Unexpected Tax Hike Drills Alaska Oil Producers

Published April 1, 2005

Alaska Gov. Frank Murkowski (R) surprised oil and gas industry officials in his State of the State speech on January 12 by announcing a $150 million tax increase on an industry that already pays more than 80 percent of the state’s general fund budget.

“We were totally taken by surprise,” said Judy Brady, executive director of the Alaska Oil and Gas Association. “This is a governor who campaigned on no increase in taxes. The concern on oil companies’ part is that this is a change in policy from how oil fields were treated. It’s caused a lot of concern. At the same time, the governor has suggested hearings on changing the production tax.”

Brady said 87 percent of Alaska’s general fund budget revenues come from the oil and gas industry.

Satellite Fields Now Taxed

Murkowski increased taxes by ordering smaller oil fields to be consolidated with larger fields for tax purposes.

Under the state’s Economic Limit Factor (ELF), which charges a tax based on the amount of oil drawn from fields and the number of wells in operation, fields or wells that fall below the ELF pay no tax. By ordering the consolidation of multiple fields for tax purposes, owners of wells that had been below the ELF began paying taxes on them.

“There were six fields operating with an anchor field. The Department of Revenue can aggregate fields or separate them. These fields were really part of the anchor field,” said Dan Dickinson, director of the tax division of the Alaska Department of Revenue.

Alaska law gives the department authority to decide on its own whether oil and gas fields should be treated separately or aggregated, Dickinson said.

Changes Were Discussed

In an official statement, Murkowski said, “If my decision to aggregate six fields with Prudhoe Bay was based on faulty data, I have given them [oil and gas industry officials] the opportunity to come in and present their facts and figures to the Department of Revenue. In this way all pertinent data will be on the table so that at the end of the day both the oil producers and the people of Alaska will be treated fairly.

“I ran for governor to get Alaska’s economy back on track. Tough decisions require a significant resolve of conviction, and I am convinced that it was fair to aggregate the six fields with Prudhoe Bay for severance tax purposes. My decision reflects the producers’ decision to consolidate the individual satellite fields into the Prudhoe Bay Unit.”

Murkowski said he twice met with industry representatives to discuss tax changes and was told they would not support the changes.

Preferred No Change

Brady confirmed this. “We said our best advice is do not change the taxes, do not increase them. If production is what you’re after, increasing taxes is not the way to do that. We’re making about $3.5 billion from oil revenues, about the same as 1981 and 1982 when production was higher.

“Our tax system protects the state on low prices, gives them a big chunk at medium prices, and at high prices the state still does well. If it’s working, you’re taking terrible risks by changing things.”

Brady said Alaska is the highest-cost place in the world for oil producers. Production has fallen from 2.1 million barrels a day in 1989 to 1 million a day now because the larger fields are being drained of oil, and smaller fields are expensive to bring on line.

“If you’re going to have the kind of investment you need to keep it at one million barrels a day, we’re going to need to double investment from $30 billion [over 10 years; companies are spending more than $3 billion a year on these fields] to $60 billion over 10 years [because production in these fields is falling]. If you start messing with taxes, we have other places to go. We’re in worldwide competition for money. The state doesn’t see it like that.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.