Alaska Gov. Frank Murkowski signed the state's new oil and gas production tax into law Aug. 19, hiking taxes on the industry by $1.4 billion to $1.6 billion per year, depending on oil prices. The new tax law, which is retroactive to April 1, also contains a progressivity formula that raises the tax rate as crude oil prices rise.
Despite the loss of production from a partial shutdown of the large Prudhoe Bay field, Murkowski said Alaska will enjoy a $2 billion revenue surplus next year thanks mainly to the new tax.
Although the new law increases the oil industry's taxes, a new investment tax credit is expected to encourage new spending by producers and explorers, Alaska officials said. "We expect to see significantly increased investment in oil and gas exploration and development resulting from this change. This investment is crucial to the future of oil production on the North Slope," the governor said in a Aug. 19 press conference.
The new law shifts Alaska's production tax system from a tax on gross revenues at the wellhead to a tax on net revenues, allowing deductions for operating and capital costs, with an additional investment tax credit that allows a dollar-for-dollar credit for up to 20 percent of capital investments.
In reaction to problems with North Slope oil transit pipeline maintenance, however, state legislators inserted a clause disallowing the equivalent of 30 cents per barrel of investment tax credit, arguing that producers should be spending this amount anyway on maintaining aging infrastructure. The overall investment tax credit should be aimed at stimulating investment in new production, not used for spending on infrastructure the producers should be maintaining anyway, lawmakers felt.
Oil producers will pay 22.5 percent tax on net production revenues with the progressivity formula hiking the tax rate at 0.25 percent for every dollar crude oil prices rise above $40 per barrel. At current oil prices North Slope producers will actually pay about 26 percent on net revenues, said a representative from one of the producers.
In a transition provision, the state will allow producers to pay under the current tax system until January and then calculate what is due the state under the new tax back to April 2006. Payment on the 2006 tax due should be made in March, state tax director Robynn Wilson said.
Murkowski pushed for the new tax as part of an agreement with North Slope producers on a gas pipeline, and because he wanted to replace the former tax because of an incentive formula that had become obsolete under the current producing environment on the North Slope. The producers agreed earlier this year to support a plan by the governor for a 20 percent net profits tax as part of the pipeline deal.
Murkowski chief of staff Jim Clark said he doesn't expect the new tax to unravel the pipeline deal. The state and producers are now renegotiating parts of the contract, Clark said, and discussions on the new tax will be part of that.
"They'll recognize that the tax is higher than they agreed to, and they'll want something for that in the negotiations," Clark said.
Democrats in the Legislature criticized the new tax as being too generous to industry. Rep. Les Gara, D-Anchorage, said he objected to deductions and credits in the new net revenues tax that will require the state to pay for part of BP's costs related to the recent Prudhoe field shutdown. Gara and other Democrats had proposed an explicit disallowance of the investment tax credit for those costs to BP, but they were outvoted on an amendment by the Republican-led majority.
Another objection to the new tax is that it will require aggressive auditing of operations and capital costs, and create opportunities for producers to employ tax-avoidance measures. "If Enron can cook its books, you know Exxon and BP can too," Rep. Harry Crawford, a Democrat from Anchorage, said in a press release Aug. 19.
Tim Bradner can be reached at
tim.bradner@alaskajournal.com.
