Alaska gears up for its own royalty battle

Shawn McCarthy, December 29, 2007,Globe and Mail -- Alaska's oil and gas industry is threatening to reduce investment in the state after Governor Sarah Palin recently signed a "fair share" tax increase that will boost state revenues from the industry by $1.5-billion (U.S.) next year.

In a replay of Alberta's bitter debate over this fall's royalty increases, the industry is making noises about shifting investment to more hospitable climes, while its critics suggest that there are few more welcoming jurisdictions than the northern state.

Exxon Mobil Corp. indicated yesterday that it would be reviewing its investment plans in light of the tax hike, which raises the basic state production tax to 25 per cent from 22.5 per cent and eliminates key deductions.

"The tax increase that Governor Palin has signed into law reduces the attractiveness of future oil developments in Alaska," Exxon spokeswoman Kimberly Johnson Brasington said in an e-mailed statement. "We are re-evaluating investment plans."

BP PLC, one of three major producers in the state, also indicated this week that it would review its investments plans.

Doug Suttles, president of BP Exploration Alaska, said he was "disappointed" by the move and hoped the government would reconsider the tax increase, the Financial Times reported.

"This massive tax increase will weaken investment in Alaska's oil fields at the very time that more investment is needed ... This will impact our business plans in 2008," Mr. Suttles said.

The battle over the tax increase is just one front in a continuing confrontation between the oil majors and the state of Alaska. The government has moved in recent years to strip Exxon, BP, ConocoPhillips and Chevron Corp. of leases in the Point Thomson natural gas fields near Prudhoe Bay, and sought new bidders to build the pipeline that would bring that gas to market.

In a Boxing Day ruling, Alaska Superior Court Judge Sharon Gleason found that the state was within its rights in 2006 when it stripped the companies of valuable oil and gas resources they had held since the 1970s, because they had failed to develop the properties.

Kara Moriarity, deputy director of the Alaska Oil and Gas Association, acknowledged that the partnership between the industry and the government is strained.

"The industry still believes we're partners with the state of Alaska ... and it may seem, with all the headlines, like that partnership may not exist but we in the industry do believe it exists," she said.

Ms. Moriarity said the tax changes undermine business activity that Alaska is heavily dependent upon.

She said that the taxes and royalties paid by the oil industry - primarily Exxon, BP and ConocoPhillips - account for more than 85 per cent of the state's budget.

"Are the companies going to lock up shop come January 1? The answer is no," Ms. Moriarity said. "But will this tax affect investment decisions, especially on new projects? That answer is absolutely yes."

Richard Fineberg, an industry analyst who has consulted with government, said the state believes it is only seeking its "fair share and a level playing field for competition."

Mr. Fineberg said the big three oil producers maintained a stranglehold over the crude pipeline from the North Slope, and that that dominance - with its uncompetitive tariffs - hobbled development. The new tax law seeks to redress that unfair tariff structure, he said.

In the case of the gas field leases, Judge Gleason upheld the right of the government to strip the companies of their Arctic oil and gas leases. But she made a small concession to the firms - ordering the state to hold hearings to determine whether the companies could persuade the government overturn its decision.

The companies said that over the past three decades they have spent more than $800-million (U.S.) to develop the Point Thomson field, 80 kilometres east of Prudhoe Bay on the state's North Slope. But they can't proceed further without a pipeline.

The field is considered North America's largest untapped gas field, with 8-trillion cubic feet of natural gas. That's three times the estimated size of the Canadian Arctic gas fields that would feed the long-proposed, oft-delayed Mackenzie Valley pipeline.