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Alaska Ballot Measure for Gas Reserves Tax Given Green Light

Alaska Lieutenant Governor Loren Leman last Monday gave the go-ahead to a proposed ballot measure that would tax leases on undeveloped natural gas resources. The measure is designed to spur construction of the $20 billion Alaska Gas Pipeline Project, which would lead to the development of more than 35 Tcf of conventional natural gas resources in the state.

It is sponsored by state Reps. Eric Croft, Harry Crawford and Dave Guttenberg as well as former Governors Walter Hickel and Jay Hammond, and is similar to an application certified on Aug. 3 by the lieutenant governor but would apply the tax to "leases" instead of "resources." It also increases the proposed tax by 50% to 3 cents/Mcf of reserves per year, or about $1 billion a year, according to some estimates.

If it goes into effect in 2006, the taxes could be levied for nearly 10 years until the gas pipeline enters service based on current construction estimates. The measure calls for an escrow account to hold the proceeds of the taxes in case producers file a lawsuit to challenge the tax. The funds collected would be returned to the producers in the form of a credit against future severance taxes as soon as the pipeline is built.

The proposed ballot measure is based on a tactic the state used in 1975 to get an oil pipeline built.

"The Department of Law reviewed the initiative to determine if it meets constitutional requirements. Although the department raised concerns about some of the provisions in the initiative, such as the new escrow account, it concluded these were not substantial enough to deny certification," Leman said in a statement. "I concur with the department. Alaska courts have generally held that they want to decide the more complex legal issues when and if the initiative ever becomes law."

The measure's sponsors are now allowed to circulate petitions to try to get it on the November 2006 ballot. They must gather signatures of 31,451 registered voters to qualify the measure for the ballot. This is 10% of the 314,502 votes cast in the 2004 general election. Under the constitutional amendment approved by voters in 2004, signatures are needed from at least 7% of voters in at least 30 of the 40 Alaska House Districts. Sponsors have one year from the time they receive petition booklets to collect the required signatures.

"The number of signatures necessary for this initiative is higher than previously required because of the record turnout for the 2004 General Election," said Leman. "In addition, the signers will have to be more broadly distributed geographically around Alaska."

The proposal has drawn an angry reaction from producers. BP spokesman Daren J. Beaudo said it would add to production costs in the state and would lead to lower production and less revenue for the state. He called it an "expression of frustration" with the lengthy negotiation process that has been taking place between producers and the governor's office.

The governor hopes to complete a contract on the pipeline with producers this fall. The basic issue in the negotiation process is the tax-royalty framework that would provide producers with certainty on future returns from the project.

However, a presentation made to the Alaska legislature last week by California-based consulting firm Econ One indicates that the producers could earn a healthy profit from the pipeline project even with prices lower than $5/MMBtu without a tax or royalty relief.

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