A Citizen’s Guide

JUNEAU—A compromise production tax bill underwent a major change Wednesday in the House Finance Committee after oil industry executives complained that the original plan was misguided.

The new version of the “produce or pay” plan unveiled Wednesday night would adjust the companies’ production tax rates depending on how much they invest in exploration and whatever other capital expenditures they make in the state.

Under the proposal, companies’ base tax rates would be between 20 percent and 25 percent of their profits from Alaska operations. The more a company invests in Alaska, the lower its tax rate. The less a company invests, the higher the rate.

The first version of the “produce or pay” plan would have adjusted companies’ tax rates up or down based on the actual number of barrels of oil and gas they produce.

Industry executives from two of the state’s largest producers, BP PLC and ConocoPhillips said Tuesday that would have been a bad system because increased production does not necessarily reflect the amount of money a company is investing.

For example, a company can drill a dry exploration well. The company would not receive credit for the money invested in that dry hole because it did not produce any new oil, industry executives said.

The architects of the plan, Reps. Ralph Samuels and Mike Hawker, both R-Anchorage, spent most of the day Wednesday revising the plan so it reflected the investment companies make instead of production.

Rep. Bill Stoltze, R-Chugiak, said the testimony heard by the oil executives raised questions about the soundness of the plan.

“I don’t think you should punish good efforts,” he said.

It remains to be seen if the new “produce or pay” plan may be a compromise that will pass the Legislature after nearly six months of trying.

“If this is the best we can do, it’s the best we can do,” said Rep. Jim Holm, R-Fairbanks.

Some legislators aren’t yet ready to jump on board. Rep. Beth Kerttula, D-Juneau, said she wants to understand it better, but she would still prefer a tax on companies’ gross oil and gas production instead of their profits.

She also questioned whether the companies under this plan could get a lower tax rate based on the amount of money they would have spent anyway as the North Slope oil fields mature.

“They’re obviously going to spend more in the future,” Kerttula said.

Rep. Les Gara, D-Anchorage, said a consequence of the formula in the bill may be that if a company produces less oil while its level of investment stays the same, that company could end up with a reduced tax rate.

This is how the plan would work: The production tax would be based on every dollar a company invests in Alaska, divided by the barrels of oil—or barrels of oil equivalent, in the case of natural gas—the company produces in the state.

For example, a company that reinvests less than $1 for every barrel of oil it produces would receive the maximum 25 percent tax rate on its profits.

At the other end of the spectrum, if a company invests $6 or more per barrel of oil it produces, it would get a 20 percent tax rate.

“Once you hit that $6, you dive down to that 20 percent and that’s where it stays,” said Dan Dickinson, a consultant for Gov. Frank Murkowski who assisted Hawker and Samuels in putting the proposal together.

Then, when oil reaches about $55 per barrel, a “progressivity factor” would kick in and the tax rate would start to rise. The rate would go up by 0.25 percent for every $1 per barrel price increase, to be capped when the total tax rate is 50 percent of companies’ Alaska profits.

For the last five years, the average investment per barrel of oil produced for the entire North Slope was just less than $3.50, according to the Alaska Department of Revenue.

That would equate to about a 22.5 percent tax rate before the progressivity factor, under the proposal.

The capital spending this year is expected to be a little more than $4.60 per barrel of oil produced, which would translate into a tax rate of about 21.5 percent before progressivity.

The House Finance Committee plans to hold another hearing on the bill Thursday.