A Citizen’s Guide

What makes an oil tax progressive? What’s the difference between a field and a pool? And what’s an ELF got to do with anything?

Here are definitions to some of the words and phrases used in talking about the oil tax, the gas pipeline negotiations, and the oil and gas industry in general.

Alaska Department of Natural Resources, Division of Oil and Gas

The state agency that provides incentives, administers leases, oversees permitting, and collects revenue from state leases.

Alaska Permanent Fund

The permanent fund was created in 1976 as the state’s savings account for oil and gas revenue. The fund automatically gets 25 percent of oil and gas royalties. The first payment, in 1982, was $1,000. Payments after that started at $386.15 in 1983, rose to well over $1,000 in the late 1990s, and have fallen for the last five years.

Clawback

Usually refers to reacquiring money that has been paid or taken. In the context of oil and gas, refers to the part of Gov. Frank Murkowski’s proposed oil tax that would allow oil companies to recoup, through deductions, some of the costs of capital investments made in the last five years.

Corporate income tax

The state taxes the worldwide profits of oil companies based on the percentage of their property holdings, production, and sales that are in Alaska. In fiscal 2005, the state received 15 percent of its oil revenue, or $524 million, from corporate income tax.

Downstream

Whatever an oil company does once the oil or gas has left the field, including refining and marketing (see upstream).

Economic Limit Factor (ELF)

A component of the state’s severance, or production, tax system (see production tax).

Energy Information Administration

An arm of the U.S. Department of Energy that provides official worldwide energy statistics.

Field

An area including or thought to include at least one underground reservoir containing oil or gas, according to state statutes. When only one reservoir is involved, field and pool are used interchangeably. A field can contain multiple pools.

Gas cap

A layer of gas on top of an oil reservoir. The gas cap increases the pressure of the oil, sometimes enough to force the oil to the surface without pumping. Gas removed from Prudhoe Bay is currently injected back into the field to maintain pressure.

Gas condensate

A natural gas liquid coming from gas wells and measured by the barrel.

Heavy oil

A heavier (denser), stickier, harder-to-produce form of crude oil. On the North Slope, heavy oil is often closer to the surface and therefore cooler.

Incentives

State incentives include the Exploration Incentive Credits, or EIC, which allow companies to deduct some exploratory drilling expenses in leased areas or preliminary mapping expenses in areas the state plans to lease out.

Other incentives allow for reduction of the royalty to encourage otherwise uneconomic production of oil and gas. The royalty, which is normally 12.5 percent, can be reduced to 5 percent for new wells and 3 percent for existing wells.

Lease and lessee

A lease grants a company the right to explore an area and develop its oil and gas deposits. State leases are limited to 5,760 acres and are good for five to 10 years but can be extended as long as the field is productive. Rent on the leased land increases from $.50 an acre for the first year to $3 an acre after four years.

A lessee, according to state statutes, is “any individual or individuals, a corporation, or, collectively, two or more corporations or individuals, that hold a working interest in a lease.”

The DNR’s Division of Oil and Gas holds competitive lease sales on a regular basis.

Natural gas or gas

Non-liquid fossil fuel found in deposits with oil and composed mostly of methane. Natural gas also contains butane and propane, which can be separated in processing. State statutes define gas as “all natural gas and all hydrocarbons produced at the wellhead not defined as oil.”

Natural gas can be transported in a pipeline as gas or chilled to -260 degrees Fahrenheit and shipped as liquid natural gas, or LNG.

Natural gas is measured and sold by thousands of cubic feet, abbreviated Mcf, or millions of British thermal units, abbreviated MMBtu, which come out to be about the same. (Tcf stands for trillion cubic feet.)

The price of natural gas varies around the world more than that of oil, mostly because it’s harder to transport. The price per MMBtu at the Henry Hub, a spot in Louisiana along many of the country’s main natural gas pipelines, topped $14 last December—seven times the price in December 2001—but fell to below $7 in March.

Natural gas liquids

A liquid form of natural gas sold as oil from the North Slope and shipped down the Trans-Alaska pipeline but separated out later and used in various ways by the petrochemical industry. Natural gas liquids include butane (think cigarette lighter) and propane.

The North Slope

The geographic area that includes the National Petroleum Reserve-Alaska, Prudhoe Bay and the Arctic National Widlife Refuge and where almost all of Alaska’s oil comes from (some comes from Cook Inlet). The central North Slope area between NPR-A and ANWR has a proven reserve of about 7 billion barrels of oil and 35 trillion cubic feet of gas.

Oil or crude oil

Yellow-to-black liquid fossil fuel usually coming from underground reservoirs. At refineries, oil is processed to produce petroleum products, including gasoline, jet fuel, diesel fuel, as well as asphalt base. Crayons, bubble gum, tires and most plastics are also made from petroleum products.

Oil is measured by the barrel, abbreviated bbl, a unit of 42 U.S. gallons. Alaska oil is sold at the Alaska North Slope West Coast price, which is about the same as world prices. In January, the average ANS West Coast price was $62.85 a barrel. In January 2001 it was $24.37.

