Alaska Gov. Frank Murkowski’s administration has given two major presentations on a production profits tax this year, a proposed complete rewrite of how Alaska taxes oil production.
There was some confusion early on as to whether the administration or the Legislature would introduce the oil tax bill, but House Speaker John Harris, R-Valdez, said Feb. 6 that the administration would be introducing the bill.
“I think it’s fair to say we’re both working with each other, but you know quite honestly it’s an issue that they’ve spent a lot more time on than we have. They have the expertise on it and I think when they’re ready” they’ll introduce a bill, he said at the weekly House Republican meeting with members of the press. On Feb. 13 he opened the meeting by saying administration officials had told him a production profits tax bill would be introduced Feb. 16.
Harris said he didn’t have the details of the bill, but said he expected hearings would begin the week following the introduction.
Pedro van Meurs, a consultant for the administration, has twice briefed legislators on the concept of a production profits tax, or PPT (see stories in Jan. 22 and Feb. 12 issues of Petroleum News).
The PPT would eliminate the economic limit factor and the previous field-by-field tax system in favor of a corporate-level profits tax.
Democratic version introducedThe Democrats, who have been pursuing oil tax reform through a reform of ELF for two years, introduced their own production profits tax Feb. 13. Harris, asked about the Democrats’ bill, said the administration bill would be the vehicle for addressing oil tax changes in the Legislature. But, he said, there is no done deal: both sides of the aisle will bring ideas to the table as the bill goes through the committee process.
When House Bill 466, the Democrats’ oil tax reform bill, was introduced on the House Floor Feb. 13, Harris assigned it to the Resources and Finance committees. The House Special Committee on Ways and Means held hearings on HB 63, the Democratic proposal to reform ELF; that bill was passed out and went to the House Special Committee on Oil and Gas. Ways and Means also held hearings on a 2004 Democratic ELF reform bill, although that bill was never moved out of the committee. Rep. Les Gara, D-Anchorage, was the sponsor of both bills.
Harris said Feb. 6 that the change in oil taxation policy, or PPT, would be referred to the Resources and Finance committees.
“We’re not going to refer those to special committees. Nothing against any special committees, but they’re just too important to go to a special committee; they’ll need to go directly to those two committees.” The same would happen with gas pipeline bills, he said.
Harris said that was why there had been two hearings already, one in Resources and one in Finance, “to bring them to the table and start seeing what the concepts were ... as soon as they can get those kind of principles on the table so that people can begin studying them themselves and start looking at the validity of some of the information that they’re going to put forward.”
Democrats call for 30 percent taxThe Legislature’s Republican leadership asked the administration to model production profit tax rates of 17.5 percent, 20 percent and 25 percent. The Democrats called for a 30 percent tax on “the gross production revenues of the oil produced, based on the gross value of the oil at the point of production, net of royalties paid on the oil production ... and less the taxpayer’s (1) lease expenses; and (2) capital expenses related to the lease.”
Gara is the prime sponsor of HB 466; Sen. Hollis French, D-Anchorage, is the prime sponsor of the Senate version, Senate Bill 292. The two are also the prime sponsors of HB 63, the ELF reform bill, and SB 50, the Senate version. While HB 63 was heard in Ways and Means and moved out of that committee, SB 50 has not been heard in its first committee of referral, Senate Resources.
SB 292 was referred to the Resources and Finance committees.
Better Alaska than BP stockholdersDemocrats discussed the bills in a Feb. 13 press briefing.
French said the 30 percent production tax could be reduced by as much as 50 percent by exploration expenditures. The bill also includes a 1,000 barrel-per-day tax exemption. He said Democrats believe the bill would bring in about $2.5 billion more than the state is getting now from production taxes, and said the bill was introduced “because we believe there’s been a vacuum in leadership on this subject from the governor.”
Gara said the goal was “to put some policy behind the sound bites that everybody’s heard over the last month.” One tax measure is not as good as another tax measure, he said, and this bill defines “what we think are the acceptable boundaries.”
The state needs to be getting a fair share at all oil prices, he said, and since BP has said that at $20 per barrel they make so much money that they give excess cash flow back to shareholders, “we needed to say as a dividing line that we’re not going to give money back to oil companies when they’re making huge profits.” Gara said the Democrats’ bill “makes sure that we don’t reduce the oil tax liability above $20 a barrel.”
In an April 15, 2004, address to shareholders, John Browne, BP’s chief executive, said: “In periods of high oil prices such as the one we find ourselves in today, the Group generates significant ‘excess free cash flow’ after capital expenditure and dividends.
“Rather than using this cash to reduce debt below our longstanding target gearing levels, we are committing to the return of 100 percent of this excess free cash flow to our investors, for as long as oil prices remain above $20 a barrel, all other things being appropriate,” he said. “While it is possible that some of the ‘excess’ might be used, for example, for material acquisitions if we saw opportunities which fitted our strategy, we see no such opportunities at present.”
Browne also said BP would continue its program of share buybacks.
In a quarterly release statement from April 26, 2005, Browne said: “Our strategy is unchanged. We continue to execute it with discipline and focus. Strengthening cash flow enabled shareholder distributions in the form of dividends and share buybacks amounting to $4 billion in the quarter.”
Harris is also concerned about taxes the state gets at low prices of oil.
“We don’t want to be getting less than we’re getting now under low prices of oil,” he said Feb. 13.
John Coghill, R-North Pole, the House majority leader, said the joint House-Senate Legislative Budget and Audit committee has been “very diligent” in getting the right people busy looking at the numbers. Its consultants are looking at what is known about the governor’s proposal and running models. It is the governor’s bill, Coghill said, but the presentations gave the Legislature a “heads up” on what questions to ask consultants.
The governor’s bill will be “the beginning of a discussion,” Harris said, “that’s why we’ve hired our own consultants.” He said he wasn’t worried about $8 a barrel oil “right now” but said it is a worry for the future.
Coghill said there was no way to know how long such a bill would take. Technically it could move through the House with two or three hearings — it could also take until the Legislature adjourns May 9.
If it took a week in each committee and a week of floor debate, that would be three weeks in the House, he said.
Harris said an oil tax change bill won’t mean work on every other bill will stop. But the public hearings will take a lot of time, he said. There will be testimony and competing experts, and it will take time for members “to get their arms around it.”