Despite tax increase, oil profits rise

High oil prices may make moot companies' old fears of decreased revenue, investment in Alaska

Posted: Monday, July 21, 2008

Alaska oil companies have seen their profits rise since Alaska imposed a big, and controversial, tax increase last year.

Juneau Empire
Juneau Empire

That's not what either of the companies said would happen while they were opposing the tax, or even something that legislators who imposed the tax thought would happen.

Alaska's Clear and Equitable Share Act was passed by the Legislature last fall at the request of Gov. Sarah Palin, who said the previous Petroleum Profits Tax was "tainted" by corruption. Some legislators are now serving federal prison time for their role in its passage.

The revelation of the increased profits comes in financial disclosures filed with the Securities and Exchange Commission by ConocoPhillips Co. and BP over the last several months and reviewed by the Empire.

Those two of the state's big three oil companies released financial information specific to their Alaska operations.

The state's third big oil producer, Exxon Mobil Corp., does not break out its Alaska operations, but is thought to be at least as profitable as its competitors. Exxon owns the largest share of Prudhoe Bay, the nation's largest oil field.

Oil company representatives did not dispute the Empire's analysis, but declined substantive comment.

The financial reports show that the companies have benefited greatly from soaring oil prices, prices that appear to have outstripped the tax increases for both companies.

"Clearly, oil prices are driving any kind of net income right now," said Natalie Lowman, spokeswoman for ConocoPhillips.

Net income is the profit left after subtracting the cost of production, taxes and other expenses from total revenue.

BP's total revenue from Alaska rose from $6 billion in 2006 to $6.6 billion in 2007.

For BP, that meant profits of nearly $2.5 billion in 2007, up more than a quarter billion dollars from $2.2 billion in 2006. The London-based company did not provide Alaska detail for the first quarter of 2008, but companywide profits and profits for the type of operations they conduct in Alaska both rose dramatically.

ConocoPhillips of Houston saw total revenue in Alaska rise from $6.5 billion in 2006 to $7.1 billion in 2007.

ConocoPhillips' total Alaska profits in 2007 edged down less than $100 million in 2007 to $2.3 billion, but then edged up by more than that in the first quarter of 2008 for a total net gain since the tax increase took place.

The Department of Revenue's Ian Laing, a special assistant to Commissioner Pat Galvin, said he was not surprised the companies were doing well along with the state.

"It's important to realize that ACES was never intended to capture all of that excess profit, but to share in that increase," he said.

Driving the state's increased revenue, while allowing the company profits to remain high is the structure of the new tax. It is a production tax, calculated before profits are figured. That means some of the state's increased production tax revenue comes at the expense of state and federal income taxes, which actually declined for both companies.

At the time the tax was being discusses, oil prices were at then-record levels in the $70-$80 per barrel range. Just recently they've hit new records in the $130-$140 per barrel range.

"The prices now are something that nobody I've been speaking with anticipated," Laing said.

The ACES tax passed by a divided Legislature last fall by a 2-1 vote in both houses, despite opposition from several powerful legislators.

Among the legislative critics' big concerns was that the new taxes would reduce investment in the state, a fear the oil companies tried to instill as well.

Since the passage of the ACES tax, however, investment appears to be up.

In the only 2008 report made public so far, ConocoPhillips said it has spent $191 million in the first quarter of the year in capital spending in Alaska, up from the $158 million spent in the same quarter last year.

Lowman said that despite the increase in one quarter, "oil tax increases will affect how we invest in the future."

BP Alaska spokesman Steve Rinehart said his company's spending in Alaska this year is up, but likely is less than it would have been without the tax increase.

"Our capital budget for this year, about $850 million, is higher than it was in the previous year, and lower than what we had hoped to spend," he said.

"Some work we had planned to do has been deferred," Rinehart said, including a new drilling pad in Prudhoe Bay with more than 50 wells.

With new, higher oil prices, Laing said it is hard to define what is prompting or limiting investment spending.

"Under the current prices we're seeing, and new price forecasts considerably higher than they were, you are seeing investment in both oil and natural gas all over the world," Laing said.

• Contact reporter Pat Forgey at 523-2250 or

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