Alaska Gov. Sarah Palin last week released a draft bill that would replace the state's Petroleum Profits Tax (PPT) with a new production tax -- called Alaska's Clear and Equitable Share (ACES). Most notably, the bill would boost taxes on oil production for the second straight year.

The 46-page bill, which was released last Monday, would raise Alaska's net profits tax to 25% from 22.5%, something about which producers have already started to howl. The Alaska Oil and Gas Association is airing radio and television advertising touting the producer view on taxes. In one radio spot, Ken Sheffield of Pioneer Natural Resources, Alaska tells listeners his company is poised to be the first independent producer active on Alaska's North Slope, but...

"Changing tax policy year after year will steer critical investment dollars away from Alaska," Sheffield says in the ad. "Pioneer is eager to build our business in the state, but to do so we need a competitive, stable tax system. Today, Alaska is the highest taxed oil and gas region in North America. Another tax increase this year will harm Alaska's ability to compete."

The ad has echoes of cries currently being heard from Canadian producers over proposed royalty changes in Alberta (see related story).

The release of the ACES bill, more than two weeks before the beginning of the state's legislative special session, will allow additional time for the public and lawmakers to review the bill prior to the start of the special session, Palin's office said. The final bill will be introduced in the state House and Senate on Oct. 18, the first day of the special session. During the next two weeks, the administration plans to hold town hall meetings to explain the plan and work with the legislature on committee hearings.

The PPT passed in special session following much wrangling between lawmakers and former Gov. Frank Murkowski (see NGI, Aug. 14, 2006). The historic tax rewrite was seen as key to moving forward with the plans for a gas pipeline to allow commercialization of North Slope reserves (see NGI, Jan. 22).

The upcoming special session was announced in August after an analysis prompted by Palin showed PPT was not putting enough in the state's coffers.

At the direction of Palin, the state's Department of Revenue reviewed PPT and found that it is "resulting in far less revenue than was estimated in the fiscal notes prepared in support of the bill," Palin's office said. Further, the review found that companies are reporting far greater costs than were predicted, and exploration companies are getting less value from credits included in PPT than was expected due to a limited resale market for the credits (see NGI, Aug. 13).

"The state's experience with PPT puts a spotlight on the risks associated with a net profit-based tax system," the department said. "The new system introduced the added variable of costs into the oil revenue equation. While it is a risk that is inherent in the decision to approve a net profit-based tax, the question is whether the magnitude of the risk was fully understood by the legislature given the information provided to them. While costs would be expected to increase, the dramatic difference between what was predicted and what has actually been experienced brings into question whether the legislature made its decisions based upon appropriate information."

Palin's ACES bill codifies the principles set out in Palin's Sept. 4, ACES announcement. The draft bill provides a more transparent tax system and increases public confidence by improving the state's audit function, providing for forward-looking cost data from producers and economic information sharing among the state departments of Revenue and Natural Resources and the public, Palin's office said. There are a variety of improvements to the state's authorities to protect Alaskans' interests. Among other changes, the ACES plan removes a tax deduction for producers who fail to maintain pipelines and other infrastructure.

In May two executives of an Anchorage, AK-based energy services firm pleaded guilty to bribery and conspiracy charges related to the PPT (see NGI, May 14).

The draft bill is available at http://www.gov.state.ak.us/aces/.

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