By Tim Bradner
Alaska Journal of Commerce

Oil revenues are surging into Alaska's state treasury. The state now expects to net $650 million to $700 million in additional oil production tax and royalty revenues for the state's current fiscal year, compared to estimates made in April, according to the state's acting chief petroleum economist.

The state Department of Revenue projected $8.49 billion in total oil income for fiscal year 2008, which ends June 30. That is now likely to be $9.14 billion to $9.19 billion, state economist Cherie Nienhuis said.

The outlook for next year is even rosier. If crude oil prices stay in the current ranges, petroleum revenues could exceed $14 billion in fiscal 2009.

The state spends about $4.5 billion per year on state programs and has authorized in the state capital budget about $2 billion in state funds on construction and other one-time projects next year.

About $700 million in state oil royalty income is to go to the Alaska permanent fund this year, which now totals about $37 billion in value. As it adjourned in mid-April the Legislature also appropriated $5 billion of surplus revenues from the past two years into two other state cash reserve accounts.

The amount of money rolling into the treasury is startling. Nienhuis said a change in the state petroleum production tax made by the Legislature last year as well as higher crude oil prices are primarily responsible for the increases.

The latest estimates are that Alaska will get more than twice as much income from oil production taxes and royalties in July, August and September, compared to what had been predicted as recently as April.

Alaska now expects to receive $3.384 billion in oil production tax and royalty income in July, August and September, the first quarter of the new state fiscal year, according to estimates released by the state. That is more than twice the $1.571 billion that was estimated April 11.

The $3.84 billion estimate is based on an assumed sales price of $124.02 per barrel for Alaska North Slope crude, while the April forecast used an estimate of $86.99 per barrel.

If prices stay in current ranges, Alaska could receive more than $14 billion in oil income in fiscal 2009, about $7.5 billion more than state funds spent on agency operations and the state capital budget.

Even if prices decline to $78 per barrel by June 2009, the state would still receive $8.65 billion, according to the most recent revenue department estimates.

Nienhuis' said revenues to Alaska are increasing faster than oil prices because of a progressivity formula in the new production tax that hikes the tax rate as the oil price increases.

North Slope oil producers acknowledge the tax changes have substantially increased the effective tax rates on production.

BP spokesman Steve Rinehart said that, at current prices, BP is paying more than half its net revenues from production to the state's production tax. The burden gets higher when other payments to government are added, such as the state royalty.

“We've said before that increased taxes will have a detrimental effect on our investments here at the very time when production is declining and more investment is needed,” Rinehart said.

Rinehart wouldn't comment on the tax rate on marginal investments, or new projects the companies are undertaking, but sources among other producing companies said the total government take, which combines the production tax, state royalties and other state taxes and federal taxes, is as much as 93 percent of net production revenues on some new projects.

Rinehart said Alaska's marginal tax rate - the tax on new projects - is now among the highest in the world.

The state Legislature changed the tax last fall, increasing the base tax rate on net production revenues from 22 percent to 25 percent when oil prices are at a base price of $40 per barrel. Lawmakers also changed the progressivity formula so the tax on net revenues increases at a faster rate as oil prices climb.

The affect of the formula is to create high tax rates when prices exceed $100 per barrel.

BP and ConocoPhillips say the higher tax rates have caused them to delay some field development projects planned for 2009. Earlier this year BP said a 55-well project in the west end of the Prudhoe Bay field would be delayed because the higher tax made the project uneconomic, while ConocoPhillips cancelled a field refinery upgrade project in the Kuparuk field.

Both companies said other projects planned for 2009 may be affected, but would not give details.

Meanwhile, one other part of the new state production tax that is causing problems for the companies is a cap on deduction of field operating costs for the Prudhoe Bay and Kuparuk fields.

Previously the state allowed all operating costs to be deducted from production revenues for purposes of calculating the state tax, but the Legislature changed the law to cap the deduction at 2006 operating cost levels for Prudhoe and Kuparuk.

The state tax allows for a 3 percent annual increase in operating costs deductions but actual oilfield cost inflation is exceeding that, the companies said.

This means not only must the companies absorb operating cost increases above 2006 levels, but when new projects are planned in both fields, the companies must assume the operating costs for the new projects cannot be deducted.

The cap on deductions ends in 2010 but the companies cannot assume that the state will extend it when new Prudhoe and Kuparuk projects are planned, company officials said.

Rinehart said substantial investments are needed in the large fields to stem the decline in annual production, which is now running at 6 percent or more. About 100 new production wells must be drilled yearly in Prudhoe Bay field to soften the decline rate, he said.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.