Tax break ending for Prudhoe Bay satellites

Jan. 19, 2005
Alaska Gov. Frank Murkowski has said that, effective Feb. 1, satellite fields surrounding Prudhoe Bay oil field no longer will be allowed to take advantage of a state tax break called the Economic Limit Factor (ELF).

By Paula Dittrick
Senior Staff Writer

HOUSTON, Jan. 18 -- Alaska Gov. Frank Murkowski has said that, effective Feb. 1, satellite fields surrounding Prudhoe Bay oil field no longer will be allowed to take advantage of a state tax break called the Economic Limit Factor (ELF).

During his Jan. 12 State of the State address before a joint session of the Alaska Legislature, Murkowski said the tax break originally was intended to encourage development drilling on marginal prospects.

"It was never the intention of the legislature, which crafted revised ELF legislation in 1989, to have it reduce taxes close to zero in situations in which satellite fields are administered as one field with the Prudhoe Bay field," Murkowski said.

If companies had operated Prudhoe Bay and its satellite fields in 1989 as they currently operate them, Murkowski said, the fields "would have been treated then by the legislature as one field for ELP purposes—just as we are proposing to do now."

Prudhoe Bay and its satellite fields primarily are owned by BP PLC, ConocoPhillips, and ExxonMobil Corp., although several other companies hold smaller interests.

The elimination of the tax break will affect Borealis, Midnight Sun, Orion, Polaris, Point McIntyre, Aurora, and the Prudhoe Bay initial participating areas, Murkowski said. The administrative change will not affect current ELF application to Kuparuk, Alpine, Northstar, or Liberty fields.

"Whether ELF should be changed remains in the hands of the legislature following legislative hearings—just as I have previously proposed," Murkowski said.

Companies and trade associations said the decision poses a heavy tax burden on industry and could threaten future investment in Alaska.

ConocoPhillips Alaska Inc. issued a statement calling the administrative action "a structural tax increase by the state of Alaska.

"This change will have an immediate $150 million negative annual effect on Prudhoe Bay. We will also need to consider the increased costs and risks when assessing whether to go forward with future developments," ConocoPhillips said.

ExxonMobil Corp. said, "The proposed action brings into question whether it would be possible for the state to ensure the predictability and durability necessary for such a huge project as the Alaska gas pipeline."

The tax increase "would significantly increase the taxes on fields where investments have already been made," ExxonMobil said in a news release. "A number of satellite fields were specifically developed independent of the core Prudhoe Bay development. These marginally economic fields should continue to be treated as separate fields for tax purposes."

Orion field is an example, ExxonMobil said. "Changing the oil severance tax will make portions of this project uneconomic, jeopardizing development of millions of barrels. In addition to adversely impacting satellite fields, this would also raise taxes and adversely impact development activity at the core Prudhoe Bay field."

Judy Brady, executive director of the Alaska Oil and Gas Association, an organization representing oil companies, said of the tax policy change, "There is a lot of concern about the uncertainty that this brings to the table for tax liability."

Oil companies and government officials are consulting attorneys about how to discuss tax policy while maintaining confidential information, she said, adding that the administrative change was announced without oil companies having a chance to comment on it.

In addition, there is confusion about heavy oil. Murkowski said the administrative decision would not apply to heavy oil, but Orion and Polaris, both producing heavy oil, were on the list of affected satellites, Brady said.

Larry Houle, general manager of the Alaska Support Industry Alliance, said the action was "bound to send some shock waves through the industry." The alliance is a trade association of oil and gas service and equipment contractors representing 400 companies.

He said the tax change "will serve as the poster child for industry for the need of a clear and durable gas line fiscal contract. Unfortunately, yet again, the state has proven it is willing to arbitrarily change its interpretations of tax law."

Houle noted that satellite developments provide the greatest number of jobs for oil and gas contractors in Alaska. The developments also pose the greatest potential to increase the state's oil and gas production.

"A tax increase will inevitably put such developments at risk," Houle said. He noted that state statistics indicate that 87% of the state's general operating fund already comes from oil and gas taxes.

Contact Paula Dittrick at [email protected]