Alaska's oil production or severance tax has not been updated for 15 years. As the price of oil rises, the state's percentage of the revenue declines while oil companies take a bigger slice of the pie. Most new oil fields pay nothing or a small portion of the 15 percent production tax. As these new fields begin to take the place of the state's oil-producing powerhouse, Prudhoe Bay, which is steadily declining in production, the percentage of income to the state will also decline.

Gov. Frank Murkowski has tasked the Legislature with reviewing oil taxes next year and is requesting recommendations from industry officials.

The Alaska Oil and Gas Association, a group representing the industry, says oil companies will have to spend up to $60 billion over the next decade to keep production stable. The North Slope is expected to produce an average 934,000 barrels a day in fiscal year 2005, and increased taxes would hinder investment, according to Marilyn Crockett, deputy director of AOGA.

"Any changes to the stable tax climate is not going to do anything to increase investment in Alaska," Crockett said.

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Anchorage Democrat Les Gara, along with several other lawmakers, has called for an adjustment to a production tax exemption known as the Economic Limit Factor, also called the ELF.

"We don't have to sell our oil at rock-bottom prices to encourage investment," Gara said.

In the early 1980s, legal disputes from oil companies over the corporate income tax law prompted the state to increase the production tax to 15 percent, where it remains today, according to Deborah Vogt, a former deputy commissioner for the Department of Revenue. But lawmakers placed a sunset on the increased severance tax in anticipation of resolution of corporate income tax disputes, and in 1986 the ELF was lowered for oil fields, based on their production rate and number of wells.

That year, state revenue declined sharply, as the price of oil dropped to $11 a barrel. Vogt said it was the first year lawmakers warned that a fiscal gap could deplete the state's financial reserves.

The state revised the ELF law in 1989, bringing in more revenue, but as marginal oil fields come online most are exempted from the production tax.

Only three of 20 oil fields in the state pay a significant portion of the production tax, said Dan Dickinson, director of the state's tax division. Dickinson said the ELF is determined largely on the number of wells in a field compared to the field's daily production.

For instance, the Alpine field has a high ELF rate because the daily production of about 99,000 barrels of oil is taken from only 35 wells. This results in an ELF rate of about 84 percent. Comparatively, Kuparuk field produces 155,233 barrels per day from 450 wells, resulting in an 18 percent ELF rate.

Gara said 11 of the last fourteen fields that have come online since 1989 pay little or no production tax.

Crockett, of AOGA, said Wood Mackenzie, an international consulting firm in Britain, identified Alaska as one of the most expensive places in the world to drill in 2002. The entire report, however, is not available to the public and the 2004 update also has not been released.

She said the 2002 report shows it costs about $12.82 per barrel to find, produce and transport oil from the North Slope, which, adjusted for inflation, contributed to the $60 billion figure. But Crockett said the projection is a high-end estimate.

"Obviously these are not exact numbers," she said.

Crockett said AOGA has not engaged in active discussions with the Legislature or administration about the ELF review, but added: "We have told the governor what our concerns are in increases in taxes."

A bill proposed by Gara and several House Democrats in February establishes a minimum production tax of 5 percent for all fields and would allow the state's share of oil profits to rise and fall with the price of oil. The proposal, however, did not receive a single committee hearing during the 2004 session.

It would have raised an extra $500 million for the state in 2003 if oil had reached $32 a barrel. This year the state Department of Revenue predicts oil will average $43.61 per barrel.

Gara said the state has a constitutional duty to maximize the return on its resources.

"When $40-per-barrel oil gives twice as much to companies as the state, we're violating our duty to the public," he said.

The proposal does not tax heavy oil and includes a reduction in the tax if oil drops below $16 per barrel. Gara said he plans to reintroduce the so-called "Alaska fair share" bill again in the 2005 Legislature.

• Timothy Inklebarger can be reached at timothy.inklebarger@juneauempire.com.