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Vol. 11, No. 24 Week of June 11, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

No PPT — again

Alaska Senate votes in favor of tax compromise; House rejects it 13-25

Kristen Nelson

Petroleum News

The conference committee finished its work and the production profits tax, the PPT, made it to the floor in the Alaska House and Senate in time for a vote before the special session ended at midnight June 8.

The Senate voted 14-6 in favor.

House members, however, rejected the compromise 13 to 25 and immediately adjourned, leaving the Legislature with no legislation to show for its 30 days of work.

As conference committee member Mike Kelly, R-Fairbanks, explained on the House floor prior to the vote, the conference committee got the House language on many of the 10 points of difference between the House and Senate versions of the PPT.

The committee compromised on the numbers issues: The Senate bill had a tax rate of 22.5 percent of net profits, the House 23.5 percent. The conference committee settled on 22.8 percent. The trigger for a progressive surcharge remained at $35 net, about $50 gross, he said, with the slope between the Senate and House rates.

The tax rate of 22.8 percent was close to the middle, Kelly said, with some extra concession on the rate (a split down the middle would have been 23 percent) in exchange for signing off on all those other issues.

Kelly told the House that the result wouldn’t please either those who wanted to see a 25 percent tax rate or those who wanted to see 20 percent.

The vote which followed proved how right he was.

Harris: too high for some, too low for others

House Speaker John Harris, R-Valdez, told reporters after the House adjourned that the vote was a surprise, but said there were forces at work to defeat the PPT from various angles, with the tax rate higher than what the governor wanted and lower than what some other people wanted.

Harris said that when the governor calls the Legislature back for another special session it will be starting from scratch. “If and when we come back I think we’ll look at an entire package,” both the production profits tax and the gas package. He said the next special session may take on “an entirely different dynamic” than the last few weeks.

The whole idea of the PPT was to tie a change in the severance tax to incentives for more exploration, with all of that tied to the gas project, he said, noting that one of the problems had been that the process moved so fast that many members weren’t comfortable with it. He said he suggested the governor take some time and come back with a lot of information and support before calling another special session. When would that be? Harris said he didn’t know, but said he recommended to the governor the Legislature come back after the primary in August.

The PPT was introduced in February, after Gov. Frank Murkowski announced the administration and the Alaska North Slope natural gas pipeline proponents — BP, ConocoPhillips and Exxon Mobil — had reached agreement in principle on terms of a fiscal contract. The contract, minus an oil tax component, was released in early May; legislation to conform the proposed contract to the Alaska Stranded Gas Development Act and to create the state’s pipeline entity was introduced in late May.

Tough satisfying all constituencies

Kelly told reporters after the vote it had been a tough process trying to satisfy all the constituencies, from the oil companies and the governor who wanted a 20 percent tax, to those wanting 25 percent. Kelly has argued for a higher rate.

He said he wasn’t completely surprised by the House’s rejection of the bill: The “whole playing field’s been constantly in motion,” he said, adding that the House vote convinces him “it’s very difficult to get enough people aboard to change an oil tax.”

And the rejection means the state still has a “broken ELF,” he said, referring to the current severance tax with its economic limit factor.

Senate Minority Leader Johnny Ellis, D-Anchorage, told reporters the language in the bill was not tight enough, and said you could drive a supertanker through some of the phraseology. He said people seemed to have dug in on a number of issues and while there was sentiment to just get something passed he said he disagreed with those who believed legislators could pass the conference committee bill and come back later and fix what was wrong.

Governor, industry opposed

The governor put out a last-minute plea for a lower rate, arguing that the 23.5 percent rate passed by the House would dry up “the substantial investment” needed on the North Slope to increase the amount of oil flowing through the trans-Alaska oil pipeline and would also threaten the North Slope natural gas project.

The governor said the 23.5 percent rate would make Alaska’s government take “the highest in North America and would make us uncompetitive with other international projects.”

He said the mandate in the state constitution “is to maximize oil and gas value to the state over time,” and said while a rate higher than the 20 percent the administration proposed “may make the state more money in the short term,” it would be detrimental to the constitutional goal in the long run.

Angus Walker, BP Exploration Alaska commercial vice president, said in a statement that the administration’s proposed 20 percent tax and 20 percent credit rate would raise taxes on the industry by more than $1 billion a year, while the 23.5 percent rate proposed by the House would increase taxes by some $2.5 billion per year at current prices.

“This matters greatly because the biggest threat facing Alaska today is not attracting the investment needed to convert its massive resource potential into production.”

Walker said BP believes a lower tax rate would result in more investment and is in the best interests of the state.

Conference bill was in middle

Figures provided to the Legislative Budget and Audit Committee by consultant Econ One after the conference committee reached agreement projected that at $70 a barrel for Alaska North Slope crude oil on the West Coast the annual average tax difference — compared to the present production severance system — would have been $2.898 billion for the House bill, $2.129 billion for the Senate bill, and $2.504 billion for the conference committee version.

The Econ One projection used the conference committee numbers: a 22.8 percent tax rate and a progressivity factor of 0.175 percent at $35 net per barrel.

The Alaska government take would have been 40 percent under the House version, 37.7 percent under the conference committee bill and 35.6 percent under the Senate bill, with total government take of 62.7 percent, 61.3 percent and 59.9 percent respectively.

Conference committee

The conference committee, appointed June 6, met briefly June 7 and finished its work the evening of June 8.

Sen. Bert Stedman, R-Sitka, chair, and members Sen. Charlie Huggins, R-Wasilla, Sen. Hollis French, D-Anchorage, Rep. Ralph Samuels, R-Anchorage, Rep. Beth Kerttula, D-Juneau and Kelly, finally reached agreement on the 10 differences between the House and Senate versions just before 10 p.m. June 8.

“I’d like to thank everybody for their patience and for showing up this evening, particularly committee members,” Stedman said when the committee’s final meeting got under way just after 9:30 p.m. June 8. (House members had failed to appear for a meeting scheduled the evening of June 7.)

The committee then moved quickly through the 10 items, adopting House language on most of the items and then agreeing on the compromise numbers.

When the committee worked through the differences at a June 7 meeting Dan Dickinson, former director of the state’s Tax Division and a consultant to the administration on the PPT, noted that one of the items was a technical error in the Senate bill where the numbers did not reflect the intent while another was a case where the Senate used months and the House used days, but there was no apparent difference in intent.

What’s next?

The governor had not yet issued another special session call when Petroleum News went to press with this issue.

Sen. Gene Therriault, R-North Pole, chairman of Legislative Budget and Audit, told members of the Senate before that body adjourned June 8 that the committee had tentative meetings set in Anchorage the week of June 12 to hear from its consultants, with meetings most likely to be Wednesday and Thursday, June 14-15.

Sen. Ralph Seekins, R-Fairbanks, chair of the Senate Special Committee on Natural Gas Development, which had just wrapped up two days of roundtable meetings, said that committee would also hold meetings in the interim.

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