Bradners'

Alaska Legislative Digest

October 24, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Compromise 'deal' in House on higher oil taxes?

The concern over a special legislative session dealing with a bill increasing oil taxes has always been that a 'get out of town' compromise might involve ratcheting up the tax from what was initially introduced. Glimmers of such a scenario are appearing. In a new development in Juneau, House Democrats said the Palin administration and House Republican majority members approached the Democratic minority to discuss possible 'areas of agreement.' Revenue Commissioner Pat Galvin, the administration’s lead on the tax issue, confirmed that a range of scenarios proposed by House Democrats are being run analyzed in the administration’s ACES computer model. A compromise appears to have some House Republican support. House Speaker John Harris and Majority Leader John Coghill met with House Minority Leader Beth Kertulla and other Democrats to discuss the idea. It is not known what senators think of the idea.

Democrats are still hazy on details of what they might support, but they are leaning toward much higher taxes on legacy fields and a higher tax rate and steeper accelerator on the progressivity surcharge in the Petroleum Profits Tax, or PPT. Rep. Les Gara (D-Anch.) said terms being analyzed are in the range of a gross revenues tax equal in effect to a 35 percent net revenues tax on large legacy fields production (Democrats are waiting for the Dept. of Revenue to advise them of the appropriate gross revenue tax rate), 25 percent on net profits on 'newer fields' and a progressivity surtax that triggers at a per-barrel profit of $40 (as in the current law) but with a steeper escalator of that increases the effective tax rate as per-barrel profits go up.

Meanwhile, Rep. Harry Crawford said he has dropped plans to introduce separate legislation as an alternative to the governor’s tax bill. Crawford had planned to sponsor a bill with a gross tax of 19 percent or higher on large 'legacy' fields, a net profits levy on other fields and a 40 percent tax credit for new production. Changes would now be offered through amendments, he said.

Correction:

We incorrectly reported Oct. 22 that Crawford is drafting a new initiative petition to levy a natural gas reserve tax. Crawford said that effort is underway for the 2010 election ballot. His immediate effort, targeting the 2008 ballot, is a petition to impose a gross production tax on the Prudhoe Bay, Kuparuk and Alpine oil fields and offer tax credits for new production.

Slope producers say huge investments needed to sustain production rates ExxonMobil Corp. told Alaska legislators Oct. 23 that it and other North Slope oil producers would have to increase new investment to between $3 billion and $4 billion a year to flatten the decline rate of Alaska production. The companies are now investing about $2 billion a year, Craig Haymes, ExxonMobil’s Alaska production manager, told the House Oil and Gas Committee in Juneau. Chevron USA Alaska manager John Zager agreed with Haymes, in a separate presentation to the committee, that about $4 billion per year is needed to significantly slow the decline.

The Department of Revenue’s long-term production forecast calls for an approximate 3 percent average decline but this is widely viewed as very optimistic because much of the new oil needed to meet the agency’s prediction will be from projects not yet developed, which would also require major investments.

'Conservatively, we estimate that at least $30 billion to $40 billion of investment is required within the next 10 years to meet the Department of Revenue forecast,' Haymes told the committee. Most of this investment is needed in the next few years to get the needed new production on-line within the 10-year period, he said. Slope producers are limited by available prospects and by current state taxes that should be reduced to make more development projects economic, Haymes told the legislative committee. Raising taxes higher is going the opposite direction, he said.

Zager said new oil can be developed in Alaska but most of it will be from existing fields. New exploration prospects in Alaska on lands open to drilling are modest compared with U.S. regions like the deepwater Gulf of Mexico. 'New exploration plays in Alaska are not world-class prospects. They are middle-of-the-road, and costs are high,' Zager told the legislators.

North Slope producers are keeping the production decline to about 6 percent yearly through investments of about $2 billion per year in drilling and new enhanced oil recovery projects. Most of the investment is in the two largest fields, the Prudhoe Bay and Kuparuk River fields, which also produce about 70 percent of the 750,000 barrels per day coming from the slope. Haymes said that if the $2 billion in annual investment weren’t made the decline rate would increase to about 15 percent yearly. A 15 percent decline rate would bring North Slope production to as low as 150,000 barrels per day within 10 years, he said. That is too low to sustain trans-Alaska oil pipeline operations.

Wednesday’s schedule

9 a.m.

• House Special Committee on Oil & Gas: presentations by legislative consultants.

10 a.m.

• Senate Resources Committee: testimony from ExxonMobil, BP and ConocoPhillips.

5:30 p.m.

• House Special Committee on Oil & Gas: public testimony from Legislative Information Offices. Others may testify by teleconference by calling 1-888-295-4546.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.