A Citizen’s Guide

JUNEAU—The “produce or pay” production tax plan that passed the Alaska House this weekend looked unlikely to survive the Senate after Gov. Frank Murkowski’s petroleum consultant gave it a thorough drubbing Tuesday.

Senate Republicans met in a closed-door caucus much of Tuesday afternoon to try to salvage the tax bill before Thursday’s close of the special session. Senate Special Committee on Natural Gas Development Chairman Ralph Seekins, R-Fairbanks, said the committee would meet Wednesday morning to hear amendments and send a new version of the bill to the Senate floor later that day.

Murkowski has threatened to call back the lawmakers on Friday if they again fail to change the production tax, and he says he’ll veto any tax that is not based on companies’ net profits.

Perhaps in anticipation of the year’s third special session, four senators during Tuesday’s floor session asked to be excused for different periods of time starting Friday.

This is the third time this year the Legislature has attempted to rewrite Alaska’s production tax laws in a way that would both bring more money to state coffers and encourage the oil companies to invest and slow the decline of the North Slope’s aging oil fields.

The latest proposal appeared to have the best chance of making it through both chambers. It would be a tax based on the net profits of oil companies operating in the state, and each company’s tax rate would be based on how much that company invests in Alaska.

The base tax rate would be no higher than 25 percent of profits and no lower than 20 percent. But when the price of oil is at $55 per barrel or higher, all tax rates begin to incrementally climb.

House Republicans largely united behind the bill and passed it over the protests of minority Democrats, who pointed out what they saw as major flaws that would benefit the oil companies at the expense of the state.

On Monday and Tuesday, international petroleum consultant Pedro van Meurs added weight to the bill’s detractors by blasting a complicated formula in the plan meant to prevent companies from passing on all the costs of their capital investments through tax credits and deductions.

That “gold plating” formula was meant to limit government subsidies of such investments, such as replacing a transit pipeline, to 75 percent of the cost.

Van Meurs, a consultant for Gov. Frank Murkowski, told the Committee on Natural Gas Development that some credits were not accounted for in the formula. Consequently, van Meurs said, the state and federal governments could end up paying for as much as 90 percent of those capital investments.

The great majority of those subsidies would come from the state.

For every $1.50 spent on capital investments, $1.40 would be paid for by government, he said.

After the hearing, van Meurs applied Prudhoe Bay as an example, where BP officials say they plan to replace 16 miles of corroded transit pipelines.

“Alaskans would pay 80 to 85 percent, and I don’t see why we should do that,” he said.

To the committee, van Meurs said those expenses would be doubly useful to the oil companies.

The companies would take those government-subsidized capital expenses and drive down their tax rates to the 20 percent floor, he said. Once there, it would be easy to stay at that level because the companies could ride the general decline of North Slope oil production to lower tax rates under the investment-per-barrel formula used to calculate the tax.

Moreover, with the oil fields’ decline, companies could actually reduce their investment each year and keep the same tax rate, van Meurs said.

“That’s not particularly a strong incentive to increase investment,” van Meurs said.

Speaking to reporters, van Meurs said the problems of the formula were the result of it being unnecessarily complicated. He said every time he proposes a simple concept in Alaska, within 10 days it becomes much more complex.

“It must be part of the Alaskan psyche,” he said.

Another consultant for Murkowski, former state tax director Dan Dickinson, had the opposite view. Dickinson said he didn’t dispute van Meurs numbers, but he saw it a different way. The question should be how much of the oil’s production tax value is being reinvested in Alaska, he said.

Right now, oil companies are reinvesting about 8 percent of their revenue from Alaska operations in the state. If that can be raised to 23 percent, as the bill aims, “I think that would be a job extremely well done,” he said.

“Dr. van Meurs and I are talking about the same situation, I guess (in) the classic way, is the glass half empty or is the glass half full?” Dickinson said.

Van Meurs’ words affected committee members, who had expected to move the bill to the Senate floor Tuesday.

“Anytime that we have the ability for taxpayers to game the system or to gain an advantage over the system, that doesn’t make for good legislation,” Seekins said. “Good legislation has to be simple, it has to be clean and it has to be fair to all parties, including the state.”

One of the authors of the “produce or pay” plan, Rep. Mike Hawker, R-Anchorage, said he thought van Meurs overreacted and “added more theater than merits” to the debate.

Hawker said he was aware that so-called “gold plating” was an issue, and if van Meurs had a solution, he’d be happy to adopt it. Hawker huddled with ConocoPhillips lobbyist Michael Hurley in his office to try to fix the formula, but acknowledged that van Meurs’ testimony may have killed it.

“It was emotionally overwrought but extremely successful,” Hawker said.