Legislation Proposed to Modernize Oil Taxes
February 22, 2006
"Completion of the gas pipeline contract represents a major milestone in securing a natural gas pipeline, which will provide hope and opportunity for Alaska's future. Modernizing our oil tax system will provide Alaskans with revenue today," said the governor. "These are two historic events, ones that will define the state's economy for decades to come."
(February 21, 2006) An historic agreement was reached between the state and three major producers on the initial contracts for a Petroleum Production Tax and the construction of a Natural Gas Pipeline. Pictured above from left to right: Tony Hayward (Group Managing Director and CEO of E&P for BP), Frank H. Murkowski (Governor of Alaska), Morris Foster (President of ExxonMobil Production Co.), Jim Mulva (Chairman of the Board and CEO of ConocoPhillips) and Jim Clark (Chief of Staff to Governor Murkowski).
"ConocoPhillips is pleased that all parties have reached an agreement in principle with the State of Alaska on the base fiscal contract terms for an Alaska gas pipeline project. We also believe that a well-constructed net profits tax could benefit Alaska and provide the fiscal certainty that will support future investment," said Jim Bowles, president of ConocoPhillips Alaska.
"Oil contract terms consistent with the governor's proposed tax bill would provide the predictability and durability necessary to advance the gas project to the next phase. ExxonMobil also confirms that we have reached agreement with the governor on the major provisions of the gas fiscal contract," said Richard Owen, vice president of ExxonMobil Alaska Production, Inc. "We look forward to working with the administration to finalize the materials and initiate the public comment period."
The governor stated that technical issues connected to the gas contract must still be addressed along with oil fiscal stability terms. He also noted that the oil tax legislation will be transmitted to the Legislature for full public and legislative consideration.
"The legislation I am proposing strikes a balance," said Murkowski. "As governor, I must be mindful of all operators, the smallest to the largest, with an eye on the ultimate goal of a sound economic and investment climate in the state of Alaska."
The current production tax on oil is based on a percentage of the gross value of production and is driven by the Economic Limit Factor, which no longer works. The Kuparuk field, the second-largest oil field in the nation, will no longer pay a production tax this year and Prudhoe Bay will pay near zero taxes in 12-14 years.
The proposed legislation will deliver significantly higher oil revenues to Alaska. At current oil prices, Alaska will receive an additional $1 billion in production tax revenue.
"Alaskans deserves a fair share of revenues from our oil wealth particularly at this time of higher oil prices. With the producers seeking greater fiscal stability in return for a commitment to move forward on a natural gas pipeline, this is the most appropriate time to reform our ineffective and inadequate tax system," Murkowski said.
The new tax system will be based on the percentage of the net profit, or revenues minus capital and operating expenditures. Under the system, the producers will pay a 20 percent tax rate and receive a 20 percent tradable tax credit. Tax revenues would be lower when initial large capital investments are made and, consequently, higher as the production increases.
The petroleum production tax will provide a $73 million annual standard tax deduction that will provide an incentive for oil exploration by smaller independents.
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