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Oil Tax Change Mulled, Regardless of Gas Line

Posted on: Monday, 20 March 2006, 03:03 CST

By Bradner, Tim

State legislators should pass a revamped oil and gas production now and not wait for a gas pipeline deal, according to state revenue commissioner Bill Corbus.

Corbus, backed up by revenue department economist Roger Marks and consultant Pedro van Meurs, told lawmakers in Juneau that the state is losing significant revenue with its current tax system and that an overhaul is needed regardless of the ongoing gas project negotiations.

"Our current oil tax system is no longer working for us, particularly at high prices," Corbus said. "Most people now realize the current tax, with its Economic Limit Factor, is flawed. It will result in the second largest oil field in North America, the Kuparuk River field on the North Slope, paying no production tax this year."

Corbus said the oil production tax must be changed before an agreement call be made between the state and North Slope producers on a gas pipeline fiscal contract.

In effect, that means the gas contract is most likely off the table for the Legislature this spring because lawmakers will consider such a radical overhaul of the tax system with much deliberation. Corbus said the administration wants the new oil tax in place before finalizing gas negotiations so that the producers will know the kind of overall tax structure with which they are dealing.

Marks said that a new net profits production tax that will soon be introduced in the Legislature as a replacement to the current tax could bring more than $1 billion in additional revenues under current oil prices.

The potential revenue estimates were based on scenarios of tax rates and tax credit rates given to the revenue department by the Legislature. Senate President Ben Stevens said he asked the department to develop numbers based on tax rates between 17.5 percent and 25 percent of net profits and tax credit rates between 15 percent and 20 percent.

Under those scenarios, the state would take in anywhere between $1.1 billion and $2.6 billion more than it does now when oil is $60 per barrel.

Stevens said these rates presented were not necessarily what would be proposed in a bill. The information was presented as background meant to help lawmakers' dellberations, said van Meurs, a consultant to the Department of Revenue on a gas negotiations.

Van Meurs told the House and Senate Finance Committees that almost every other major oil producing region of the world has some form of tax that cuts the host government in when oil prices surge, and that Alaska's tax structure leaves the state earning much less revenue than it should.

The administration's strong push for a new oil tax now caught the oil and gas industry off guard. Mark Hanley, public affairs manager for Anadarko Petroleum's Alaska operations, said a net profits tax could be constructed in a way that is fair to the oil industry, but details on Murkowskis idea have been few.

"It's impossible at this point to say if it's good, if it's bad or if it's indifferent," Hanley said.

"We were surprised, and disappointed," at Corbus' presentation, a senior industry manager said on background. "We have been talking with the administration about a lot of things regarding taxes," but the manager said the companies had not been briefed ahead of time on the specifies of the revenue department's presentation to the finance committees.

Legislators said the presentation, in effect, gave them the green light to make major Lax changes now. "It clearly showed us that we're losing a lot of money with the present tax," said state Rep. druce Weybrauch, R-Juneau, who chairs the House Ways and Means Committee, a panel that deals with tax and fiscal issues.

Marks said the current tax, with the ELF formula that is now in place, results in an effective rate of tax on all Alaska oil production of about 4 percent. The ELF determines a tax rate based on average daily well production and the number of wells in an oil field.

In the Feb. 1 hearing, van Meurs showed an example of how a major oil field producing 600,000 barrels per day with 2,000 wells, each producing an average of 300 barrels per day, would pay zero production lax under the ELF.

Some legislators have reservations about rushing into a new system, however. There are concerns about what could happen if oil prices fall. Sen. Fred Dyson, R-Eagle River, remembering when oil prices were $9 per barrel in early 1999, asked where the "crossover" points is, or the oil price at which the current tax structure would- bring in more revenue than the new system being suggested.

Marks said the crossover is at oil prices in the mid-$20-per- barrel range. At a price of $20 per barrel the state would lose $150 million to $200 million per year under the new tax joinpared with the current tax.

A progressive tax, like a net profits tax, brings in more money than the current tax when prices are high, but revenue drops off sharply when prices fall. One advantage of a regressive tax, like Alaska's current system, is that revenues decline less sharply when prices fall. It can serve as a kind of safety net for a government during periods of low prices,

Another concern being voiced by legislators is that a net profits tax, which is an income tax, can be "gained" by taxpayers, meaning that costs can be loaded or manipulated so as to depress the net income figure on which the tax is paid. There, is some evidence that this has occurred with net profits royalty terms that currently apply on some state oil and gas leases, they say.

In the Feb. 1 hearing, van Meurs said many nations are now using a net-profits participation approach to oil and gas taxation, and there is little evidence of widespread cheating by producers. Alaska could also take advantage of the experience that producing nations like Norway and the Untied Kingdom have with similar taxes.

Corbus said another key goal of the administration is to offer encouragement for continued heavy oil development and for small companies and independents to explore in Alaska.

An investment tax credit mechanism that will be proposed along with the new tax will be a powerful inducement for new explorers because the expenses, as investment tax credits, can be transferred or sold to others, he said.

Van Meurs said the combination of the net profits tax with all investment tax credit will be almost unique in the world. No other producing region offers such a plan, he said.

Heavy oil will also be given special tax treatment as other nations now do with heavy oil resources, van Meurs said.

Copyright Morris Communications Feb 12, 2006

Source: Alaska Journal of Commerce

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