Playing with the future: Legislature's changes to tax bill hurts consumers, Cook Inlet

Voices of the State

Posted: Wednesday, April 05, 2006

The Alaska Legislature currently is considering changes to a Petroleum Production Tax (PPT) under House Bill 488 and Senate Bill 305, which, at today’s prices, would more than triple production taxes on the oil and gas industry.

Amongst other impacts, the PPT in its current forms will increase prices for consumers of natural gas in Southcentral Alaska and make Cook Inlet an even more economically challenged place for oil and gas investment.

The gas fields of Cook Inlet provide gas to the local utilities that supply electricity and distribute natural gas to Anchorage and Kenai Peninsula area residents. The PPT as currently proposed will increase the severance tax on the majority of the gas used to supply the utility companies. The utility sales contracts recognize that production taxes are a cost. Any increase in taxes will therefore result in a direct increase in the cost of natural gas and electricity supplied to residential and business consumers.

In addition, the two large industrial users of gas, the fertilizer plant and the LNG plant, ultimately must absorb any increase in the cost of gas making them less competitive in the world market.

The geology of the inlet, the relatively small scale of operations, the offshore nature of many of the fields and the remoteness of the west side fields make the inlet nearly as costly a place to operate as the North Slope. Unlike the North Slope, however, the target size for development and exploration are generally smaller.

When companies look at investing in Cook Inlet, the increase in costs resulting from the PPT, to the extent they cannot be passed directly on to the end user, may be the deciding factor to invest funds elsewhere.

Tax or investment credits have been proposed as part of the PPT to encourage new development, but the proposals minimize the usefulness to companies that have made the investments to secure a steady supply of gas and oil in the inlet.

The assumption seems to be that new entrants and small companies will turn the corner on the inlet’s declining production. Unfortunately, results to date do not indicate that the new and/or small sized companies are going to be able to do as much to increase inlet production as the current producers.

If one of the goals is to increase production in the inlet, the credits should be structured such that all companies can use them.

There are several things the state can do to promote oil and gas investment. Among them are providing access to land and an efficient and effective regulatory and permitting system. But, just as important, the state must provide stable and fair fiscal and tax policies. This is particularly true for investment in Cook Inlet.

Make no mistake, if the changes to the PPT move in the direction that many in the Legislature seem bent on taking it, there will be negative impacts on oil and gas investments in Alaska and particularly Cook Inlet. There will always be those who will point to the investments that will be made (and some may well proceed), but what we will never see is just how bright the future really could have been.

Scott Jepsen, Cook Inlet Asset Manager for ConocoPhillips Alaska, the state’s largest producer of oil and natural gas. The company’s Cook Inlet operations include the Kenai LNG Plant, the North Cook Inlet platform and the Beluga natural gas field. ConocoPhillips has 1,000 Alaska employees and about 200 live on the Kenai Peninsula, many of whom work on the North Slope.



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