April 27, 2006
Thursday

The Alaska Senate passed the Petroleum Production Tax bill (SB 305) on Tuesday that encourages new oil exploration and production and generates additional revenue for the state.

SB 305 highlights as passed by the Alaska Senate:

• 22.5% tax rate on production with a 25% credit rate for capital expenditures.
• Progressivity. State receives more revenue when the price of oil rises above $50 per barrel. (Based on today's oil prices, the state can take in an estimated $1.6 billion per year in additional oil revenue.)
• Provisions to protect Cook Inlet oil and gas production.
• New tax rate takes effect April 1, 2006.

SB 305 was originally requested by Alaska Governor Frank H. Murkowski. On Tuesday the Governor expressed his continued support for the administration's original petroleum production tax proposal, which sets the tax rate at 20 percent and the tax credit at 20 percent. He also expressed concern over setting the tax credit rate too high, which could result in considerable risk for the state.

"My original proposal was a carefully crafted balance between incentives for investment ­ the tax credit - and the tax rate," said the governor. "While I understand the desire in the Legislature to raise the tax rate, you cannot simply balance a higher tax rate with a higher tax credit. Such a structure creates too much risk for the state if the price of oil drops significantly, and thus too much risk for Alaskans who rely on their state government."

The governor noted that many new developments on Alaska's North Slope involve heavy oil, which requires significant new investment. A high tax credit rate coupled with large new investments in a low oil price environment could result in zero tax to the state.

"We cannot gamble solely on continued high oil prices," said Murkowski. "That is why I limited my proposal to a 20 percent tax credit. Extensive analysis by our consultant, Dr. Pedro van Meurs has shown that 20 percent is the maximum incentive the state can safely provide."

"A 25 percent tax credit is a high risk strategy for Alaska," said Dr. van Meurs. "That strategy gambles too much on oil prices staying high. If it is wrong, it would be to the great detriment of the state."

The governor also underscored the importance of providing a tax climate that encourages a significant increase in investment. North Slope production is declining rapidly, despite the current level of investment and to achieve the Department of Revenue's latest production forecast, investment must be significantly higher.

"We must continue to focus on encouraging the significantly increased investment needed to arrest the rate of decline of oil flow through TAPS. That is why it is important to keep the tax rate competitive ­ at 20 percent," said the governor. "The strategy of raising the tax rate and compensating with an increased tax credit is too risky for Alaska and will not result in the significant investment we need."

However, Sen. Lyda Green (R - Wasilla) said after passage by the Alaska Senate on Tuesday, "This legislation modernizes our petroleum tax structure by bringing it in line with how other oil producing regions of the world tax this non-renewable resource. I'm proud to say this bill will serve Alaskans well by bringing in plenty of new revenue for schools, roads and public safety for many years to come."

Senate President Ben Stevens (R - Anchorage) on Tuesday called the bill a win-win for the industry and the people of Alaska. "Oil production on the North Slope is falling fast and the state needs to do all it can to halt the slide. This bill creates incentives for the major producers and independents that will eventually put more oil in the pipeline, maintain and create new job opportunities for Alaskans and generate more revenue for the state."

After passage by the Alaska Senate Tuesday, the Petroleum Production Tax bill moved over to the Alaska House for its consideration.

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