A luncheon at the swankiest hotel in town turned sober recently when oil-company executives gave Alaska lawmakers a warning: Leave oil taxes...

Share story

JUNEAU, Alaska — A luncheon at the swankiest hotel in town turned sober recently when oil-company executives gave Alaska lawmakers a warning: Leave oil taxes alone.

Industry leaders repeated that message at a conference two days later, telling officials that a Feb. 1 tax increase could threaten investment in the North Slope.

“We ask ourselves, ‘Is Alaska really and truly open for business?’ ” said Steve Marshall, the president of BP Exploration (Alaska).

The oil industry had been riding high on North Slope crude prices, now around $43 a barrel. Then the announcement came that Alaska was changing the way production taxes are calculated for six satellite oil fields near Prudhoe Bay, the largest field in the country.

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks

The change imposed by Republican Gov. Frank Murkowski means a tax increase, which estimates have placed between $150 million and $190 million a year at current prices for the five oil companies that own the Prudhoe Bay field.

The state Department of Revenue said the satellite fields are operating interdependently with Prudhoe Bay and should be taxed as one unit. The satellites now pay little or no production tax because of a formula called the economic limit factor, which was meant to encourage the development of small or marginally profitable fields.

The change sent a shock through the state’s oil industry.

“We don’t want to play a survivor game here. The industry can’t afford it,” said Judy Brady, the executive director of the Alaska Oil and Gas Association, an industry group.

Supporters of the tax increase, and those who say additional changes are needed, contend the industry really isn’t being hurt by the tax and that the oil companies aren’t going anywhere as long as they’re pulling record profits out of the Alaska tundra.

At an oil-association luncheon last month, oil-company executives told Alaska lawmakers and their staffs that the effects of the change would be entirely negative. Changing the structure without due process, industry officials contended, threatened the viability of affected satellite oil fields and could send exploration money elsewhere.

The dispute comes as Republican gains in the Senate give President Bush his best chance yet to open the coastal plain of the Arctic National Wildlife Refuge, where proponents believe 11 billion barrels of oil lie beneath the refuge’s tundra and ice. The Bush administration is also advocating new exploratory drilling on thousands of acres on Alaska’s North Slope that had been protected, land that would presumably be affected, too, by the new taxes.

In the meantime, the tax change could crimp contract negotiations already under way for Alaska’s holy grail: a $20 billion gas pipeline from the North Slope.

Executives from the state’s top three oil producers — BP, ConocoPhillips and Exxon Mobil — who are directly affected by the tax change aren’t the only ones opposed. Smaller companies also are worried that their fields’ taxes may be changed in the future without warning.

“An increase in taxes will mean less investment,” said Mark Hanley of Anadarko Petroleum.

Murkowski said he has no plans to rescind his decision, and he is encouraging the Legislature to further examine production taxes and the economic limit factor.

But he appears to be giving the industry some wiggle room, saying late last month that he would honor earlier agreements preventing some other satellite fields from being aggregated like the Prudhoe Bay satellites. He also said he would consider appeals for the six affected satellite fields if the companies could prove the tax would make those fields unprofitable.

“We’ll take a look at anything that is questionable with regard to the application of the law,” Murkowski said. “And further, I said specifically we’re not going to allow any production to be terminated as a consequence of this tax application.”

George Gaspar, an oil analyst for Robert W. Baird & Co., said Alaska has to compete with the rest of the world when it comes to new development. Murkowski’s tax makes the state less attractive, he said.

However, Gaspar said, oil companies have already sunk billions of dollars into the North Slope and want to protect and keep those investments. Gaspar said he believed the change could affect negotiations for the gas-pipeline project, a longtime goal of the state and a project seen as replacing the state’s declining oil production in the future.

Oil companies have said in the past the $20 billion project is too risky, but high gas prices have spurred negotiations with the state, and a fiscal contract proposal could be presented to the Legislature this year.

“I think that this tax maneuver creates gas-development indigestion. I don’t know how else I can say it,” Gaspar said.

But, he said, it shouldn’t be a deal breaker if an airtight long-term fiscal contract could be negotiated.

“I don’t think that any company is going to be willing to step up to the plate on that Alaska gas pipeline deal unless they are absolutely guaranteed certain parameters of cost structure and taxation,” he said.

Some Alaska lawmakers want to restructure the formula used to assess production taxes.

Under the proposed legislation, taxes would increase $1 billion a year on top of Murkowski’s boost, under current prices. Democratic state Rep. Les Gara said those calculations may be altered considering Murkowski’s increase.

Sponsors of the bill say the goal is to make the partnership between the state and the oil companies more equal. As it stands, they contend, Alaska is a junior partner in the deal.

High oil prices highlight the inequity, they say. When oil is $43 a barrel, oil companies receive nearly 50 percent of the total oil revenue, according to Department of Revenue calculations. Alaska gets 26 percent, and the balance goes to the federal government.

Under Murkowski’s change, that industry-state split is about 48-28. Under the proposed legislation, the difference would shrink to 40-39.

Gara said there is no need for Alaska to undersell its oil, and he did not put much stock in the economic-limit-factor complaints from the oil industry.

“It’s a little bit of crying wolf to say, ‘We are taking $5 billion of profits, and we can’t afford for you to ask for a fair share,’ ” he said.

But Republican state Rep. Vic Kohring, the Oil and Gas Committee chairman, said he would like Murkowski’s decision reversed.

“The oil industry is the centerpiece of our whole economy. It’s what makes us tick,” Kohring said.