Owner

State statutes define an owner as “the person who has the right to drill into and produce from a pool and to appropriate the oil and gas the person produces from a pool for that person and others.” (See producer).

Petroleum Production Tax

This is the title Gov. Frank Murkowski has given his proposal for a tax on oil and gas production based on a company’s net profits rather than well and field production. The acronym PPT handily refers to both the name the governor gives to his specific proposal and to the type of proposal, which is a “production profits tax.” Rep. Les Gara, an Anchorage Democrat, has legislation that he, too, refers to as a PPT.

Pool

An underground reservoir containing, or thought to contain, oil or gas (see field).

Producer

State statutes define the producer as “the owner of a well or wells capable of producing oil or gas or both.” (See owner.) In the current oil and gas debate, “the producers” refers to BP, ConocoPhillips, and Exxon Mobil, the companies with the largest oil and gas operations in the state and the three who are negotiating a natural gas pipeline with Gov. Frank Murkowski.

Production tax

Production, or severance, taxes are imposed on companies producing oil and gas. Oil fields are taxed at 12.25 percent for the first five years and 15 percent after that, with adjustments made for well productivity.

The Economic Limit Factor, or ELF, is a component of the tax system that lowers the tax rate imposed on wells considered only marginally profitable. The ELF is unique to each field and determined by the productivity of individual wells and the field containing them.

The ELF is a number between 0 and 1 that is multiplied by the standard tax rate to determine the specific tax rate. For example, a field with an ELF of .5 would pay .5 X 15 or 7.5 percent tax.

The standard rate for natural gas is 10 percent.

Companies do not pay production tax on royalty oil and gas.

Progressive

An oil and gas tax is called progressive if it taxes companies at a higher rate as the price of oil or gas rises. Bills introduced by Gara and Sen. Hollis French in 2004 and 2005 would increase the tax rate as oil climbed above $20 a barrel.

Property tax

Oil companies pay property tax at a rate of 20 mills (2 percent, or $2 on every $100) on the appraised value of oil and gas production and transportation infrastructure. In fiscal 2004, the North Slope Borough received $193 million in property taxes from the oil companies and the state received $47 million.

Prudhoe Bay

The largest oil field in North America and the 18th largest discovered worldwide. Prudhoe Bay is thought to contain 25 billion barrels of oil. About 11 of the more than 13 billion considered economically recoverable have been recovered.

BP operates the field and has a 26 percent ownership of it. ConocoPhillips and Exxon Mobil each have a 36 percent ownership interest in the field, and other companies have the remaining 2 percent, according to BP.

The field also contains an estimated resource of 46 trillion cubic feet of natural gas in an overlying gas cap and mixed in with the oil, including about 26 trillion considered economically recoverable.

Quality bank

The system by which differences in the quality of oil are factored into the price that the producers receive and customers pay.

Flint Hills Resources, which buys about half of the the state’s royalty oil, produces about 60,000 barrels of petroleum products a day from 200,000 barrels of oil. Because the 140,000 barrels it returns to the pipeline are of different quality—usually lesser—than when the refinery took them, Flint Hills pays or receives a quality bank adjustment.

Reserve, known reserve or proven reserve

A quantity of oil or gas known to exist (see resource).

Resource

A quantity of oil or gas undiscovered and unconfirmed but believed to exist (see reserve).

Royalty

Companies producing oil or gas on state land are required to give a percentage of their production to the state. The royalty rate is most often 12.5 percent but is sometimes higher and can be lowered in some instances to encourage production (see incentives).

The state chooses whether to take its royalty “in-value,” meaning in cash, or “in-kind,” meaning as actual oil or gas, (RIV and RIK, respectively.) The state currently sells about half its royalty oil (around 60,000 barrels a day) to the Flint Hills Resources refinery in North Pole and takes the rest in cash.

Twenty-five percent of the royalty revenue goes to the Alaska Permanent Fund. Half a percent goes to a school fund and the rest goes to the general fund. In fiscal 2005, the state received $1.38 billion in royalties, with $1 billion going to the general fund, $345 million to the permanent fund, and $6.9 million to the school fund.

Severance tax

Severance, or production, taxes are imposed on companies producing oil and gas (see production tax).

Tariff

A charge for shipping oil down the trans-Alaska oil pipeline or gas down an eventual gas pipeline. Different tariffs are charged depending on whether the oil is used in Alaska or shipped out of state.

Trans-Alaska oil pipeline

The 800-mile oil pipeline from Prudhoe Bay to Valdez, completed in 1977 at a cost of $8 billion. The pipeline is jointly owned by the producers—BP, ConocoPhillips and Exxon Mobil—and other oil companies, who all charge tariffs for use. It is operated by the Alyeska Pipeline Service Co., a consortium. Gov. Frank Murkowski recently proposed that the state own a portion of the pipeline.

Upstream

Refers to exploring for, drilling, and pumping oil or gas, removing water and other things, and getting the oil or gas to a pipeline or ready for transport (see downstream).

Well

A number of wells can retrieve oil or gas from the same reservoir. Prudhoe Bay has more than 1,000 oil-producing wells. Alaska had 1,924 working wells in 2004.

Wellhead

The point where crude oil and/or natural gas reaches the surface.