Palin offers oil tax plan for session in Juneau

Palin offers oil tax plan for session in Juneau
Tom Kizzia & Sean Cockerham, Anchorage Daily News, 05-Sep-2007

BP dislikes call for higher taxes in Alaska
Steve Quinn, Anchorage Daily News, 04-Sep-2007

Build trust on oil taxes
Editorial, Anchorage Daily News, 05-Sep-2007

BP Alaska President Doug Suttles talks taxes
John Tracy, KTUU News, 05-Sep-2007

Oil companies, associations express displeasure with tax proposal
Stefan Milkowski, Fairbanks News Miner, 06-Sep-2007

COMMENT: Alaska's Governor Palin wants to revisit new tax legislation, to ensure that Alaska gets a fair share of revenues from its oil. Industry throws up the "scare away investment" bogeyman. It's the same debate in Alberta, where royalties are under review. In BC, it's still the giveaway royalty regime.

Gov. Sarah Palin will call lawmakers to Juneau for a special session next month, where she will ask them to increase oil taxes by adopting a new hybrid system combining gross-production and net-profits taxes.

The tax proposal, announced in Anchorage on Tuesday, would raise the current tax on oil field profits from 22.5 percent to 25 percent. It would also create a floor of a 10 percent tax on gross production that would kick in on the state's oldest "legacy" fields if future profits shrink.

The special session begins Oct. 18 and can last up to 30 days.

Other changes, if adopted by the Legislature, would do away with retroactive deductions on investments from previous years and investments made to catch up on deferred maintenance. Credits would be available to encourage investment in new fields.

Palin also called for changing job classifications for state tax auditors, raising salaries to bring more expertise to the state.

A simple tax on gross oil production, which Palin favored at first, would "risk the viability of future fields," the governor said in announcing her hybrid plan.

"We want to make sure the golden goose is fed and not killed," she said.

State officials have dubbed the new plan Alaska's Clear and Equitable Share, or ACES.

MIXED REACTIONS

Palin originally wanted to hold the session somewhere on the road system. In agreeing to go to Juneau, she said she wants to see committee hearings outside the capital. Legislative leaders would have to agree to such hearings.

The governor's plan got a favorable reception from House Speaker John Harris, R-Valdez, who attended Tuesday's event. He said legislators would probably feel compelled to make some changes, given the cloud of corruption over the original tax. Palin's plan seems to offer change but not a huge overhaul, he said.

Harris said he hopes to begin committee hearings on the road system at the start of October, after a specific bill has been drawn up.

But Senate President Lyda Green, R-Wasilla, was less enthusiastic. She said it seems too soon to reconsider last year's tax changes. She also didn't like the idea of splitting the special session between Juneau and the road system.

Rep. Harry Crawford, D-Anchorage, said he was disappointed, calling the plan not much more than a warmed-over version of the existing net-profits tax. Democrats called last week for a simple, predictable tax like a gross-production tax.

Oil industry reaction was negative.

Increasing tax rates will reduce investment here, said BP Alaska president Doug Suttles. The state should be focused on offsetting the decline of oil production, he said. "We have to call on every Alaskan to think really hard about the future."

Both the increased tax and the notion of changing taxes for a third time in three years -- former Gov. Frank Murkowski imposed a smaller tax increase through regulation before the PPT was passed -- make for "a pretty jittery investment climate" in Alaska, said Marilyn Crockett, executive director of the Alaska Oil and Gas Association.

PALIN GIVES IN

The Legislature passed the latest oil-profits tax in August 2006. It was designed to allow oil companies to deduct operating and capital expenses before calculating taxes. That plan was presented by Murkowski as a way to promote investment. The Petroleum Profits Tax, or PPT, replaced the discredited "ELF" tax on production that was riddled with exceptions.

Legislators argued over what percentage of net profits should be taxed. After much wrangling, they settled on a 22.5 percent tax rate.

