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The Rise of Oil

Alaska will reap rewards of record high prices, but faces new risks

Posted: Sunday, November 25, 2007

The price of oil is climbing toward the once unimaginable level of $100 a barrel, with prices closing Friday in New York at a record of more than $98 a barrel.

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That's good news for Alaska, which has more riding on high oil prices after the just-completed special session on oil taxes.

"We'll start sharing in this bounty of high prices," said Rep. Les Gara, D-Anchorage.

"If it goes down, we're in trouble," according to Sen. Bill Wielechowski, D-Anchorage.

Web links

To complete the governor's survey about Alaskans' priorities for savings, click on the link at the top of the governor's Web page at www.gov.state.ak.us.

The new, more aggressive tax rate climbs dramatically at higher oil prices.

High prices will raise oil tax rates well above the base, 25 percent of profits. At $70 a barrel, the rate goes to 29 percent; at $100 it can reach 41 percent, Sen. Bert Stedman, R-Sitka, said.

Stedman said the windfall profits the state was trying to tax would bring the state a "staggering" amount of money.

But that's as long as prices stay high, and not everyone thinks they will.

Oil producers have been reluctant to acknowledge how profitable their Alaska operations were, likely fearing the state would seek an even larger share of those profits.

Even BP, operator of the hugely profitable Prudhoe Bay field, only grudgingly acknowledged how much money it was making in the legacy fields developed at a time when oil prices were far lower than today.

Finally BP-Alaska Vice President Claire Fitzpatrick admitted what lawmakers already knew.

"Is it profitable? Yes it is," she told legislators. "It's profitable to both of us."

During the session, oil industry executives lined up to ask the Legislature to keep taxes low, saying they wanted to "partner" with the state in the oil business.

They didn't get the low taxes they wanted, and left dejected from Juneau after a bipartisan coalition of some Republicans, most Democrats, and Republican Gov. Sarah Palin adopted a new tax scheme.

Risk for Alaska, producers

Kevin Mitchell, ConocoPhillips Alaska vice president, said his company couldn't count on prices staying high.

"We do not view the price environment we're seeing today as one we're making long-term decisions on," he said.

Experts hired by the Alaska Legislature say prices are likely to fall closer to historic averages, and the state's long-term forecast is well below today's high levels.

Some legislators are concerned that the new tax bill won't bring in the additional $1.5 billion to $1.8 billion estimated during the special session.

House Oil and Gas Committee member Rep. Mike Doogan, D-Anchorage, was skeptical that the tax would bring in as much as touted.

"It's a mistake to focus on the predictions of how much money the new law will bring in," he said.

The new tax only brings in more money at high prices. At low prices, it brings in little more than the current Petroleum Profits Tax, legislators say. In exchange for the state taking a bigger share at high prices, it gave up a minimum "floor" that Palin had originally requested.

Both Palin's proposal and the original PPT brought in substantially more than the previous tax scheme, which the state had adopted nearly two decades ago.

Stedman said taking out that floor would help encourage the industry to invest in Alaska, because it would make those investments viable at lower price levels as well, and protect the industry from price declines.

"We still have, at $20-$30-$40-a-barrel oil, protection for the industry," he said. "Of course, at $20 a barrel, we're all in trouble."

Wielechowski said the experts the Legislature listened to agreed the state could give up some taxes at low oil prices and take a bigger share at high prices, bringing in more money without hurting development.

"The industry and consultants all told us the amount of taxes they pay at the low end is a huge consideration for them," he said. "It makes future development more risky."

He said it was better for the state to give up a few hundred million dollars at low prices to get billions in taxes at high prices.

"If it goes down, we're in trouble, but we were in trouble no matter what we did," Wielechowski said.

Sen. Johnny Ellis, D-Anchorage, said the new tax bill might bring big benefits to the state, but it did so at the cost of adding some risk.

"When someone says the private sector takes all the risk, that's not true," he said.

The new partnership shares both the risks and the rewards between the state and industry, he said.

"We're moving forward together," Ellis said.

High prices already here

The decision to accept the risk of low prices was made easier by the fact that the Legislature wasn't simply wishing that oil prices might someday reach a high level, but they were already there when the tax was adopted.

The Legislature's bill is retroactive to July 1, the start of the fiscal year.

Since the bill's passage, prices have edged higher, with no indications of an imminent fall.

The month before the special session started, the trustees of the oil-funded Alaska Permanent Fund convened an energy forum in Fairbanks to look at the future of the fund and their investments.

Thomas Schmitt, senior vice president for Alliance Growth Equities, told the trustees high oil prices were likely here to stay.

"I think we're going to have high prices for a while, so enjoy it," he said.

At the time, prices were less than $80 a barrel.

Another expert, testifying before the Legislature in the final days of the session, said factors such as oil demand, political risk, supply, and inventories indicated that oil prices, then at just over $90 a barrel, shouldn't be that high.

Still, said David Hobs of Cambridge Energy Research Associates, oil prices don't stay where they should in the short term.

"There is no doubt in our mind that the underlying fundamentals do not support a price as high as it is today," he said.

"That doesn't mean the price won't go higher," he said.

Hobbs argued that those fundamentals will keep oil prices from ever dropping to the $20 a barrel price oil averaged for years.

"You might argue that $40 is the new $20 a barrel," he said.

Rep. Beth Kerttula, D-Juneau agreed with the strategy, but said implementing it successfully requires the Legislature and governor do something they haven't always done well. They must save the profits from years like this one for the bad times, she said.

Revenue Commissioner Pat Galvin said Palin's bill originally included protection for the state's income at low prices, but the governor was supportive of the Legislature's changes.

"It provided an important revenue stream at low times, but one that could be replaced by getting more revenue at high prices, and saving for low" prices, he said.

Wielechowski said the next battle might be to ensure the surplus was saved.

"We're really going to have to save this to have a cushion of sorts for those lean years," he said.

Legislative leaders hoping to save the surplus have strong backing from Palin, who last week began an online survey asking Alaskans what their priorities are for savings. She also asked about spending priorities, which she called "investing for the future."

The survey ends at 5 p.m. Monday, Dec. 3, and will be used to help develop her budget proposal for the next legislative session.

Kerttula said saving the surplus, one of her goals going into the session, seems to have a new priority among legislators.

• Contact Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.

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