Delaying any freeze on oil and gas tax rates until producers have fully committed to building a gas pipeline, an idea floating this week as state lawmakers discuss amending the Alaska Stranded Gas Development Act, presents some possibilities for compromise, Gov. Frank Murkowski said Tuesday in Soldotna.
The House Resources Committee voted Saturday in support of locking in an oil tax rate for 12 years, beginning after a gas pipeline project had begun. Meanwhile, Senate President Ben Stevens has suggested locking in oil taxes for 14 years once a project is sanctioned.
The idea “has some real prospect,” Murkowski said after an address on the pipeline project delivered at a luncheon sponsored by the Kenai Chapter of the Alaska Support Industry Alliance at the Soldotna Sports Center. He did not go into further details.
Murkowski has negotiated a draft contract (that could lead to a pipeline project) with three major producers, BP, ConocoPhillips, and ExxonMobil, in which they agreed to pay a 20 percent tax on profits while getting a 20 percent tax credit on future investment in Alaska. The proposed Petroleum Profits Tax, or PPT, is meant to replace the out-of-date state tax regime called the Economic Limit Factor, or ELF. Lawmakers are wrestling with the PPT bill they hope to pass by the end of the special session Thursday night. House and Senate versions have yet to be reconciled.
To invest in the mammoth pipeline project, the producers want a measure of fiscal certainty. Murkowski wants an OK to lock in tax rates on oil and gas (for 30 and 45 years respectively) to provide just that, which requires amending the Stranded Gas Act. Many lawmakers have balked at the idea of setting tax rates for so long. The governor addressed that issue in his speech.
Producers, he told the luncheon audience could commit as much as $20 billion to a pipeline project. For that kind of risk, they want the predictability of a stable tax regime, a demand that the governor likened the kind of assurance private citizens seek when negotiating a home mortgage.
“Would you want a fixed rate, or variable?” he asked the gathering.
But to get the stable, fixed rate would require one Legislature binding another, and there is an unanswered question about whether the Alaska Constitution actually permits lawmakers to surrender their authority to tax. Murkowski, however, appeared confident that the Constitution did not specifically prohibit such action.
“It doesn’t prohibit or allow that,” he said, adding that there is no case law on the issue, making the question very likely to be the subject of a court test.
The proposed gas pipeline would run from the North Slope to Alberta, Canada, with a possible further extension to Chicago. It would have the capacity of transporting 4 billion cubic feet of gas per day to the North American market. Under the draft contract, Alaska would invest 20 percent of the costs and assume a 20 percent ownership in the pipeline. It would also take 20 percent of the gas, which Murkowski said would then be used or marketed by the state.
But there remain huge hurdles to cross before construction becomes a reality. One is the rate the producers would be willing to pay in taxes.
The draft contract proposes a 20 percent tax on profits and a 20 percent tax credit on future development investment in Alaska. Lawmakers, so far at least, have their eyes focused on higher rates as they debate provisions of the proposed Petroleum Profits Tax bill. As of Tuesday afternoon, the House was backing a 23.5 percent rate, the Senate a 22.5 percent rate. Both versions also offer competing provisions for upping the tax rate when the price of a barrel of oil rises above certain levels. Murkowski said producers may not be willing to agree to a higher tax rate than they’ve negotiated, and that could put the project in serious jeopardy.
“My greatest concern is that the producers won’t make the investment (in a pipeline),” he said.
Murkowski said data provided by ConocoPhillips showed the House proposal would make Alaska the place with the highest total government take of any place the company operates in North America, he said.
The governor admitted the proposed 20 percent tax rate in the negotiated contract was not the highest possible amount, but it was fair, he said, and potentially could put $100 billion in state coffers over the next several decades, 25 percent of which would go into the Alaska Permanent Fund.
“There are risks, big ones,” he acknowledged.
For instance, taking a share of the gas in-kind would make the state responsible for marketing it.
“We will assume our own shipping risks,” he said. “But I’m satisfied we have the expertise to do that.”
Another issue is that Alaska’s gas must compete with locales that have no equivalent up-front project costs, such as Qatar, where gas is at tidewater, Murkowski noted.
As for Southcentral Alaska’s gas needs, Murkowski said the region faces an energy crisis until it can get a supply of North Slope gas. He said there needs to be incentive that encourages more gas exploration and development in Cook Inlet.
“We have to work with industry to get more gas,” he said.
It is important, the governor said, to bear in mind that the pipeline project is no small undertaking, but would be on the order of magnitude of a second Prudhoe Bay.
“They just don’t get any bigger than this,” he said.
Building the pipeline for gas will also benefit the state on the oil side, he said. Exploration for gas is very likely to uncover new reserves of oil, and that will mean more revenue flowing down the TransAlaska Pipeline, he said.
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