Tuesday, July 04, 2006

British Petroleum Reports Windfall 2005 Oil Profits In Alaska

The need for a new Alaska petroleum profits tax formula is now beyond question (see graphic at left - click to enlarge). British Petroleum rode a wave of record crude oil prices to earn a windfall $2.6 billion profits on it Alaska production last year. The 2005 results was 44% higher than the $1.8 billion reported in 2004, according to new reports filed with the U.S. Securities and Exchange Commission. Click here for the full story from the Anchorage Daily News dated July 4th, 2006.

The increased profits came despite a 9% decline in BP's Alaska oil production from 295,000 barrels per day to 268,000 barrels. Higher prices fueled the increase as the price of oil, which fetched an average of nearly $54 per barrel last year on West Coast open markets, was up 38% from 2004. BP is the state's No. 2 oil producer. It runs Prudhoe Bay, the nation's largest oil field, on behalf of itself and other major field owners including Exxon Mobil and Conoco Phillips.

ConocoPhillips, the state's top oil producer, reported a similar profit on its Alaska production in 2005. Exxon doesn't report separate figures for Alaska.

BP's profit report comes just before the July 12th special session of the Alaska Legislature , when lawmakers, in additional to debating the natual gas pipeline contract, will once again consider revamping oil tax law in a way that could substantially increase state revenue when crude prices are high. Alaska oil traded Friday June 30th at $72.63 a barrel, nearly a record.

Legislators were unable to find enough votes to pass oil tax reform during their regular session this spring or in a special session that followed. Despite both chambers being only one percentage point apart, and a compromise 22.8% petroleum profits tax proposal emerging from a conference committee, the legislature could not pass the compromise. The issue isn't necessity. While most agree the current tax law shortchanges the state at high oil prices, lawmakers are divided over how aggressively oil company profits should be taxed. However, Governor Frank Murkowski, in an attempt to accelerate legislative action, reminded us that the state is losing $3.2 million for each day lawmakers fail to pass his proposed overhaul of the state's oil production or severance tax. What the mainstream media consistently fails to remind us of is that the producers originally wanted no more than a 12.5% petroleum profits tax, as reported here, and that it took much persuasion by Governor Murkowski merely to get them up to 20%. This is a significant compromise that must be factored into the legislature's final decision.

Ronnie Chappell, a Houston-based spokesman for BP and a former Alaska resident, admits the 2005 profit was handsome, but that doesn't mean oil prices will remain high forever. "One thing Alaskans know is that oil prices go up and down, and any tax regime needs to recognize that," Chappell said. He also noted that high oil prices resulted in a more lucrative year for the state as well, through its tax and royalty collections on North Slope oil.

But the run of high oil prices in recent years hasn't benefited the state as handsomely as it has the oil companies. For the fiscal year ending June 30th, 2006, the state expected to reap about $4.2 billion in oil revenue, an 87 percent increase from 2001. In contrast, BP's profits jumped 340% from 2001.

The way the state's tax regime is structured now, the state would fare much better than the oil companies if oil prices dipped low, Chappell said. Unlike the state, the oil companies could actually lose money on the giant investments they've staked in Alaska's oil fields, he said. Executives with BP, Exxon and Conoco have said they agreed to the governor's proposed tax hike to 20 percent of Alaska oil profits only if the rate holds steady for 30 years as part of a tax contract that could help lead to construction of a natural gas pipeline into Canada.

State Rep. Les Gara (D-Anchorage), who's running for re-election unopposed in his district and is under no pressure to engage in political posturing, is among lawmakers who believe that although the oil companies could pay more taxes under the governor's plan, they still wouldn't be paying enough. He said BP's latest profits show how badly the state needs tax reform. "The sad thing is, almost nobody in the Legislature is taking our consultants' advice, which is to tax at the world average," Gara said.

Sen. Ralph Seekins, R-Fairbanks, is chairman of the Senate Special Committee on Natural Gas Development, and, unlike Gara, is running for re-election and has two general election opponents. He said BP's 2005 profit likely will provide incentive for lawmakers. "It's a very good reason why we need to change the current severance tax," he said. But Seekins said lawmakers should temper the urge to overtax, noting the state is making more money too and oil prices could go south someday.

He likened the situation to his own business, an auto dealership in Fairbanks. He said he wouldn't appreciate it if the state, learning he had a highly profitable year, decided to jack up his taxes. Seekins also expressed the hope that BP might plow some of its higher profits back into Alaska's oil patch, but BP's Chappell said the company had no plans for a spending spree here.

Analysis: To recap, Alaska's current oil tax formula was crafted when prices were lower and more variable. The producers would take some losses when prices were low in exchange for larger profits and taxes lower than world markets when prices were high. This arrangement provided more fiscal certainty for the state, partcularly during lean periods.

However, prices not only are high now, but are remaining high (see graphic at left). This puts the producers in a continuous windfall situation, costing us, as Governor Murkowski stated, $3.2 million per day. This requires a new formula enabling the state to grab a larger share of the profits, but constructed in such a way as to encourage the producers to plow more profits back into renewed exploration and secondary development.

While the producers prefer no more than 20%, this is not enough. Exxon's willingness to pay departing CEO Lee Raymond a multi-million dollar severance package indicates a capacity to pay more than 20%. However, we must not only recognize the major compromise already agreed upon in jumping from 12.5% to 20%, but must also provide an escape of sorts if they will plow more profits back into development. So a 25-25 arrangment would be prudent, in which the producers pay a 25% petroleum profits tax, but get a 25% tax credit for reinvestment. If Congress could reduce or eliminate the Federal tax on the tax credit, this would be an added bonus. Ronnie Chappell's remark about BP "planning no spending spree" here shows the need for stronger incentives towards reinvestment, both positive and negative.

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