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Alaska Legislature Begins Hearings on Proposed North Slope Gas Line Agreement

It's a long way from a done deal, but after years of up and down negotiations, Alaska last week announced an agreement with the three major North Slope producers -- BP plc, ConocoPhillps and ExxonMobil Corp. -- to build a natural gas pipeline to transport 4.5-6 Bcf/d of new supplies to the Lower 48. The agreement, tied to a controversial new oil and gas tax system, still has to be approved by the state legislature, and some members are questioning provisions pushed by Gov. Frank Murkowski, which, they say, give producers too many incentives.

Under the agreement, a revised petroleum production tax would be based on the percentage of the producer's net profit, or revenues minus capital and operating expenditures. Producers would pay a 20% tax rate and receive a 20% tradable tax credit. Tax revenues would be lower when initial large capital investments were made and, consequently, higher as the production increases. The tax also would provide a $73 million annual standard tax deduction as an incentive for oil exploration by smaller independents. At current oil prices, Alaska would receive an additional $1 billion in production tax revenue under the new system, according to Murkowski.

Currently, Alaska's petroleum production tax is based on a percentage of the gross value of production and is driven by the state's Economic Limit Factor, " which no longer works," according to the governor. He noted Alaska's Kuparuk field, the second-largest oil field in the nation, will no longer pay a production tax this year, and Prudhoe Bay will pay "near zero taxes" in 12-14 years.

"Completion of the gas pipeline contract represents a major milestone in securing a natural gas pipeline, which will provide hope and opportunity for Alaska's future," Murkowski said in a statement. "Modernizing our oil tax system will provide Alaskans with revenue today. These are two historic events, ones that will define the state's economy for decades to come."

He said the legislation "strikes a balance. As governor, I must be mindful of all operators, the smallest to the largest, with an eye on the ultimate goal of a sound economic and investment climate in the state of Alaska." He noted technical issues still must be addressed along with oil fiscal stability terms.

The producers have committed to a two- to three-year period to design the pipe and obtain permits, but construction is still several years away. Among other things, the preliminary plans call for a 52-inch gas line, which no steel mill now produces, according to the governor's office. Other technical details also have to be worked out, Murkowski said.

ExxonMobil's Richard Owen, vice president of the Alaska production unit, confirmed it had reached an agreement on the "major provisions of the gas fiscal contract." He noted the new tax regime proposed by Murkowski would provide fiscal terms necessary to "advance the gas project to the next phase." Steve Marshall, president of BP Alaska, said the agreement was "a significant milestone. We see merit in a profits-based oil tax system, provided it appropriately balances risk and reward to enable additional investment." And ConocoPhillips' Alaska president Jim Bowles said his company was "pleased that all parties have reached an agreement in principle...We also believe that a well-constructed net profits tax could benefit Alaska and provide the fiscal certainty that will support future investment."

Still, the negotiations with the state legislature are expected to take time. Following the announcement by Murkowski, his staff began talking with Alaskan lawmakers about how the pipeline contract would be tied into tax credits for the major producers.

Without a tax change, "the oil companies were unwilling to proceed without a recognition of the need for oil certainty," Natural Resources Commissioner Mike Menge told members of the House Resources and Finance committees. "We resisted that for months, but it became quite obvious that we were not going to get a gas deal until we addressed oil."

"You have to, in the back of your mind, be thinking, 'Are you going to be willing to live with this for a long time, just in case it gets stuck in there?' " said State Rep. Ralph Samuels, co-chair of the House Resources Committee. "But you can't just look at this [tax change] as a part of the contract. We could pass oil and never get a gas contract. It could still completely implode for a large number of reasons. It can't be the driving force behind the debate."

State Rep. Les Gara of Anchorage said, "You normally want to encourage very risky investments, so we've historically given an incentive for exploration costs, because you will usually find a dry hole..."It's pretty novel to also let them get a tax credit after they've found oil. At that point they've struck gold, and we're still letting a tax credit apply to that. In the past, we've limited it to true exploration costs."

Testimony by the North Slope producers is expected to begin this week in Anchorage.

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