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Vol. 11, No. 33 Week of August 13, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

It’s a tax bill!

After 6 months of work, Legislature passes 22.5% net profits, 20% credits

By Kristen Nelson

Petroleum News

It pretty much came down to the wire — as it has twice before — but this time the Alaska Legislature passed a revision of the state’s oil production tax.

Agreement that couldn’t be reached at the end of the regular session in May — or at the end of the summer’s first special session in June — was reached Aug. 10 in the final hours of the summer’s second special session.

The bill, a rewrite of Alaska’s severance tax on production, is based on a net profits formula, recommended by administrative consultant Pedro van Meurs as a way to encourage oil and gas companies to reinvest in the state. Gov. Frank Murkowski proposed a 20 percent tax rate and a 20 percent credit when he introduced the bill in February.

The bill that passed has a tax rate of 22.5 percent and a progressivity feature — at oil prices above $55 a 0.25 percent tax increase kicks in. Cook Inlet oil production remains under the current system with its economic limit factor which protects smaller and less productive fields.

The bill also requires the Department of Revenue to report to the Legislature in 2011 on how the incentive provisions are working to enhance exploration, development and production in the state.

At an Alaska North Slope crude oil price of $75.05 (the closing price Aug. 10), and a full year of production, the new tax would generate $3.7 billion in one-year revenues, almost three times the amount the present system generates; the governor’s original proposal would have increased the present tax rate by about $1 billion.

Senate returns to original plan

Because of the previous failures in getting a tax change through both the House and Senate — largely, it appeared, due to differences on what the tax rate should be — the House came up with a compromise, the so-called “produce or pay” plan, which it passed 30-10.

It had a varying tax rate, from 20 to 25 percent, based on the amount a company invested in the state on a per-barrel-of-production basis.

That plan was scrapped in the Senate after van Meurs told the Senate Special Committee on Natural Gas Development Aug. 7 that he viewed the House proposal as a harvester’s plan. He said because of declining production levels at the state’s big North Slope fields, the tax rate would quickly drop to 20 percent for all companies, whatever their investment rate in Alaska. Companies could even accelerate that drop with some early investment, he said.

The old severance tax system, with the ELF, was producing less and less revenue — some fields, like Kuparuk, paid no production revenue under the ELF. The governor introduced the 20/20 tax plan as part of the administration’s gas fiscal contract with the goal of providing fiscal certainty on oil as well as gas.

The House was able to garner enough votes to concur, by a 26 to 14 vote, with the Senate plan, but that was the only thing the administration got out of the special session. A bill the Senate passed expanding from 30 to 120 days the time the commissioner of Revenue has to complete work on public comments on the proposed gas fiscal contract died in the House.



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