A Citizen’s Guide

JUNEAU—Oil industry representatives on Tuesday blasted the latest attempt to break the Legislature’s deadlock over a new production tax.

The “produce or pay” plan would reward oil companies that increase production by lowering their tax rates, while punishing oil companies that don’t produce new oil and gas with higher tax rates.

Executives from two of the state’s largest producers told the House Finance Committee that the new tax plan doesn’t reflect the reality of the decline of Alaska’s aging fields and urged the Legislature to reconsider the original tax deal they agreed to with Gov. Frank Murkowski.

In addition, the Alaska Oil and Gas Association, which represents all oil and gas companies operating in Alaska, told lawmakers in a letter dated Tuesday that “this is no way for a major oil state to develop major oil tax legislation.”

“You are scaring us to death,” says the letter from AOGA executive director Judy Brady.

It is the Legislature’s third try to come up with an agreement that lawmakers hope will both boost tax revenue to the state and encourage investment that will stem the decline of Alaska’s oil production.

The tax revision is also seen as a key component of Murkowski’s proposed fiscal contract with ConocoPhillips, BP PLC and Exxon Mobil Corp., which the governor says is the state’s best chance to build a natural gas pipeline from the North Slope.

On Tuesday, executives from two of those companies, ConocoPhillips and BP, panned the tax plan. Ken Konrad, the gas business unit leader for BP’s Alaska subsidiary, said the proposal assumes a 5 percent decline in North Slope oil production, which is too high. The average rate of decline for Prudhoe Bay over the past five years was 8.6 percent, he said.

“It just doesn’t match up to the reality we live in,” he said.

Tom Williams, BP’s senior tax and royalty counsel, said under this plan, companies would be penalized with higher taxes even if they invest a lot of money in exploration, but their wells come up dry.

“There will be exploration failures,” Williams said.

Instead of basing the tax rate on production, it should be based on the amount of money companies invest, Konrad said.

Brian Wenzel, ConocoPhillips’ vice president of finance and planning, made similar points, but also said the plan was shortsighted because of the sheer size of the tax increase over the deal agreed upon by the three companies and the governor.

That deal was for a 20 percent flat tax on companies’ Alaska profits, but that plan has not survived in either the House or Senate.

“This is a system that intends to grab another $1.2 billion on top of that $1 billion tax proposal that was previously proposed,” he said.

Wenzel also said many things can cause production shortfalls, such as maintenance, federally mandated shutdowns or safety concerns.

The bill could go to the House floor as early as tonight, said House Speaker John Harris, R-Valdez.