Some legislators, including many Democrats, had argued for a tax on gross production instead of net profits. Palin herself favored a gross tax during her 2006 election campaign.

In recent weeks, Palin said, analysis by state officials showed that a simple gross system would either mean less revenue for the state or hurt the oil industry's investment climate.

"I was dragged kicking and screaming, with a little bit of gnashing of teeth, even, away from the pure simple gross system," Palin said Tuesday.

Palin said the tax has to be revisited because the original version was tainted by corruption. Several legislators have been accused by federal prosecutors of selling their votes on the oil tax in 2006. Two of them, former Reps. Pete Kott of Eagle River and Bruce Weyhrauch of Juneau, are scheduled to stand trial in federal court starting today.

Palin also said the tax is not performing as predicted because industry expense deductions are coming in much higher than expected.

Administration officials said that, in fiscal year 2007, the new PPT brought in $1 billion more than the old tax -- but $200 million less than was predicted when the PPT was passed. Unless the tax is changed, rising deductions from the industry will bring $800 million less than predicted for the next fiscal year, said Revenue Commissioner Pat Galvin.

"I'm not sure how disappointed we should be with getting a billion dollars more," Green said after the governor's announcement. "We really need to kind of hold on and review it some more."

TIME TO MAKE A MOVE

But Palin said it is important to act now to make sure Alaska gets an equitable share of the oil's value.

"There are those who would say we should do nothing and that we should continue the PPT experiment. Doing nothing is not an option," Palin said.

The proposed new tax would bring in $700 million more this year than the PPT tax, according to state officials. But Democrats complained that's still $100 million less than was promised by a tax that was passed with undue pressure being exerted by lawmakers now accused of corruption.

Palin's earlier statement about holding the special oil tax session on the road system met resistance. Many legislators said they preferred to work in Juneau, where their offices and staff could be at close hand.

"It's kind of a hybrid plan there, also," Palin said of her call for hearings away from Juneau.

Contact reporter Tom Kizzia at tkizzia@adn.com and Sean Cockerham at scockerham@adn.com.

The tax and the session

Palin's "hybrid" proposal for new oil tax:

Alaska's Clear and Equitable Share

• Establishes minimum gross production tax for major "legacy" fields.

• Raises net profit tax on North Slope fields from 22.5 percent to 25 percent.

• Eliminates some deductions, such as catching up on deferred maintenance.

Plan for legislative session is a hybrid too

• Special session begins in Juneau on Oct. 18, lasts up to 30 days.

• Commitee hearings on new bill to be held outside Juneau, probably before session.

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JUNEAU, Alaska (AP) - The oil industry never liked the 22.5 percent net profits tax the state passed last year, and now Gov. Sarah Palin wants that raised to 25 percent.

It's part of a restructuring plan of the state's oil production tax Palin announced Tuesday, but one that doesn't sit well with the state's largest operator, London-based BP PLC.

Doug Suttles, president for BP Exploration (Alaska) Inc., said the state needs to be mindful that too much change would discourage multimillion dollar investments.

Those investments are crucial to extending the life of North Slope production - already in a 6 percent annual decline - by several decades.

"The big enemy in Alaska is production decline," he said. "The only way to offset it is investment, not just for exploration of new fields but existing fields and new technology."

Palin stressed she is not anti-oil - indeed, her husband Todd just returned to his blue-collar production job for BP on the North Slope after a year's leave- but believes the year-old tax needs to be restructured.

She wants lawmakers during a special session to start Oct. 18 in Juneau to fix a system she has called a failure and tainted by the federal corruption charges against former lawmakers in connection with the tax.

Palin's announcement comes as two former lawmakers begin their federal trial Wednesday on corruption charges.

These bribery and extortion trials are linked to the passage of the oil tax and they have helped thrust the state's political credibility into the national spotlight.

Palin noted the upcoming trial during her Tuesday news conference in Anchorage, but still stressed the need to fix a tax that she said "isn't working as promised."

