Road bill provision to cost state $50M

Stipulation by Sens. Stevens, Murkowski decreases potential gain in oil dispute

Posted: Tuesday, August 09, 2005

The state will miss out on approximately $50 million in back oil royalties and taxes because of a provision put in the recently passed federal highway bill by U.S. Sens. Ted Stevens and Lisa Murkowski.

The provision sets a limit on back payments in a long dispute between oil producers and state refineries on the value of the oil put into and taken out of the Trans-Alaska Pipeline System.

It's in response to an administrative law judge's decision last year to change how the Trans-Alaska Pipeline System Quality Bank values the different types of oil that flow through the pipeline. The judge made the decision, which is not final, retroactive to 1993, when the dispute arose.

The decision would have cost the refinery companies hundreds of millions of dollars in compensation to oil producers. The producers, in turn, would have to pay taxes and royalties to the state on the compensation they receive.

Stevens and Murkowski, both Alaska Republicans, added language to the transportation bill that said the Federal Energy Regulatory Commission cannot order retroactive changes to quality bank adjustments before Feb. 1, 2000. It was put in the bill to protect in-state refineries and to ensure future cases do not drag out for a dozen or more years, said aides to both senators.

Because of that cap, Alaska's anticipated share of back taxes and royalties is expected to drop from $80 million to $30 million, said former Alaska Tax Division director Dan Dickinson.

Dickinson said it could have been worse - the bill could have denied any retroactive payments entirely and the state's take would have been nothing. He pointed out that since the state never had the money, it did not actually lose anything.

"We lost the potential to get it," he said.

State petroleum engineer Roger Marks confirmed Dickinson's $50 million estimate but said the federal legislation would not affect a second quality bank dispute, which could bring the state $20 million in back taxes and royalties.

He said neither case was settled and those numbers could change.

Gov. Frank Murkowski's spokeswoman, Becky Hultberg, said $50 million is a significant amount but it is not money out of the state's budget. She said state officials saw an early version of the federal provision, but were not consulted before the final version was inserted into the transportation bill.

The royalty and tax money collected on Alaska oil goes into the state's general fund for operations and capital projects and also into the Alaska Permanent Fund, the state's oil wealth savings account.

Courtney Schikora Boone, Stevens' spokeswoman, said the provision by Stevens and Murkowski was a compromise by producers, refinery companies and the state in a case that should have been settled years ago.

"The compromise really ensures the refineries won't go out of business and the state and (oil) companies will get compensation," she said.

Petro Star Inc. and Flint Hills Resources Alaska, which operate the two refineries, did not return calls on Friday or Monday, so it was not clear how much they would have had to pay or whether their businesses would have been jeopardized by making payments back to 1993.

A spokesman for Williams Companies Inc., which sold the Flint Hills refinery in 2004, referred to a company filing that said the company's accrued liability would total between $134 million and $166 million, but the spokesman acknowledged that it could be more.

The quality bank sorts out 10 different types of crude oil that flow down the pipeline and assigns values to each of them. The refineries pull out crude to make gasoline and other products, and return lower quality oil to the line. They have to pay into the bank. Producers of high-quality crude take money from the bank to make up for the loss in quality when their oil is mixed with lower-quality oil.

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