New Oil Tax Plan is Coming

By Richard Richtmyer, Anchorage Daily News, Alaska

Jan. 19–JUNEAU — Gov. Frank Murkowski will propose legislation soon that would raise oil taxes and state revenues when oil prices are as high as they have been for months.

This proposed oil tax change will have to happen before the administration can present a contract for a natural gas pipeline to the Legislature for approval, Pedro van Muers, the governor’s oil and gas consultant, told legislators Wednesday. The proposed pipeline could become a $20 billion project.

“This is being presented as a law of general application and cannot be in the (gas line) contract from the beginning,” van Muers said after outlining Murkowski’s plan at a joint meeting of the House and Senate resources committees.

Last fall, seven Murkowski officials, including Natural Resources Commissioner Tom Irwin and state Oil and Gas Director Mark Myers, resigned after questioning key elements of the governor’s gas line talks, including whether it was legal to seek oil tax changes while negotiating a gas line deal.

Van Muers said Wednesday that oil tax changes remain on the negotiating table but they cannot be part of a contract unless the Legislature first approves a new oil tax structure.

For more than a year, a Murkowski team has been negotiating with Conoco Phillips, Exxon Mobil and BP over terms for the proposed pipeline to carry North Slope natural gas to the Lower 48. It would not guarantee construction of the project.

The details of the contract are confidential until a deal is struck, but Murkowski has revealed several components his team is pushing for, including reforming the state’s oil taxation system.

During Wednesday’s hearing, van Muers laid out in broad strokes the components of Murkowski’s oil tax plan. It is similar to proposals pushed by Democratic lawmakers, to recover a bigger share of the wealth being pumped from the ground in Alaska.

Murkowski’s idea is for the state to collect more money when oil prices are high and to give smaller companies more incentive to look for oil and gas, van Muers said.

The state collects royalties, property tax, corporate income tax and production tax on oil and natural gas. Murkowski would scrap the production tax and replace it with a tax tied to oil companies’ Alaska profits, van Meurs said.

At issue is the Economic Limit Factor, often called ELF, an adjustment introduced in 1989 that was designed to give tax breaks to small and weak fields.

That system, van Muers said, has become outdated as North Slope production levels have tapered off while the oil companies developed smaller satellite fields and prices have soared to record highs.

For instance, van Muers said, Kuparuk, the nation’s second-largest field, no longer pays production taxes.

“It is ridiculous to have a world-class oil field that no longer pays production taxes,” he said.

The tax would apply to the oil companies’ production revenue after subtracting capital expenditures — excluding oil and gas pipeline costs — operating costs and property taxes, van Muers said.

If a field were to lose money, an oil company could convert the losses to tax credits that it could transfer or trade to other companies. That system would encourage small companies to develop oil and gas prospects that require heavy upfront costs but are unlikely to yield profits for several years, van Muers said.

He said the administration will introduce the bill and proposed tax and tax credit rates in the near future and asserted the new system would produce “significantly higher” revenue for the state at today’s oil prices.

“When I say significant, I mean significant,” he said. “I don’t mean another 10 percent.”

He would not be more specific.

During the fiscal year ending June 30, the state Revenue Department estimates the state’s take from oil and gas production at roughly $4 billion.

Rep. Les Gara, D-Anchorage, said legislation he and Sen. Hollis French, R-Anchorage, have introduced would increase the state’s take by $1.5 billion at today’s prices.

They have introduced tax reform legislation for the past two years, but the bills never got out of committee, Gara said.

He and French propose to scrap the ELF system and establish a floating production tax tied to oil prices, with a minimum of 5 percent on all oil wells.

Gara said he was heartened by the Murkowski administration’s overtures toward changing the tax structure but he said he’s concerned that the proposal is tied to a natural gas pipeline contract, which is uncertain.

“It’s clear that Alaska is being shortchanged,” he said. “The question is how come it’s taking so long for the administration to get on board with this? It’s very unclear if any new tax would be effective independent of a gas pipeline contract. I’d like to hear an answer on that.”

Revenue Commissioner Bill Corbus, who attended but did not speak at Wednesday’s committee meeting, said Murkowski’s bill likely will be ready within the next couple of weeks.

—–

To see more of the Anchorage Daily News, or to subscribe to the newspaper, go to http://www.adn.com.

Copyright (c) 2006, Anchorage Daily News, Alaska

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.