Recent projections for the current Petroleum Profits Tax have the state falling $800 million short of what was predicted by former Gov. Frank Murkowski's administration last year.

That's nearly enough to fund the state's entire public education budget for the current school year.

Palin says she wants a tax that is fair to the state, but also provides the industry with the right incentives for future the exploration and production.

"We must receive appropriate value for our oil," she said. "It must be a clear and equitable share."

But some lawmakers and industry leaders are skeptical, saying it's too soon revisit the tax lawmakers passed just last year.

Senate President Lyda Green, R-Wasilla, stood firm on her long-standing belief that a special session is not necessary to rewrite the state's Petroleum Profits Tax.

"There is nothing that we are going to be doing that can't wait until the regular session next year," she said. "It's way too early right now to say whether (PPT) is right or whether it isn't right."

Nevertheless, lawmakers will report next month to the capital. Palin earlier announced the special session, but on Tuesday explained the scope of what she wants lawmakers to consider and the venue for the session, which can last up to a month.

The current tax has a base rate of 22.5 percent on oil company profits, but also affords the companies various deductions and credits.

Palin said she wants lawmakers to replace the current net profits tax plan with what she calls a hybrid of a net and gross profits tax.

She is calling it Alaska's Clear and Equitable Share, or ACES. Some of those changes include:

- Raising the tax rate from 22.5 percent to 25 percent on net profits, a figure some lawmakers pushed for last year.

- Not allowing deductions on facility repairs deemed to be from poor or negligent maintenance.

- A 10 percent gross-based floor tax on some of the older or "legacy" fields such as those in the North Slope.

- Eliminate some deductions, including those for retroactive investments, known as "claw backs."

"What the governor is trying to do here is get a better return for the state and create an environment that encourages more investment, and for that I applaud her," said House Speaker John Harris, R-Valdez.

"I do believe once we get the bill in a few weeks, we will want some expert advice as to what the effects of the bill will be on the budget, on revenue and on investment," he said.

But House Minority Leader Beth Kerttula, D-Juneau, isn't convinced that Palin's plan will achieve the stated mission.

Kerttula said the changes don't go far enough to keep the tax laws simple and understandable.

"Right off the bat, I've got some grave concerns," she said. "We still don't have much of a picture as to what deductions are going to be allowed."

Senate Minority Leader Gene Therriault, R-North Pole, said he would like to see more details of Palin's plan.

"This is more than rounding off the edges," Therriault said. "There is a lot of detail we have yet to see.

"If they are true to their word and have run the numbers with good data, then what they proposed could ultimately result in a fair take for the state."

Palin has not formally proposed the changes in a bill just yet; she expects to do that in a few weeks.

Palin had earlier said she wanted the special session to be held on the state's road system, in places like Anchorage or Fairbanks, to allow the public greater access than in Juneau, the state capital that is only accessible by boat or airplane.

However, she deferred to the wishes of lawmakers to keep the session in Juneau, but has asked legislative leaders to consider holding committee hearings elsewhere.

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* Lawmakers should heed call for hearings on road system
* Take it on the road, lawmakers. Share a little, Juneau.

Gov. Sarah Palin has called the special session on oil taxes for Juneau, despite being inclined to meet closer to where most Alaskans live.

She also has urged lawmakers to hold committee hearings and take public testimony on the road system.

That's a good idea, especially given the context of this special session.

This session aims to make sure that Alaska gets a fair return on the oil wealth that Alaskans own. This session is necessary to restore Alaskans' faith that their government can do that job with honesty and competence. The current tax regime carries the baggage of the current corruption scandal. This session must clear the air.

Tuesday, Gov. Palin stressed the message that the oil is ours. So is the government. That's why as many Alaskans as possible should have as good a look as possible at the work of the administration and lawmakers. While the Legislature will convene in Juneau, there's no reason that committee meetings can't be held in Anchorage, Fairbanks, Kenai, Wasilla and/or Palmer.

