Governor puts forth oil-tax reform plan

PACKAGE: Murkowski also says BP and Exxon will join Conoco on gas line contract.

By RICHARD RICHTMYER and WESLEY LOY
Anchorage Daily News
February 22, 2006

Gov. Frank Murkowski on Tuesday unveiled oil-tax reform legislation that could add $1 billion annually to the state treasury at today's oil prices and said it is part of a natural gas pipeline deal that all three North Slope producers have agreed to.

The governor said his oil-tax plan would replace the state's production tax with a tax tied to oil companies' Alaska profits. The plan is part of a package deal his administration struck over the weekend with the state's top producers that links oil taxes with a contract for state terms on the proposed natural gas pipeline, Murkowski said at an Anchorage news conference.

"These are two historic events, ones that will define the state's economy for decades to come," declared Murkowski, who was flanked by several of his commissioners.

The governor's dense 22-page bill proposes to tax oil companies' profits at a rate of 20 percent while granting a 20 percent tax credit on the money they reinvest in Alaska oil field development.

Initially, the governor had planned to introduce his tax plan last Thursday with a rate of 25 percent and a 20 percent tax credit, members of his administration said last week. He postponed it, however, after top executives of the three biggest North Slope producers, Conoco Phillips, Exxon Mobil and BP, asked to meet with him first.

The governor said he made up his mind Sunday to pare back the proposed tax rate as part of a compromise to get all three producers to go along with a gas line deal, which he said they did during a meeting Monday.

Jim Clark, the governor's chief of staff, said the tax-rate rollback aims to strike a balance between collecting oil revenue and giving incentives to new oil and gas producers, particularly midsize and small companies.

The higher tax rate would have placed a heavier burden on some of those companies, such as Anadarko Petroleum Corp., thus reducing their incentive to invest in Alaska, he said.

The governor said he believes the smaller companies are the future of Alaska's mature oil patch because they are more willing than the super majors to be interested in the likely smaller pools of oil that remain undiscovered.

Clark has led a Murkowski team negotiating in secret for nearly two years with the North Slope producers for a contract setting out tax and other terms on a pipeline to bring Alaska's gas to the Lower 48. Prudhoe Bay has one of the nation's biggest natural gas reserves, but lack of a pipeline keeps most of it in the ground.

The governor has said the Legislature will have to replace the production-based oil tax with a profits-based tax before his team can seal a gas line contract.

Clark said Tuesday the oil companies, before they pursue a huge gas-pipeline project, want certainty on oil taxes so they will know the state's tax take when they plan future exploration and development spending.

Critics of guaranteeing tax rates assert it would be illegal because the state constitution lets future lawmakers change taxes if they want.

Clark said the state expects the issue to be challenged in court.

Although Murkowski's proposal would add some $1 billion a year to the state's coffers when oil prices are high, as they recently have been, if oil prices were to fall to $20 a barrel, the state could take in $100 million less than under current law, said Pedro van Meurs, the governor's oil and gas consultant. Van Meurs joined Murkowski's news conference via telephone from Algeria.

Mike Menge, Murkowski's natural resources commissioner, said it's possible oil companies would pay little or even nothing under the new tax at times if they were making heavy investments, due to the proposal's tax-credit provision.

But that would mean more oil flowing and more state royalty collections, Menge noted. Royalty oil -- the state's share of production as the North Slope land owner -- is the state's top source of revenue, with the existing production-taxes a distant number two.

Representatives from the three producers confirmed Tuesday that they have an agreement in principle on major provisions of a gas-pipeline contract.

They were not as clear-cut about what they think of the governor's proposed oil-tax change.

"A profit-based tax has merit, but it must appropriately balance risk and reward," said BP spokesman Daren Beaudo.

A bipartisan group of legislators -- including House Speaker John Harris and Senate President Ben Stevens -- also met with the oil executives Monday, stressing that they will have the final say on oil taxes.

"You can negotiate with the administration all you want, but in the end you have to negotiate with us because we determine state law," said Harris, R-Valdez.

Stevens, R-Anchorage, said he delivered a similar message.

"They said they were optimistic about future investment in Alaska, and we said obviously we're interested in the future development of Alaska's natural resources. It just has to be a fair and equitable arrangement," Stevens said.

Rep. Ethan Berkowitz, the House minority leader, said he was encouraged by what he heard at Monday's meeting.

"The Senate president and the speaker told them we're not negotiating, and oil was going to be considered separately from gas," Berkowitz said. "They were very strong on that front."

State Rep. Eric Croft, D-Anchorage, attended the governor's news conference.

After it ended, he hotly debated Clark about Murkowski's oil tax plan. The two were face to reddening face, like a baseball manager with an umpire. Croft, who is running for governor, took Clark to task over the need for confidential negotiations and the level of the proposed oil tax.

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Daily News reporter Richard Richtmyer can be reached at rrichtmyer@adn.com or 1-907-586-1531. Reporter Wesley Loy can be reached at wloy@adn.com or 257-4590.

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What's next?

• Legislature begins consideration this week of Gov. Frank Murkowski's proposed legislation overhauling the state's oil taxation system.

• Murkowski administration is to unveil a draft natural gas pipeline contract laying out tax and other terms between the state and oil giants Conoco Phillips, BP and Exxon Mobil.

• Legislature ratifies, rejects or modifies the governor's oil tax proposal.

• Legislature accepts or rejects the gas contract.

• If lawmakers accept the gas contract, oil companies spend about $1 billion on engineering and other groundwork for a gas pipeline into Canada. Studies could take four years.

• Oil companies decide whether to build the pipeline, a potentially $20 billion project.