The Governor chose to introduce oil tax modernization legislation including a 20 percent tax rate with a 20 percent tradable tax credit to strike the right balance between exploration and development incentives and a tax rate. His decision was designed to encourage investment – which leads to more exploration, which leads to more barrels of oil, which leads to more state tax revenue than a higher tax might bring. After all, it is only through barrels in the pipeline that Alaskans see the benefits of jobs for working families and dollars in the treasury.

The new petroleum production tax will change the existing oil taxation system in Alaska. The current production tax on oil is based on a percentage of the gross value of production. A new petroleum production tax would be based on a percentage of the net profit. The current production tax rate is driven by the Economic Limit Factor (ELF). This ELF-based system is no longer working for Alaska. The second largest oil field in the nation (Kuparuk) will no longer pay a production tax in the next year and Prudhoe Bay will pay a near zero production tax in 12 – 14 years.

First, the ELF-based oil production tax no longer works effectively for Alaska for three reasons:

• 1. Alaska is not getting its fair share of oil revenue under the ELF system compared to what the producers are paying in similar oil regimes around the world.
• 2. The current production tax provides few incentives for investment. The new oil production tax being proposed will provide significant new oil and gas exploration and investment incentives.
• 3. ELF will drop to near zero in 12 –14 years, meaning that Alaskans will receive no production tax revenue.

Second, the producers with whom the state is negotiating a gas pipeline contract believe that any contract that provides tax certainty on gas should include tax certainty on oil, since the financial basis of the gas contract could be changed simply by raising oil taxes.

The new tax system would be net cash flow driven. That is, it would be based on the difference between capital and operating expenditures and revenues as they occur annually. As a result, tax revenue would be lower when the initial large new capital outlays are made and higher as production responds to that investment and net cash flow becomes positive.

The producers will pay a 20% tax rate with a 20% tradable capital investment tax credit. The bill also provides for a $73 million annual allowance to be used as an additional deduction as long as the allowance is not greater than the net value before the allowance. 20% of any carry-forward loss may also be taken as a tax credit.

Yes, when oil prices are above approximately $25 per barrel. Under the current system, when profits are high, they are being expatriated outside of Alaska because there is no tax incentive to invest in Alaska. However, when producers reinvest their profits here, or when prices are low because of low oil prices or high costs, it is possible that the state could see lower production tax revenue. More investment will lead to more barrels, more barrels will lead to more profits and more profits will lead to more taxes.

Alaska should receive a fair share of the revenue generated from our natural resources. The current oil production tax does not provide Alaska the same level of revenue (also considering federal tax) that the producers are paying in similarly situated oil provinces around the world.

The new petroleum production tax would be a component of the fiscal stability offered to the producers who are proposing to build the gas pipeline. It is only fair that in exchange for fiscal stability on oil taxes that the state gets a fair share, similar to what the producers are paying elsewhere in the world, especially since fiscal stability increases the value of the leases that the producers hold.

A new petroleum production tax would ensure that Alaska gets a fair share of oil revenues compared to what the producers are paying in similar areas around the world. The structural tax change puts in place development incentives that encourages new and existing producers to invest their oil profits in finding and developing Alaska’s oil and gas resources.

The bill creates new incentives for investment, exploration and development – a 20% tradable capital investment tax credit and a $73 million “standard deduction”. The new incentives were included in the legislation because Prudhoe Bay is an aging field and other than ANWR, we are unlikely to find major new oil fields on state land on the North Slope. Explorers are more likely to find new fields in the 50 to 150 million barrel range. These explorers will need incentives to find and develop these expensive and smaller fields.