Shock hasn’t dissipated

Alaska governor’s decision to change ELF calculations for Prudhoe Bay fields draws resource association’s ire

Kristen Nelson

Petroleum News Editor-in-Chief

It’s been more than a week since Alaska Gov. Frank Murkowski told the Alaska Legislature Jan. 12 that he was changing by administrative order the way the economic limit factor, or ELF, is calculated for six fields in the Prudhoe Bay unit.

The shock still hasn’t worn off.

It was at the top of the list for the Resource Development Council Jan. 20, with Executive Director Tadd Owens telling members the organization believes “the process and the policy are very flawed.” The decision will up the tax bill for Prudhoe by $100 million to $150 million per year, he said. “And to us, that is a policy change that warranted a little more thorough public discussion. It certainly warranted the involvement of the affected parties before 24 to 48 hours in advance of the decision.”

Owens said RDC is working with its members in the oil and gas industry to look at options to overturn the decision, which could be appealed to the Department of Revenue, then to an administrative hearing officer and then to the state courts. “Obviously the oil and gas industry is evaluating whether or not there may be some additional options to deal with this issue outside of that process,” Owens said.

In a statement issued after the governor’s announcement RDC said it believes “this action sets a terrible precedent for establishing tax policy in Alaska. The long-term effects of this policy may very well be reduced private sector investments, lower revenues to the state general fund and fewer jobs for Alaskans.”

RDC said in its statement that the policy change “raises a host of technical and legal questions. These questions could have been addressed as part of a normal public process, but now may only be answered by the courts.”

BP, ConocoPhillips and ExxonMobil are the majority owners at Prudhoe Bay.

As to their next steps, BP Exploration (Alaska) and ConocoPhillips Alaska told Petroleum News the companies have not yet made a decision. “We’re assessing our options,” was the response from ExxonMobil spokeswoman Susan Reeves.

The Alaska Department of Revenue issued a statement on the ELF change Jan. 12 which Petroleum News did not get in time to incorporate into its Jan. 16 story.

“We have been analyzing the Prudhoe Bay unit since the earliest days of the Murkowski administration,” Revenue Commissioner Bill Corbus said in the department’s statement, “and it has become increasingly evident over time that Prudhoe Bay production has grown ever more inter-dependent, and that needs to be reflected in how we apply the ELF.”

The department said its administrative decision is not a public document, but offered some background on the decision.

ELF, the department said, is a component of the state’s production tax, and is intended to eliminate production taxes on output below the economic limit, while continuing to tax barrels produced above the economic limit.

“The philosophy is to keep properties producing as they become depleted and thus protect jobs and production for as long as possible, never allowing taxes to be the operating cost that causes a well or property to shut down.”

The department said it is allowed under law to “aggregate properties for purposes of determining the ELF if the operations of one or more properties are so interdependent that it doesn’t make sense to tax them separately.”

The department also said that it is authorized to issue advance rulings at a taxpayer’s request “saying it will not aggregate certain properties.” The department said it “has determined that the oil and gas production operations for all leases or properties within the Prudhoe Bay unit are economically interdependent, it has issued a determination only for those properties not covered by advance letter rulings.”

Gov. Murkowski said in his state of the state address that the ruling, which takes effect Feb. 1, covers the initial participating area at Prudhoe, and satellite fields Borealis, Midnight Sun, Orion, Polaris, Point McIntyre and Aurora.

There are a number of other participating areas at Prudhoe: Lisburne, Niakuk North Prudhoe Bay, West Beach and Western Niakuk.

Point McIntyre used to be produced through the Lisburne production facility, but beginning in early 2004, production from one of the two Point McIntyre drill sites began going to the main Prudhoe production facilities. The other fields on the list to be rolled in with the main participating area at Prudhoe for ELF are satellite fields on the western end of the Prudhoe unit which use Prudhoe facilities.