insurgent49

December 2, 2005
Alaskans Should Share In Record Oil Company Profits
by Rep. Les Gara (D- Anchorage)

     This state has a history of playing poor when it’s not. We have the ability to create better schools, and a safer, stronger, more prosperous state. Instead, we’ve chosen to give away billions of dollars in tax exemptions to oil companies that are reaping record profits. I believe in charitable giving, but not to corporations that don’t need it. That’s why I and other Democratic legislators have pushed to reform our oil tax system, and to close tax loopholes that are hurting our state.

     Alaskans will soon have the chance to discuss these issues. Governor Murkowski recently announced he’s been negotiating an agreement with oil companies on possible changes to our oil tax rules.   Alaskans need a way to evaluate that proposal when it’s made public. The Governor also says he wants a provision that would prevent future Legislatures from altering the tax terms he and the oil companies propose. If that’s the case, then it’s even more important his deal is a fair one.

    Here are a few easy ways to evaluate any proposal the Governor presents.

    According to the state’s best estimates of corporate profits, Alaska tax exemptions allowed oil companies to take roughly $5 billion in clear profit from their North Slope operations last year. That’s 60% more than the state received for our total oil tax and royalty share.

    Based on oil prices that have averaged almost $60/barrel this fiscal year, state estimates show oil companies are on pace to take more than $7 billion in profit from North Slope operations for the full year. That’s nearly double what Alaska’s total revenue share would be.

    Here’s something more to consider. According to state estimates, even at $30/barrel – the low end of what experts predict oil prices will average in the future – oil companies benefit from a staggering 35% profit margin (profits as a percentage of total revenue) from North Slope operations.

    In the face of record oil company profits, the Legislature has almost fully exempted most Alaskan oil fields from the state’s 15% Production Tax. Kuparuk, the nation’s second largest field, pays only a 1% Production Tax. Endicott, the nation’s 29th largest field, pays 0%.

    So, how can we tell if the Governor’s proposal is fair?

    At an average annual oil price of $50/barrel, the state’s best estimate is that oil companies would take roughly $5.7 billion in profit for their North Slope operations on $13.5 billion in total revenue. That’s 70% more than what the state would receive. Does the Governor’s proposal level these shares? An even split would leave oil companies and the state each with a healthy $4.5 billion net share. That would still allow for a head-turning 33% oil company profit margin. Most of Wall Street’s biggest corporations strive to reach profit margins half that large.

    What about when oil is $30/barrel? The state estimates current exemptions allow oil companies roughly $2.5 billion in profits at that price. That’s a half-billion dollars more than what the state would receive. If we evened out the state and corporate shares at $30/barrel, that would produce oil company profits of roughly $2.3 billion, and a still-huge 31% profit margin.

    Senator Hollis French and I have proposed legislation (HB 63 and SB 50) to ensure Alaskans share fairly when oil companies benefit from windfall profits. We also propose tax relief at low oil prices when incentives are needed to encourage development. Hopefully Governor Murkowski’s proposal will ensure Alaskans a fair share.

    Governor Murkowski says he’s negotiating oil taxes as part of his discussion over a possible natural gas “fiscal” agreement. I hope to see a strong gas line deal for the state - one that truly requires construction of a gas pipeline. To date little about these proposals is public.

    Former Governor Jay Hammond always reminded people the Alaska Constitution requires we develop our natural resources “for the maximum benefit of [the] people.”   I hope the Governor opens his gas and oil tax proposals to the public soon, and that they satisfy this mandate.

Les Gara is an Anchorage Democrat, and has been a member of the House of Representatives since 2003.

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