Yes, there are logistical problems. But those are well worth the trouble for the governor and lawmakers to come to the people. Lawmakers needn't wait for the governor's plan to hold hearings; oil tax bills already in various committees can provide vehicles for debate and testimony.

Gov. Palin's proposal will no doubt drive the session, and her tax bill likely won't be ready until early October. But she and Revenue Commissioner Pat Galvin on Tuesday outlined the highlights of their proposal. There's substance to debate now, and to compare with the other tax revisions in the works.

Gov. Palin knows that her first job is not an oil tax proposal, as important as that is. Her first job is to restore Alaskans' trust in their government. That's the first job of lawmakers too. And that's better done face to face.

BOTTOM LINE: Lawmakers, governor need to take special session to wider audience of Alaskans before they take it to Juneau.

*Channel 2 News interview with BP Alaska President Doug Suttles

ANCHORAGE, Alaska -- BP Exploration (Alaska) Inc. President Doug Suttles answered questions from Channel 2 News about Gov. Sarah Palin's proposal of a new oil tax regime that would effectively be a hybrid tax on net production and gross profits.

Channel 2 News: How is this hybrid net and gross profits tax proposal going to sit with the industry do you think?

BP Alaska President Suttles: I think what we all need to be worried about just now is the future for Alaska. I mean, the big issue we all face is decline, and what we need is a structure here that is going to focus investment.

I think the biggest concern at the moment is the net structure did encourage investment but the [tax] rate was already too high, and this looks like an increase - and the issue is competitiveness. We need to attract capital in all the areas of the industry.

Channel 2 News: Do you think the state's current Petroleum Profits Tax at 22.5 percent is a fair tax, and do you plan on encouraging lawmakers to keep it?

BP Alaska President Suttles: Well, I think that's right. I think our job in this is to get our view of the story out and make sure people understand the decision they face, and that we have a good and thoughtful debate.

Just to put this in perspective, the tax rate, I think, with this new structure, would have us almost 50 percent higher than places like the Gulf of Mexico or Alberta, Canada; and at least 25 percent higher than places like Texas, Oklahoma and Louisiana. So, Alaska needs to attract new dollars to offset decline.

Channel 2 News: One reason the governor stated for taking another look at the state's tax structure is the cloud of corruption under which the original vote was taken.

Clearly, two VECO Corp. executives were exerting influence on the vote, admitting to bribing lawmakers.

Isn't going back and at least re-affirming with a majority of the Legislature that the original bill is truly their intent a responsible thing to do?

BP Alaska President Suttles: I think we have to respect the governor's wishes here if she wants the Legislature to readdress [the PPT] and I respect her right to ask that.

I think what's important now is that we have a good and thoughtful debate. This is going to be about Alaska's future. Like I said before, we've got to encourage investment in this state and we need to make sure the tax structure will do that.

Channel 2 News: Another concern for critics of the PPT was the types of deductions the industry might take, including deductions for the repair and replacement of poorly-maintained pipelines, including the corroded feeder lines BP replaced at Prudhoe Bay. Alaska Department of Revenue Commissioner Patrick Galvin today said the state has yet to determine exactly how much BP deducted from its tax bill for replacing those lines, and that is part of the problem with the PPT.

Can you tell us how much BP deducted for replacing those lines, and how the company justifies those deductions?

BP Alaska President Doug Suttles: Of course, all we can speak to now is last year's tax filing. Last year, our severance taxes went from $180 million to over $500 million, so almost tripling, and that was inside of $2 billion in total government payments BP made. I think there are ways to solve questions around what deductions are fair and reasonable. There are good opportunities to do that through things like the joint interest billings that occur between the various owners of [Prudhoe Bay oil field].

I think there are ways to address those concerns that the state has enough transparency into what deductions are being taken.

