House approves production tax bill

Investment in oil and gas development would determine rate

Posted: Sunday, August 06, 2006

The Alaska House on Saturday approved a bill that would tax oil companies based on how much they invest in future oil and gas development.

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The measure would tax the profits of oil companies' Alaska operations. The plan is estimated to bring the state an average $2.7 billion in revenue each year for the next 10 years at today's oil prices, according to an analysis by legislative consultants Econ One Research Inc.

In return, the state's largest oil producers would receive nearly $4 billion in tax breaks to develop the North Slope's vast, untapped natural gas fields.

Exxon Mobil Corp., BP PLC and ConocoPhillips are negotiating with the state to build a pipeline to Canada to ship the 35 trillion cubic feet of known natural gas reserves on the North Slope.

The bill passed 30-10. A final vote is scheduled for Sunday. If it passes then, it will go to the Senate. A compromise must pass both chambers before Thursday's close of the special session, or the bill will die.

This is the third time this year the Legislature has attempted to rewrite the state's production tax laws. Each time, the debate has gotten sharper. Saturday was no exception, but Republican majority representatives were resolved that this version had the best chance to pass.

Whereas earlier votes had varied with little regard to party alliances, Republican legislators this time voted as a bloc for the bill.

The exception was Rep. Vic Kohring, R-Wasilla, a staunch oil industry supporter who has consistently voted against raising production taxes.

"I'm disappointed more Republicans didn't vote against it," Kohring said.

Despite the appearance of unity, several Republicans said they had to swallow hard to vote for it.

"I just want to go get our money," said Rep. Jay Ramras, R-Fairbanks.

That appeared to be the sentiment of many who voted for the bill Saturday. One of the bill's authors, Rep. Mike Hawker, R-Anchorage, estimated Alaska was missing out on $7.3 million per day by not passing the tax.

"This argument has cost the state $2 million," he said of Saturday's lengthy debate.

Ramras said he still has reservations about the effects of the bill, and those reservations were reinforced when he saw oil company lobbyists twice go to consult with Gov. Frank Murkowski's administration officials during the floor debate.

"It was putrid. I know what that looks like. I know what I saw," Ramras told his fellow legislators.

Murkowski supports a net-profits tax, and has threatened to veto any other structure that passes.

Under the latest version of the bill, a tax rate would be set for each company between 20 percent and 25 percent of that company's profits in the state. The actual percentage would be based on the level of capital investment each company makes in the state - the more a company invests, the lower its tax rate.

At about $55 per barrel, the tax rate would begin to rise so the state shares more of the oil wealth at high prices.

Setting a tax rate was a main cause of the Legislature's previous failures. This new "produce or pay" is meant to addresses that.

"The high tax people can have some comfort and the low tax people can have some comfort. That was the goal," said Rep. Ralph Samuels, R-Anchorage, the other author of the plan.

Minority Democrats argued that a tax based on profits would cede too much to the oil companies, who would be able to manipulate costs to lower their taxes. The resulting tax revenue will be much less than what is projected, even marginalizing production tax revenue to the state, said Rep. Eric Croft, D-Anchorage.

"Don't you think they're going to adjust their conduct to that?" Croft said of the oil companies.

A tax based on the gross production value of oil would be simpler and easier to verify, several Democrats said. They tried unsuccessfully to change the bill to a gross production tax during the floor debate.

Hawker said the fear of cost manipulation was overstated and the North Slope has "one of the strongest internal auditing environments in existence."

Democrats also tried to block passage of provisions that would partially subsidize development of Alaska's gas fields. The Point Thomson field, in particular, is a source of bitter dispute.

The state has been trying for years to prompt development of the gas field with its 8 trillion cubic feet of reserves.

Last year, the state Division of Oil and Gas threatened to revoke the Point Thomson leases if Exxon Mobil did not come up with a plan to develop the fields. But after a major shakeup in the state Department of Natural Resources, that threat was put on hold while the governor's gas contract and this production tax proposal were being worked out.

Rep. Les Gara, D-Anchorage, said the bill would reward Exxon Mobil for not following the state's order.

"Don't give them tax breaks to do something they are supposed to do," Gara said.

The amendment to take Point Thomson out of the bill failed along party lines, as did the proposed change to a gross production tax. The exception was Rep. Richard Foster of Nome, a Democrat who is a member of the majority caucus and generally votes with Republicans.

A third amendment would have required the three largest oil companies to provide better access to their North Slope facilities to independent explorers. The large companies own the facilities, which has resulted in a high barrier of entry for independent companies, said Rep. Beth Kerttula, D-Juneau.

Samuels said the amendment merits attention, but he voted against it because he said it first needs to be vetted in committee.

Amendments were also rejected that would have made it illegal for oil companies to claim lobbying and advertising costs as tax deductions and would have set a floor on the credits companies can claim.

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