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Gas line advisers pitch pluses of pipeline

Posted: Wednesday, April 19, 2006

North Slope natural gas could flow south through Alaska and to Lower 48 markets within six to nine years under the new petroleum production tax Gov. Frank Murkowski has proposed. to replace the outdated Economic Limit Factor.

That’s what gas line advisers from the governor’s office said Tuesday at the Soldotna Chamber of Commerce.

Chuck Logsdon and Mary Ann Pease said the time was ripe for a gas line deal. That deal — a state contract with BP, ExxonMobil and ConocoPhillips to build a gas pipeline — is linked to a revamp of the state’s oil and gas tax system.

The state wants to replace the out-of-date Economic Limit Factor, or ELF, because it isn’t producing revenue from about half the state’s productive fields.

The terms of a tentative contract worked out during months of negotiations between the governor’s office and the oil companies have not been released. Logsdon and Pease said they were not yet complete.

The time is right for a pipeline now, Pease said, because of “extremely high demand” in Alaska and Outside, and “a supply that is diminishing.”

Two important principles have governed pipeline negotiations: a fair share of revenues for the state and access to a portion of the gas to meet Alaska needs, Pease said. Major points in the tentative gas-line contract, she said, include Alaska investing in and owning 20 percent of the pipeline and 20 percent of the gas. Construction could cost $20 billion to $30 billion, a huge investment by Alaska and the oil companies.

For that commitment, the companies want a predictable and stable tax climate, and they want it long term. Just how that will be done is the subject of debates surrounding two bills (House Bill 488 and Senate Bill 305), now before the Legislature.

As currently envisioned, there are four places a main line could be tapped to supply gas to regions of Alaska: Yukon, Fairbanks, Delta Junction and Glennallen. Some of that gas would end up in Southcentral Alaska and the Kenai Peninsula, where it is desperately needed by industry.

Pease noted they’ve heard criticism that the gas, or much of it, would be going to Canada and beyond, when it is needed here.

“We in Alaska could never use the 4.5 billion cubic feet of gas a day that the pipeline could transport, even if we tried,” she said.

Pease said it is estimated that at $40 per barrel the state could realize $2 billion to $3 billion a year from a revised oil and gas tax.

On Wednesday, oil was running above $70 per barrel.

“If you look at the total state budget, all services provided, it’s less than $3 billion (annually),” she said.

Known gas reserves at Prudhoe Bay and Point Thompson are said to be 35 trillion cubic feet. Pease likened that figure to the visible portion of an iceberg. Still hidden under the North Slope may be as much as 235 trillion cubic feet of natural gas and 100 trillion cubic feet of gas hydrates (methane). Yet, today, she said, the United States imports 78 percent of the natural gas it uses.

“There is an incredible opportunity to displace some of the gas imports and make sure Alaska is fueling North America,” she said.

The Legislature has been spending most of this session wrestling with the taxation issue, Pease said.

“The next thing they are going to focus on in a special session is amendments to the Stranded Gas Act, and then, I’m hoping, the next step is going to be the review of the gas contract,” Pease said. “We should have gas flowing by the 2011-2014 time period. That’s if everything goes as planned.”

Logsdon focused on elements of the proposed Petroleum Profits Tax, or PPT, saying the current tax structure “desperately needs to be modernized.”

Alaska earns revenue from oil and gas production in four ways. Royalties provide the bulk of the revenue stream, followed by production taxes (also called severance taxes). Corporate income taxes and property taxes provide the rest.

“The governor’s proposal only changes the production tax,” he said, adding that were the proposed PPT in place in 2006, the state would have realized about $800 million more in revenue. If imposed, the tax could boost Alaska’s rate of long-term returns from 29 percent to as high as 35 percent, he said.

The current tax rate is 12.25 percent for the first five years of production, and then goes to 15 percent, or a minimum of 80 cents per barrel. But that tax is adjusted by ELF, which applies taxes depending on the productivity of a field. Lawmakers have called the ELF “broken” because under its formula, half of all fields in the state pay no production tax.

The governor has proposed a 20-percent tax on a producer’s net profits after expenses are deducted, and a 20-percent credit on qualified capital expenditures. Further, the proposal includes a so-called “claw-back” clause, allowing producers to deduct investments made up to five years before the new tax takes effect. Finally, companies would be able to deduct the first $73 million in profits.

Some lawmakers want to shift those percentages, say to a 25-percent tax and a 20-percent credit. Logsdon said the governor had proposed a 20-percent net profits tax to increase the incentive for oil and gas companies to invest in Alaska.

Lawmakers and advisers testifying before House and Senate committees have raised numerous concerns about the details of how a new tax structure might work. Many of those issues have yet to be resolved, and lawmakers could be headed for a special session.



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