A Citizen’s Guide

JUNEAU — Significant reserves of petroleum remain locked beneath the permafrost on the North Slope, but future oil production will be more difficult and costlier to develop than in the past, energy company executives told lawmakers on Thursday.

As legislators consider changes to the state’s petroleum profits tax, or PPT, major producers and smaller independent oil-patch players cautioned against taking too big a bite out of industry profits.

“Don’t be misled that continuing to change the tax rate won’t have an effect on investment. It will,” said Kevin Mitchell, vice president at ConocoPhillips. “This is not a welcome sign for doing business in the state.” Gov. Sarah Palin is pushing legislation that would levy a 25 percent tax on a company’s net profits in Alaska, as well as a gradually increasing surtax designed to capture a greater portion of the state’s oil riches at today’s high prices. Palin’s proposal would also strengthen PPT’s reporting and auditing standards and prohibit certain expenses from being claimed as deductions.

As proposed by the administration, the plan would earn the state around $1 billion more than the current tax system when the price of oil is $80 per barrel. However, lawmakers have made numerous changes during the committee process that could more than double the state’s earnings at the same price level, but expose the state to greater risk if the prices plummet. The bill is expected to reach the House and Senate floors as early as Sunday.

Oil industry officials testified Thursday before the finance panels of both chambers that the plan would create an unfavorable relationship between risk and reward.

“It will have an effect on investment decisions,” Mitchell said.

While the rhetoric of the state’s biggest producers — ConocoPhillips, BP and Exxon Mobil — was subdued compared to last year’s smackdown over the adoption of PPT, the producers nevertheless made clear their belief that increasing the state’s take for the second time in as many years is bad public policy.

“We are well aware that there are good investment opportunities here,” BP executive Claire Fitzpatrick said. “It’s the scale and pace that some of those marginal projects are pursued that’s in question.”

Some lawmakers are referring to the bill as a “Christmas tree” that’s been piled high with amendments that aren’t fully understood. In addition to upping the tax rate, legislators have altered language dealing with deductions, tax credits and the effective date.

Critics of the process insist the administration and legislators are moving too quickly to rewrite tax policy that has only been in place for 15 months and that many of the changes amount to hidden tax increases.

Exxon’s Craig Haymes said the revision not only boosts the tax rate but also puts in place more complicated rules that create greater uncertainty for companies.

Independent explorers Anadarko Petroleum and Pioneer Resources voiced concern that the numerous changes contained in the bill could have unintentional consequences for companies with smaller profit margins.

“The cumulative effect is going to have a negative impact on investment decisions,” said Mark Hanley of Anadarko.

The industry is concerned that skyrocketing oil prices have lawmakers seeing dollar signs. They point out that as oil futures have shot up on the New York Mercantile Exchange, so has the cost of doing business — drilling rigs, transportation and labor expenses have all increased.

While high oil prices benefit both producers and the state, Fitzpatrick cautioned that companies will eventually start to take into account the higher cost environment when making investment decisions.

The producers advised legislators to focus on reversing falling North Slope production in order to increase revenue to the state treasury instead of raising taxes, which would reduce the cash on hand available for drilling new wells.

Current production on the North Slope is about 740,000 barrels per day, down from a peak of 2.1 million barrels per day in 1988. Production is declining 5 percent per year, though, the producers argue the drop-off could run as high as 15 percent without substantial investment.

The state’s biggest and oldest fields — Kuparuk and Prudhoe Bay — have produced 11 billion barrels over their lifetimes. But large deposits of high-quality light sweet crude are rare finds today.

“The largest reserves on the North Slope are more risky and costly than in the past,” Fitzpatrick said.

Sustaining production on the North Slope will require substantial capital investment in new technology and processing facilities capable of handling billions of barrels of viscous, or “heavy,” oil trapped in layers of sand beneath the tundra, Fitzpatrick said.

As much as one-quarter of the petroleum reserves on the North Slope have already flowed down the trans-Alaska pipeline. The remainder is heavy oil — estimated at some 26 billion barrels — or smaller reservoirs of 50 million barrels or less, both of which come with higher production costs.

In June, BP started a multiyear pilot project to drill for heavy oil on the western edge of Prudhoe Bay. BP spokesman Steve Rinehart said the project was economically challenged enough that a tax increase could derail it.

House Finance Chairman Mike Chenault, R-Nikiski, plans to introduce a committee substitute to the governor’s tax plan and begin the arduous amendment process today. The Republican-dominated committee will likely remove many of the amendments added in the previous committee.

Sitka Republican Bert Stedman, co-chair of Senate Finance, said he was still working on his committee’s version of the bill, though he believes it’s been overloaded with amendments.

Contact Washington correspondent R.A. Dillon at dcnews@newsminer.com.