Alaska revenue department proposes new oil and gas production tax

Anchorage (Platts)--2Feb2006

Alaska's revenue commissioner told state legislators Feb 1 that a 
proposed new oil and gas production tax should be adopted into law this year,
and that Alaska's current production tax is dysfunctional in a high oil price
environment. 
     The new tax would be more sensitive to oil price changes than the current
tax, which is linked to the number of wells in a field and daily production
rates, revenue officials said. 
     If a proposed new Profits Participation Tax were passed by lawmakers, at 
current oil prices Alaska would earn $1- to $2-bil in additional revenues per
year than under the current tax law. 
     If oil prices dropped to $40/bbl the state would earn $400- to $800-mil
more than under current taxes, the officials said, but if prices dropped to
$20/bbl the state would lose $100- to $180-mil more under the proposed new
tax.  
     If more oil discoveries are made and a natural gas pipeline is built, the
state could earn $1.5- to $2.5-bil in new oil tax revenues, the officials 
said. This year Alaska will earn about $4-bil in total revenues from oil 
production. 
     A significant feature in the new tax proposal is an investment tax credit
that would allow capital investments credits to be banked against future years
or sold to other oil and gas companies operating in the state. This would be a
major incentive for independents or new explorers, the revenue officials said.
     Modeling done by the revenue department indicates that major producers
would see long-term profits reduced by about 6% under the new tax but that 
some of this would be offset by the new capital investment credits. 
     The effective rate of tax, assuming tax credits for capital investment,
would be in the range of 10% to 14% of gross production profits, the officials
said.    
     The current production tax law contains an incentive formula, the
"Economic Limit Factor," or ELF, that has worked well years past in 
encouraging development of small fields when oil prices were lower. The
formula in the ELF is linked to well productivity and has no link to oil
prices or overall profitability, the revenue officials said. 
     Under the current tax the effective tax rate is expected to be about 4%
of gross production profits under any price from $15/bbl to $60/bbl, they
said.
     Under the current ELF formula the Kuparuk River oil field, the second
largest in North America, will pay no production tax this year. "That a
prolific oil field like Kuparuk will pay no production tax is ridiculous," a
state official said.

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