Channel 2 News: Can you tell us, though; do you have a figure that you know that BP did deduct from its taxes for those repairs?

BP Alaska President Doug Suttles: You know, I don't have that on the tip of my tongue. Last year, the deductions were all predominantly in response to the spill in making sure we got production back on. Most of the expense for replacing those lines has been incurred this year and will be incurred next year, and those filings have yet to occur. So I just don't have that number in front of me.

Channel 2 News: BP and the other producers have said they won't be submitting a gas pipeline proposal under the requirements of the Alaska Gasline Inducement Act, but will you submit a plan anyway, so the public and lawmakers will have something to measure against whatever plan the state adopts under AGIA?

BP Alaska President Doug Suttles: Well, I think that's a really good question, and I think what we're doing right now is try to find a way to get this gas moving. We're completely aligned with the state and the governor wanting to find a way.

We had certain issues with AGIA and right now we are working with our partners to see if there is some way we can put a proposal forward so that the state can get it moving.

So, it's a little early to say but I can tell you we're working hard looking for opportunities to do that.

Contact John Tracy at jtracy@ktuu.com

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Oil companies, associations express displeasure with tax proposal

The head of the Alaska Oil and Gas Association on Wednesday presented a long list of concerns regarding Gov. Sarah Palin's new oil tax proposal.

Marilyn Crockett said the proposal could decrease investment in the state by raising the tax burden on companies and scare companies away by presenting an unstable investment climate. She also said it would replace a tax that isn't broken and has hardly been given a chance to work.

"The industry does not want to have a special session," she told members of the Alaska Support Industry Alliance at a luncheon in Fairbanks.

Other members of the oil and gas association, which include ExxonMobil, BP and ConocoPhillips, some of the largest producers on the North Slope, also expressed their reservations about Palin's proposal.

"We agree with the governor's approach to stay with a PPT-based tax structure, however, we are concerned that the tax rates proposed will make every single project look less attractive for us to re-invest," Kevin Mitchell, vice president of finance and administration for ConocoPhillips, wrote in an e-mail to the News-Miner.

On Tuesday, Palin restated her intention to call a special legislative session next month to revisit the oil production tax passed last summer, and she presented an outline for a new tax that would increase the tax rate.

Palin said the current petroleum profits tax, or PPT, "isn't working as promised."

According to Revenue Commissioner Pat Galvin, revenues from the PPT will likely come in a little short of expectations in the fiscal year that just ended and very short of expectations next year. Instead of bringing in an additional $1 billion over the old tax system, the PPT will likely bring in about $250 million more in fiscal year 2008, according to department figures.

Crockett pointed to fiscal year 2007, in which the new tax is expected to add about $1 billion in state revenues over the old tax.

"Is PPT working? I would say that it is," she said.

Overall, she said, the state should be looking at how to encourage companies to invest in the state and keep production levels up, ensuring future tax revenues as well as revenues from royalties and property and corporate taxes.

"What we need to be focusing on is keeping that pipeline full," she said, "half-full at this point."

Oil production has dropped from a peak of more than 2 million barrels a day to less than 800,000 barrels a day, she said, and maintaining production levels will require significant new investment.

On Wednesday, Galvin pointed to cost increases faced by the companies in explaining the reduced revenue estimates.

Capital costs are now expected to be about 50 percent higher in fiscal year 2007 than was thought when PPT was passed, and about 100 percent higher in fiscal year 2008, he said.

PPT allows companies to deduct operating and capital costs and receive credits on certain capital costs.

Galvin acknowledged that by switching to a tax based on net company profits, the state had accepted the risk that revenues could drop if costs increased. He said the administration wanted to revisit the tax not to fill the revenue gap but because the projected revenues were so far off.

"It calls into question whether legislators would have made the same choice," he said.

Contact staff writer Stefan Milkowski at 459-7577 and at smilkowski@newsminer.com.

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