A Citizen’s Guide

The Fairbanks Daily News-Miner’s May 5 editorial, entitled “Final thoughts on oil and gas,” expressed concern about a possible serious error in the Senate version of the oil tax bill. There is no such error. The tax bill—Senate Bill 305, or the petroleum production tax, applies to oil and gas, but the main focus is on oil.

On the North Slope, the Point Thomson gas field and other possible gas fields in the National Petroleum Reserve-Alaska contain significant volumes of condensates. Point Thomson alone contains 400 million barrels of condensates. Condensates are treated as oil under the oil tax bill. Therefore, all petroleum production tax deductions and credits are taken against the value of the condensates produced along with the gas.

The anticipated revenues based on average oil prices from the tax bill could be as much as $1 billion per year more than the current production tax. This $1 billion is a “net” number after the deductions for the petroleum production tax on the condensates for the gas fields.

So Alaska will receive $1 billion per year more in oil revenues after all of the oil and gas production costs have been deducted.

Given the fact that the estimated current average production tax rate (net of royalty) is about 7 percent, which is one-third of the 20 percent tax rate on oil, it is consistent to determine the petroleum production tax rate on gas on one-third of the gas revenues. In other words, applying 20 percent to one-third of the value of the gas makes the petroleum production tax really about equal to 7 percent on gross.

Of course, the North Slope gas production will be subject to the stranded gas contracts, which will be made available to the public on May 10. And therefore the gas gross revenue exclusion will only apply to possible producers on the North Slope other than companies that have signed the stranded gas contract or similar contracts. However, for such other producers the oil tax bill has to be fair with respect to gas.

The gross revenue exclusion of two-thirds of the value of the gas will also help in maintaining a reasonable price on Cook Inlet gas.

The difference between the petroleum production tax for oil and the petroleum production tax for gas is thus based on international standards and my economic analysis. The concept must be applied across the North Slope to get a complete picture. Looking at any one field—like Point Thomson—could create a distortion.

Rather than a “serious error,” the Senate has it right. As the Legislature proceeds toward passage of the petroleum production tax, it is heartening to see the hard work the members of the House and Senate have willingly put forth toward a bill that is in the best interest of all Alaskans.

The petroleum production tax and the gas pipeline contract are, without a doubt, the most momentous issues upon which the state of Alaska—the Legislature and the administration—will have to decide in the foreseeable future. It has been helpful in informing the public for the media to provide its insights into the process.

Pedro van Meurs is Gov. Frank Murkowski’s lead consultant on oil and gas issues.