Aces oil tax: good or bad for Alaska?

• Author: Phelps, Jack E.
• Position: OIL & GAS

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In 2003, then-Gov. Frank Murkowski announced his intention to work with the "Big Three" oil companies operating on Alaska's North Slope to achieve "oil tax stability" over the longer term. The basic tax system that had been established when the Prudhoe Bay field was first developed in the 1970s was still in place. Known as the Economic Limit Factor (or ELF), it levied taxes against the producers based on the gross value of hydrocarbons produced.

Tax stability was considered important at the time because there was a strong and growing sentiment it was time to find a way to take the stranded North Slope natural gas to market. Gas prices were on the rise, and demand in the Lower 48 was expected to continue growing. For the first time, the producers were talking seriously about building a pipeline to transport gas from Prudhoe. To do so, however, would require a very substantial investment on the part of the companies who owned the rights to the gas. The projected cost ran to several billion dollars; not exactly chump change.

NEW NET APPROACH

The Murkowski administration introduced a new and different approach to taxing the North Slope oil fields. Instead of a tax based upon gross value, it proposed a tax based on the net value of oil and gas production, known as the Petroleum Profits Tax (PPT). After significant legislative review, many hearings and much discussion, the PPT was passed into law in August 2006. It established a 22.5 percent base tax rate. It also included a progressivity element under which, when per barrel net oil value surpasses $40 per barrel, the rate increases by 0.25 percent per dollar.

This represented a net increase in tax revenue to the State of Alaska, but the intention was for it to be a long-term agreement which would provide a stable tax regime for oil production. The proposed next step was to reach agreement with the producers on a gas pipeline to be built under the existing Stranded Gas Act. Gas was to be taxed separately from oil under this proposal. The gas tax rate would be negotiated with the producers as part of an agreement for them to construct a gas pipeline from Prudhoe to Alberta, where it would tic in to the existing North American gas pipeline network, which already ties western Canada to major markets in the Lower 48 states.

This approach increased the tax burden on the oil industry. The oil companies, however, understood that ELF had outlived its acceptability by the State and...