State’s oil tax structure must stand on its own

Voices of the State

Posted: Monday, February 27, 2006

Completion of the natural gas pipeline contract represents a historic milestone that will provide for Alaska’s future through both increased revenues and by spurring future oil and gas development. This contract will define the economy of Alaska and shape our future for decades to come.

And while our proposal to modernize the state’s oil tax structure to ensure a fair share of revenues for Alaska is independent of our gas pipeline negotiations, for the producers (ExxonMobil and BP) these two are intertwined.

The producers have understandably asked for fiscal certainty on oil as well as gas before making an investment that is expected to be more than $20 billion. For our part, we have insisted that this fiscal certainty provide Alaska with a reasonable return on our resources and ensure incentives for future exploration by independents and explorers.

We cannot complete a gas line contract that provides fiscal certainty on oil without amendments to the Stranded Gas Act. The first step in the process however is stand-alone legislation that reforms the existing production tax.

Alaska takes its share of oil revenues from four sources: royalties, production taxes, corporate income taxes and property taxes. Of the four, the current oil production tax system (often referred to as the Economic Limit Factor or ELF) is no longer working for Alaska.

Taken together, our new approach to oil taxes in the form of the Petroleum Production Tax measure and the natural gas pipeline provide the right combination for Alaska’s economic future.

Consider for a moment the future Alaska faces under the current regressive oil tax regime, in which Alaska receives less in revenues in times of high oil prices and more when we need to encourage continued investment.

Under our current system, Kuparuk, North America’s second largest oil field, will pay no oil production taxes later this year regardless of whether record high oil prices persist.

At the same time, the ELF based production tax is out of step with the global marketplace within which producers and explorers compete. Alaska’s revenue take from oil is significantly less than what the producers are paying in similarly situated oil regimes around the world. In addition, the current tax regime fails to provide incentives to stimulate the investment and development needed to fill a half-empty oil pipeline.

Oil prices averaged around $18 per barrel the last time state oil production taxes were modified 15 years ago in 1989. They have averaged just under $60 per barrel so far this fiscal year and most oil analysts expect them to remain high for the long-term.

What we are proposing is a replacement for ELF that provides fair and equitable revenues for both the state and the industry as a whole.

The Petroleum Production Tax will be assessed on oil production profits. It will provide tax credits for new investment. Its profit-sharing regime will significantly increase state revenues when oil prices are high.

Equally important, the PPT will provide new tax incentives for development to keep Alaska competitive worldwide. The development target is the 50 to 150 million barrels fields that are more likely to be found on state land. The large producers are probably not going to explore for fields of that size. Small and midsize explorers will be willing to develop those fields if they have the proper incentives

Some have questioned why I made the policy decision to go forward with a 20 percent tax rate rather than the 25 percent rate our consultant recommended. It was because of this balance — between revenue to the state and encouragement of future investment. The tradable credits and $73 million tax threshold will incent the small explorer. Tradable credits, the $73 million tax threshold and a lower tax rate will incent the midsize companies and hopefully ConocoPhillips to look for these smaller fields. If the incentives work and more oil is developed and put in the pipeline, Alaska will ultimately make more money under this structure than under a higher tax rate.

In the end we will have our ownership share in the form of a royalty interest in production, a profit-sensitive severance tax, a worldwide apportioned corporate income tax and a property tax shared mostly with the affected municipalities.

We will provide for future generations of Alaskans with significant tax incentives to encourage exploration and development of our oil and gas resources.

Not only do we provide for additional revenues to the state in the short term through modernization of our oil tax system but we provide for future generations of Alaskans through development of a natural gas pipeline that will provide jobs and revenue for decades to come.

The producers’ insistence on greater fiscal stability in return for a commitment to move forward with a gas pipeline makes this the appropriate time to modernize our oil tax regime. Record oil prices should serve to strengthen our resolve for a more balanced oil tax.

Frank Murkowski is the governor of the state of Alaska.

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