed.

Dan Dickinson, a former state tax director and now a consultant for Murkowski, said even if the natural-gas tax rate in the bill proves to be a better deal than what is being negotiated on the North Slope, he doesn't believe it will affect negotiations over North Slope gas contract - and the $25 billion natural-gas pipeline it is supposed to lead to.

"You can draw your own conclusion about whether or not it's more attractive, but I don't think anyone is interested in tearing this whole contract apart just because one piece might change," Dickinson said.

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Murkowski and BP PLC, ConocoPhillips and Exxon Mobil Corp. say the oil-tax bill is a precursor to releasing the contract proposal on fiscal terms to build the natural-gas pipeline from the North Slope to Canada.

Dickinson estimated the Senate Finance version of the tax would bring more than $1 billion to the state in additional tax money at today's oil prices. But he said he needs to study the details to find out whether it would work.

"It makes it more committed to the investment principles the governor has put forward. On the other hand there are some areas of concern," Dickinson said. "A 25 percent investment credit is a very high credit. It could mean higher volatility."

Senate Finance Co-Chairwoman Lyda Green, R-Wasilla, said the new version "gets us to a middle ground" that is in the state's best interests and keeps the industry producing and investing.

But the sponsor of the earlier version, Senate Resources Chairman Tom Wagoner, R-Kenai, said he wants to look closely at some of the changes that seem to favor the oil industry, including the decreases to the tax rate and particularly the changes to the escalator tax.

"We've got to look at that. That's pretty important and it sounds to me like it's pretty damn low," Wagoner said.

The industry had favored the governor's original proposal, a 20 percent tax with a 20 percent credit on capital expenditures. But oil companies had lined up to complain that the new version the Senate Resources Committee had come up with was unacceptably tilted against the industry.

They warned that the effect would have been to strangle investment in Alaska and increase the rate of oil production decline, a warning which numerous legislators say has no basis given the profits the industry is taking in.

Senate Finance Co-Chairman Gary Wilken, R-Fairbanks, requested the Legislature's petroleum consultants be given an opportunity to analyze the differences between the bills.

"I certainly want to see the government share and the industry share," Wilken said.

Green said time is short to consider the bill. She planned to hear amendments by Thursday and possibly move the bill by Friday. Next week, the committee is scheduled to consider next year's capital budget.

The House Finance Committee is considering its own version of the oil-tax bill.



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