Signals New Era in Greater Incentives for
Oil & Gas Exploration and Development
August 20, 2006
"We expect to see significantly increased investment in oil and gas exploration and development resulting from this change in our taxation philosophy," Murkowski said. "Such investment is crucial to the future of oil production on the North Slope and to critical state services that are dependent on the revenues oil production generates in Alaska."
"This reformation of Alaska's production tax to incentivize substantial oil and gas development is the first step to ensure a bright and prosperous economy for Alaska over the next 40-50 years," he said. "The next step is to finalize and approve the gas pipeline contract, which will provide the foundation for building the pipeline. Having the pipeline infrastructure to monetize our gas will provide Alaska not only the jobs and revenues from gas production, but will also extend the operating life of the state's oil pipeline by 20 years."
The new law also includes a tax credit of up to 20 percent of the cost of capital investments oil producers make in new exploration and development, and a floor of four percent. The tax revision is estimated to raise an additional $2.2 billion in revenue for the state at today's oil prices. Murkowski said he will propose saving much of the added income.
"We were successful in saving about $1.2 billion of last year's surplus, through forward-funding education and setting aside $300 million for investment in the gas pipeline," Murkowski said. "This has set an excellent marker for husbanding any surplus the new oil tax generates. I believe we need to repay the constitutional budget reserve as budget surpluses allow. We should continue to save for investment in the gas pipeline. And we need to be careful to avoid pumping up the operating budget, as there will be a natural impulse to do.
"The new Petroleum Production Tax provides a bridge from where we are today to the revenues that will begin with the gas in about nine years. It is incumbent upon us to shepherd this surplus with care and save as much as possible for potentially lean years ahead."
Murkowski also said he was very pleased that the PPT provides Alaska with what may be a once-in-a-lifetime opportunity to get our fiscal house in order. "Many Alaskans individuals, civic groups, industry support groups, and others have called for a fiscal plan for many years," Murkowski said. "The revenues generated by the PPT give us the foundational building blocks for that fiscal plan.
Murkowski noted that with passage of the PPT, a deposit in the Power Cost Equalization endowment will enable the program to be fully funded in future years. The administration proposed an appropriation of $183 million for the endowment, which the Legislature approved. The PCE endowment is expected to generate $25 million per year to help offset the high cost of energy in rural communities.
"The cost of heating oil has gone above $5 per gallon in some rural communities, and will continue to go up," Murkowski said. "The passage of the PPT will enable full funding of the PCE program to provide help for those communities to keep pace with those rising energy costs.
"The enactment of PPT will also provide $73 million in funding for the construction of three new rural schools, in New Stuyahok, Kongiganak and Noatak, so we are very pleased that those projects will be able to proceed."
SCS CSHB 3001(NGD)
Question #1. What result is this legislation supposed to deliver?
The state's old production tax based on an economic limit factor (ELF) did neither of these things. This PPT bill will do both.
Question #2. Why was this
reform needed now?
Question #3. How does this
bill encourage exploration and investment?
In most other oil provinces, a dollar earned from an oilfield that is then reinvested in that field is taxed less than if a company chooses to take that dollar and invest it elsewhere in the world. Alaska stood practically alone in not having its tax system reflect where profits were reinvested. This bill fixes that.
There are billions of barrels of heavy oil and viscous oil on the North Slope that have barely been touched because they require increased investment to get them into the oil pipeline. This bill recognizes these increased costs which will make it more likely that work on heavy oil will go forward.
Question #4. How will the bill's new provisions accomplish all this?
Question #5. Can an oil
company write-off its regular maintenance costs?
Question #6. How much increased
revenue are we talking about?
On the other hand, if prices return to the teens or twenties-prices that we saw from 1986 through 1999-and not much cash is being generated in Alaska's oil patch, then the PPT will go to zero. (The state will still collect royalties, oil and gas property taxes, and oil and gas income taxes.)
Under the old system, we always collected production taxes at low prices, even though it may not have been very much. The fact is that the additional amount collected by the PPT in a single year of $70 prices will make up for a decade of lower PPT collections from oil prices in the teens.
Question #7. What about
when prices are really high-like now?
Question #8. When will the
state get revenues from the tax change?
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