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Vol. 11, No. 17 Week of April 23, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Myers slams oil tax plan

Says state doesn’t have ability to calculate costs; downside risk significant

Petroleum News

Former members of Gov. Frank Murkowski’s administration said the governor’s proposed overhaul of the state’s oil tax policy could spark giant legal battles with some of the world’s most powerful energy companies and poses a downside risk to the state if oil prices revert back to their traditional price range.

Murkowski’s plan to tax oil profits marks a huge potential change to the current system, which instead bases the tax on the value of the oil at the wellhead.

The state doesn’t have the large and expert bureaucracy needed to calculate the true profits and costs. Nor does the state have the pay structure to attract and retain the experts it needs, Mark Myers, the state’s former oil and gas director, said April 15 at a talk sponsored by Alaska Common Ground, a nonprofit, nonpartisan public policy group.

Two other former state officials, deputy commissioners Marty Rutherford and Dick LeFebvre, attended the talk.

The three were among seven top officials in the Department of Natural Resources who resigned last October. They said at the time that Murkowski was giving up too many financial concessions to the oil companies in negotiating a natural gas pipeline, and disagreed with state negotiations to restructure oil taxes.

Converting the state’s entire oil severance tax to a profits-based system will provoke ongoing legal wrangling over what defines profit and production costs. The governor’s bill contains significant ambiguity in what are allowable deductions and profits. Furthermore it is directly linked to many terms and concessions in the “still secret gasline contract,” Myers said.

“As the director of the Division of Oil and Gas I managed the state’s net profit share leases. For the previous directors and me they were an auditing and accounting nightmare. The net profit share component time and time again significantly underperformed the state’s expectations. Given that long history of underperformance, I find it odd that the Department of Revenue, which has never managed a net profit system, is so optimistic,” he said.

“Do you want a system that’s going to lead to war between the companies and the state?” Myers asked.

Downside risk not addressed

Another major issue that has not been adequately addressed, he said, is the downside risk to the state if oil prices revert back to their traditional price range.

In an interview with Petroleum News following the talk, Myers said, “The modeling by Econ One clearly shows that under the administration’s proposal at prices less than $30 dollars a barrel the state will receive less than projected under the current system looking forward. At prices below $21 a barrel the state will receive no severance tax. It will take a sustained price of $50 a barrel for the state to receive what it has historically received from severance tax (1977-2005). If oil prices were to fall to the $20-$30 range the state could have little to no severance tax, one half to one third the current royalty dollars and much lower corporate income tax revenue at the same time it may be attempting to invest billions of dollars in the gasline.

“How will we pay for government if this happens? Will a general income tax be proposed or will the permanent fund be raided?” he asked.

SB 316 also a concern

Rutherford is also concerned about a bill introduced April 13 by the Senate Judiciary Committee, chaired by Sen. Ralph Seekins, R-Fairbanks, that would block most court challenges to the draft gas pipeline contract the governor plans to present to the Legislature before the session ends May 9.

“This bill appears to be an attempt to limit public input and review of the fiscal interest finding. This means for all practical purposes that the public will not be able to challenge the fiscal interest finding even if it contains critical errors or omissions,” Rutherford told Petroleum News.

“For example the finding might conclude that the gas is stranded without meeting or demonstrating the economic standard required in the act, or it may not adequately or quantitatively compare the contract with the other alternatives including an independent pipeline or an LNG project. It also means that if public comments to the draft finding are not addressed or if procedure errors are made in the finding process the public can do nothing about it if the legislature passes the contract,” she said.

“Finally, it also means that the public will not have the ability to obtain information through discovery,” Rutherford said.

Important to reveal gas contract first

The administration says it’s reached a deal with three oil companies — BP, ConocoPhillips and ExxonMobil — on a contract laying out taxes and other terms on their proposed $20 billion gas pipeline through Alaska and Canada.

Rutherford and Myers said Murkowski should unveil the gas contract before changes are made to the oil tax policy because the gas line contract and the oil tax are linked in many ways. The linkages of the PPT to the gasline contract may dramatically and negatively change the value and terms of the tax to the state. “For example, it may bind the state to a set tax rate for many years or give additional incentives that are additive to the deductions in the PPT. No one can reasonably access the PPT without first seeing the gasline contract,” Myers said.

Dickinson disagrees

Dan Dickinson, an accountant and former state tax director, disagreed with Myers, saying the oil tax legislation will allow the state to accurately gauge oil company profits and collect taxes.

The legislation will prevent oil companies from disguising profits as production costs, he said. It includes a list of items companies cannot count as production costs, ranging from depreciation to donations to fines.

“There are going to be some skirmishes around the fringes,” he said. “I believe that 95 percent of the costs will be without controversy.”

Dickinson did acknowledge that the state doesn’t have the team of auditors it would need to collect the taxes.

“We would have to build a team,” said Dickinson, who is working for the administration on the oil tax issue.

The Murkowski administration says overhauling the tax policy will allow the state to collect hundreds of millions of extra dollars each year when oil prices are high. But it’s possible, the administration has said, that the state could collect less than it currently does if prices fall.

Dickinson said the bill, SB 316, is intended to prevent a court challenge, perhaps by supporters of competing pipeline proposals that could delay a legislative vote on the contract.

—The Associated Press contributed to this article

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