State disputes claims about tax instability

Lawmakers, governor challenge oil industry attack on investment climate

Posted: Sunday, October 28, 2007

North Slope oil producers fear fiscal instability like nothing else.

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So much so that this year the CEO of Exxon Mobil Corp. badmouthed Alaska on Wall Street, saying the state had raised taxes at least 13 times in recent years.

BP PLC Alaska's president blasted the state government in Anchorage, saying that Alaska's tax stability was on a par with Nigeria's.

And BP's Claire Fitzpatrick, an Alaska vice president, told the Alaska Legislature that by even looking to raise taxes again it was threatening the stable climate her company wanted before investing.

"Three changes in three years doesn't feel terribly stable," she told the Legislature.

Alaska officials, ranging from Gov. Sarah Palin to legislators of both parties and their expert consultants, say none of it is true.

The oil producers such as BP, operator of the nation's largest oil field at Prudhoe Bay, have taken up the "three tax changes in three years" argument, and have been joined by the Alaska Support Industry Alliance, the local face of the industry.

The advertising campaign aimed at stopping Palin's Alaska Clear and Equitable Share bill, now being considered in a special session of the Legislature, revolves around the claim that taxes have been raised, or at least changed, three times in the last three years.

The severance tax on oil is one of the state's chief oil taxes, along with corporate income and property taxes, but it's typically the most controversial.

Rep. Beth Kerttula, D-Juneau, disputes the claim of "three tax changes in three years."

"I don't think that's true at all," the House minority leader said. Kerttula has been aggressive at trying to get more money for the state from its oil, and was an oil and gas attorney with the Alaska Department of Law before becoming a legislator.

The "three tax changes in three years" claim follows earlier oil company statements, including Exxon Mobil CEO Rex Tillerson's statement in February to oil industry stock analysts that Alaska has raised taxes 13 or 14 times in recent years.

The Department of Revenue responded that the state set the tax in 1981, and then changed it in 2006.

"On oil, there have been only two changes in 26 years; on gas there has been only one change," according to a Department of Revenue response to Tillerson.

An Exxon spokeswoman did not respond to requests for comment, but a Department of Revenue spokeswoman suggested Tillerson may have been referring to proposed taxes, such as the gas reserves tax initiative of 2006, or other proposals in the Legislature that did not pass.

Before the special session convened in Juneau, BP Alaska President Doug Suttles said that Alaska was one of the worst regimes in the world in terms of fiscal stability.

Suttles told an industry group in Anchorage that Alaska ranked below Nigeria in terms of fiscal stability, but was ahead of Venezuela, where the assets of some companies were nationalized earlier this year. Alaska ranked 99 out of 103 regimes, Suttles said.

BP spokesman Daren Beaudo said the study on which Suttles based his comments was purchased under contract and cannot be made public.

"It was not commissioned by industry, and certainly not by BP," he said.

Three times in three years

In 2006, the Alaska Legislature adopted the controversial Petroleum Profits Tax, and after a combination of criminal convictions of several legislators and lobbyists involved with its passage, and its failure to bring in expected revenue, Palin asked the Legislature to take a fresh look at it.

In 2005, however, then-Gov. Frank Murkowski's administration implemented an existing regulation that caused the oil producers to pay about $150 million more in tax a year. That, combined with last year's PPT, are the first two changes the industry cites.

"The increase being proposed would be the third major severance tax increase on the industry in the past three years," said Paul Laird, general manager of the alliance.

Backing Kerttula in the argument that the 2005 change was not a tax increase is Steve Porter, a consultant hired by the Legislative Budget and Audit Committee for the special session. Last session he worked as a finance aide for Sen. Bert Stedman, R-Sitka, and in the past for the state tax division and the oil industry.

Porter told the House Oil and Gas Committee that the 2005 action was not a tax change.

"A tax change occurs when you change the regulations or the statute," he said. "When there were no regulatory or statutory changes, all the state has a right to do is implement the law," Porter said.

What Murkowski did was implement existing rules after the oil industry changed its operations on the North Slope. The actions consolidated some wells with neighboring wells for more efficient operation, but that caused them to fall under a different state regulation, he said.

"All the state did was implement the law," Porter said. "The industry touted that as a tax change; it was not."

But oil industry executives disagree.

"From our point of view, our tax bill increased, and it increased significantly," BP's Beaudo said. A ConocoPhillips executive agreed.

That has been an ongoing point of contention during special session testimony so far.

BP's Fitzpatrick maintained that it was a tax change, because it required paying more tax.

Sen. Tom Wagoner, R-Kenai, told her he disputed that.

"That was not a change in the tax structure," he said.

"I respect your point," Fitzpatrick responded.

The PPT changes

Oil industry opponents raising oil taxes are testifying that revisiting PPT so soon after passage further contributes to the climate of instability they see in Alaska.

"The third tax change is significant," said Kevin Mitchell, ConocoPhillips vice president for finance and administration in Alaska. "There is an impact on investment decisions."

Jim Gilbert, president of Udelhoven Oilfield Systems Services, said the oil producers engaged in a hard-fought battle over PPT, and then found themselves in a similar battle just 14 months later.

"It literally smacked of a third-world country - how they dealt with it," he said.

Others testifying before the Legislature said that given the ongoing corruption trials, changes to the PPT will be expected.

"The administration's proposed tax increase would represent the third significant change to Alaska's fiscal terms in the past three years," said Craig Haymes, Exxon Mobil's Alaska production manager.

Some of the Legislature's industry consultants dispute allegations by Exxon and others that considering a PPT review now will hurt investment.

"I don't think this review will cause the world to see you as unstable," Porter said. "The industry will certainly say it is true, but anyone who looks underneath their rhetoric will know the truth."

The Legislature's consultants have given conflicting views on how Wall Street and others in the world view Alaska. Pedro van Meurs, a former Murkowski consultant who helped craft PPT last year, warned against damaging the investment climate by changing PPT.

Daniel Johnston, who worked for the Legislature last year and frequently opposed van Meurs, did so again this session.

"Pedro doesn't give oil company investors enough credit," he said. "People will understand."

Udelhoven's Gilbert said the taint of corruption mentioned by Palin didn't amount to enough to justify a tax increase.

"I have to admit that the corruption that was going on was wrong, no doubt about it, but it involved very few people," he said.

BP's Fitzpatrick acknowledged that Alaska did have a long history of price stability, but said the future was more important than the past.

"I'm not denying a history of stability," she said, but "we make investments today based on the environment today."

Rep. Les Gara, D-Anchorage, a consistent advocate for higher oil taxes, said that fiscal instability comes from taxing too little. If Alaska is not getting its fair share of oil revenue, he said, there will be pressure at every future Legislature to increase taxes.

"The problem with undertaxing is that it leads to instability," he said.

• Contact Pat Forgey at 586-4816 or patrick.forgey@juneauempire.com.



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