Alaska governor signs new oil, gas production tax law

Anchorage (Platts)--21Aug2006

Alaska Governor Frank Murkowski has signed the state's new oil and gas
production tax into law, hiking taxes on the industry by $1.4 billion to $1.6
billion/year, depending on oil prices.

The new tax law, signed August 19 and retroactive to April 1, contains a
"progressivity" formula that raises the tax rate as crude oil prices rise.
Despite the loss of production from a partial shutdown of the large Prudhoe
Bay field, Murkowski said Alaska would enjoy a $2 billion revenue surplus next
year thanks mainly to the new tax.

Although the new law increases industry's taxes, a new investment tax
credit is expected to encourage new spending by producers and explorers,
Alaska officials said. "We expect to see significantly increased investment in
oil and gas exploration and development resulting from this change," Murkowski
told a press conference on August 19. "This investment is crucial to the
future of oil production on the North Slope."

The new law shifts Alaska's production tax system from a tax on gross
revenues at the wellhead to a tax on net revenues, allowing deductions for
operating and capital costs, with an additional investment tax credit that
allows a dollar-for-dollar credit for up to 20% of capital investments.

In reaction to problems with North Slope oil transit pipeline
maintenance, however, state legislators inserted a clause disallowing the
equivalent of 30 cents/barrel of investment tax credit, arguing that producers
should be spending this amount anyway on maintaining aging infrastructure. The
investment tax credit is aimed at stimulating investment in new production.

Oil producers will pay 22.5% tax on net production revenues with the
progressivity formula hiking the tax rate at 0.25% for every dollar crude oil
prices rise above $40/barrel. At current oil prices North Slope producers will
actually pay about 26% on net revenues, one producer told Platts.

In a transition provision, the state will allow producers to pay under
the current tax system until January 2007 and then calculate what is due to
the state under the new tax back to April 2006. Payment on the 2006 tax due
should be made in March, state Tax Director Robynn Wilson told Platts.

Murkowski pushed for the new tax as part of an agreement with North Slope
producers on a gas pipeline, and because he wanted to replace the former tax
because of an incentive formula that had become obsolete under the current
producing environment on the North Slope. The producers agreed earlier this
year to support a plan by the governor for a 20% net profits tax as part of
the pipeline deal. Murkowski Chief of Staff Jim Clark told Platts he did not
expect the new tax to unravel the pipeline deal.

The state and producers are now renegotiating parts of the contract,
Clark said, and discussions on the new tax would be part of that. "They'll
recognize that the tax is higher than they agreed to, and they'll want
something for that in the negotiations," Clark told Platts.

Democrats in the state legislature criticized the new tax as being
too generous to industry. Representative Les Gara, Democrat-Anchorage, told
Platts he objected to deductions and credits in the new net revenues tax that
would require the state to pay for part of BP's costs related to the recent
Prudhoe field shutdown. Gara and other Democrats had proposed a disallowance
for those costs to BP, but they were outvoted on an amendment by the
Republican-led majority in the legislature. Another objection to the new tax
is that it will require aggressive auditing of operations and capital costs,
and create opportunities for producers to employ tax-avoidance measures.

--Tim Bradner, newsdesk@platts.com

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