A Citizen’s Guide

JUNEAU–With time running out, a Senate committee Wednesday threw out a key component of the oil production tax rewrite approved Sunday by the House and added a provision to protect the state from costs associated with shutdowns at Prudhoe Bay and other oil fields.

The Senate Special Committee on Natural Gas Development rejected the proposal to tie a company’s tax rate to its level of investment and replaced it with a 22.5 percent rate that would increase at high oil prices.

It also approved a “floor” on the tax rate at low prices and a proposal meant to limit state subsidies for repairs to the Prudhoe Bay oil field, which BP announced Sunday it would shut down because of pipeline corrosion.

“We took a good bill and made it better,” said Sen. Gary Wilken, R-Fairbanks.

Wilken said he was confident that the House would accept the changes and that the Legislature would reach agreement on the tax bill before the end of the summer’s second special session tonight.

The bill was forwarded Wednesday afternoon to the Senate floor, but consideration of it was put off until 7 a.m.today.

The committee added the 22.5 percent base rate after Pedro van Meurs, the governor’s lead adviser on oil and gas issues, spoke critically of the variable tax rate proposal earlier this week.

“It’s simpler,” said Sen. Ralph Seekins, R-Fairbanks, of the flat rate. Seekins, who chairs the committee, said the flat rate would accomplish the same goal and bring about the same revenue to the state.

In a move that acknowledged the importance of winning votes in both the House and Senate, the committee stuck with the House preference for how much to increase the tax rate as prices rise.

“The last thing I want to do is start arguing about a very, very little difference,” said Sen. Tom Wagoner, R-Kenai, who spoke in favor of sticking with the House’s rate. “I think we owe it to them.”

The other big change to the bill came in an amendment aimed at limiting state payments for oil field repairs. According to van Meurs, who helped draft the proposal, the change would guarantee that the state would not give tax credits for repairs “of the type citizens are worried about.”

“(It would ensure) when repairs turn into replacement of pipelines, that a certain amount of capital expenditures simply is not allowed,” he said.

The mechanism would work like a deductible in a health insurance policy. It would set a basic figure for capital expenditures that would not qualify for state credits and could not be deducted from an oil company’s tax base. Specifically, companies would have to pay $.30 per barrel of oil produced before the state incentives would kick in.

At current production, that basic figure would be more than $40 million per year for the Prudhoe Bay unit and roughly $80 million for all North Slope units combined.

“The companies were not aware this was coming,” van Meurs said during a break in the committee meeting, “but I think it is fair.”

Committee members approved the proposal, which was introduced by Wagoner, but turned down one crafted by Sen. Gene Therriault, R-North Pole, that would have allowed the state to limit subsidies on all costs resulting from “improper maintenance” of oil field infrastructure.

Under the proposal, the commissioners of revenue and environmental conservation and the chairman of the Alaska Oil and Gas Conservation Commission would be able to limit credits and deductions for both capital and operating costs.

Therriault said the state could end up subsidizing significant operating costs at Prudhoe Bay even while the field is not producing taxable oil. Under his proposal, the state would not be obliged to help with those costs if the shutdown resulted from a lack of maintenance at the field.

“What I’m attempting to do here is offer a tool to our agency personnel,” he said.

Seekins, who voted against the amendment, said he was concerned that it would create a bureaucratic nightmare, with companies forced to prove that expenses didn’t result from lack of maintenance and the state forced to prove they did.

“We’re going to have a regular battle on our hands,” he said.

After the meeting, Seekins said he was comforted by Wagoner’s proposal and thought it would address the Prudhoe Bay issue.

Others suggested both amendments were needed.

Therriault stressed that his proposal would cover operating costs, which he said amounted to about $1 million a day at Prudhoe Bay, while Wagoner’s proposal would not.

Wilken said Therriault’s proposal would act in concert with Wagoner’s.

“That was a good amendment,” he said. “I don’t know why it didn’t pass.”

Van Meurs stuck with the $.30 per barrel proposal and said that operating expenses associated with a shutdown would be minimal compared to capital costs. He said Therriault’s proposal would result in expensive court battles over whether a company had failed to maintain its infrastructure.

The committee also added a limit on how low the tax rate could fall when the price of Alaska crude oil dropped below $25.

Democratic Sen. Kim Elton of Juneau made proposals to make the bill effective in January of this year instead of April and to cut state incentives for natural gas treatment facilities and development of the Point Thomson unit, but none of those amendments passed.

The committee debated at length on an amendment to match the tax rate with the rate at which smaller companies could deduct in future years the expenses incurred in years when they did not earn enough to take advantage of the deductions. In the end, the committee voted the proposal down.

The Senate adopted the committee’s version of the bill Wednesday night but did not debate it. Seekins said he didn’t think the bill would require a conference committee to sort out differences between the House and Senate, but said there was still enough time for one if needed.

Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.