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Analysts see oil's gain in Alaska, not tax pain


March 31, 2006

JUNEAU, Alaska - Oil industry profits in Alaska would reach several billion dollars a year, even at tax rates much higher than those Gov. Frank Murkowski has proposed in his oil-tax reform legislation, according to a new analysis by the state Revenue Department. Murkowski is seeking to replace the state's oil and gas production tax with a 20 percent tax on profits while at the same time allowing companies to deduct from their taxable income 20 percent of the amount they invest in Alaska oil field development.

Oil industry executives, in public testimony before the Legislature, said a higher rate than the governor has proposed would create an unfavorable business climate and thwart investments. Some legislators make a similar argument.




However, the Revenue Department shows profits remaining high even at tax rates exceeding what the governor or Legislature have proposed. Its study, released this week, shows that when oil prices are at $60 a barrel, as they recently have been, industry profits in Alaska would slip to about $6.5 billion next year from about $6.9 billion under the governor's proposal.

At the same time, profit margins - the percentage of revenue the companies have left over after expenses - would decline to about 40 percent from 43 percent, the Revenue Department's analysis shows.

Even with a 30 percent tax rate, the industry would take $5.8 billion in profits out of Alaska and maintain a profit margin of about 36 percent, according to the report.

At $40 a barrel, the profits drop. At the 25 percent tax rate the Legislature is considering, the company earnings from Alaska would go down from $3.86 billion to $3.48 billion.

Lawmakers have hashed through the details of Murkowski's plan for the past five weeks, and the tax rate has been among the most contentious components.

For one thing, just days before Murkowski rolled out his tax bill, several of his top aides had said publicly that he intended to propose a 25 percent rate. The governor said he pared back the rate as part of a compromise to get the producers to go along with a gas pipeline deal.

Further, several industry consultants, including the governor's top oil and gas adviser, have told lawmakers that 25 percent is a fair rate and would not hinder future oil and gas investments.

Several legislators, however, were confounded when the executives refused to quantify the specific impact the tax proposals would have on their profits, saying they didn't want to tip their hands to competitors.

Rep. Les Gara and Sen. Hollis French, Anchorage Democrats who are staunch advocates of higher oil-industry taxes, about a month ago asked the Revenue Department for an industrywide analysis of the tax proposal's impact on profits.

Legislative panels in the House and Senate have been modifying various elements of Murkowski's proposal, including the tax rate and its sundry write-offs and incentives. The Revenue Department's analysis did not take those changes into account.

Even so, it does provide a clearer picture of industry profits and how the new tax scheme would affect them than had emerged during the past five weeks of committee work on the legislation.

"When you look at the effect of the different rates on profitability, you find it's not as big as might be suggested by the industry," French said. "It's an excellent antidote to a lot of the spin we're getting."

Daren Beaudo, BP spokesman, said his company did not know how the Revenue Department arrived at its figures and could not comment. He said, however, that BP loses money under the current tax system when oil sells for $20 a barrel or less, while it would make a modest profit under the governor's.


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Ketchikan, Alaska