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Mixed Reaction to Alaska Tax Overhaul to Support Gas Line

The big three North Slope producers -- BP plc, ExxonMobil Corp. and ConocoPhillips -- may only grudgingly approve of the proposed revamp of Alaska's oil and natural gas tax system, but independents, including Anadarko Petroleum Corp. and Pioneer Natural Resources Corp., are more enthusiastic, executives said last week. The state legislature is conducting hearings on the proposal, which is tied into a tentative deal struck with Gov. Frank Murkowski's office last month on the long-awaited gas pipeline project.

Alaska House Bill 488, introduced in February, would replace the state's production-based tax on oil and gas with a tax tied to producer profits (see NGI, Feb. 27). 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.

State legislators are being asked to approve of the tax changes first. Once the tax changes are approved, Murkowski in a separate bill would ask legislators to approve of the new tax terms to be folded into a gas pipeline contract.

In testimony before the House and Senate Resources committees last week, Richard Owen, Exxon's Alaska production manager, said the proposed 20% tax rate could hinder development of the state's oilfields. Most of the oil remaining on the North Slope is heavy crude that is more costly to produce, he said. With a higher tax, development of those resources would be difficult.

"Given our view of the resources, we would not support a higher tax rate or lower credits than proposed in this bill," Owen said. However, Exxon supports the gas pipeline project, and thus, it ultimately will support the governor's tax bill.

BP's Ken Konrad, vice president for gas in Alaska, said his company is supporting the governor's plan, but suggested a lower tax rate would encourage more oilfield investment. He asked legislators to consider revising the 20% proposed tax rate to 12.5% instead.

"BP has agreed with the governor that we will not oppose the rates and figures in the legislation before you...," Konrad said. "Our chief executive and others have made the extremely difficult decision to accept the governor's terms as a means to finalize a contract."

Brian Wenzel, vice president of finance and administration for ConocoPhillips Alaska, agreed. He said his company is supporting the tax bill -- but only reluctantly.

"We'll reluctantly agree to 20%, but Alaska has to ask itself if that rate will result in the long-term future investment the state wants," Wenzel said. "We would oppose this bill except for the fact that it enabled all parties to come together in support of a contract," Wenzel said. The bill "will move the gas pipeline contract to the next phase of development."

Wenzel cautioned that with a higher tax rate, ConocoPhillips' development of higher-cost oilfields will be hampered.

"Anytime the government raises taxes, it is taking away money from the private sector that could be used for reinvestment and for continued job growth," said Wenzel. "While it's obvious that higher rates would negatively effect the oil and gas industry, we also believe those higher rates would not be in the long-term interest of the state."

ConocoPhillips considers "this bill and the balance it provides as the maximum we can accept to move forward with the gas line deal," Wenzel said. "Changes, even small ones, will cause oil companies to reconsider investment in the state... Unfortunately, the balance in the bill is decidedly in the favor of the state and at the expense of established investors."

Marianne Kah, chief economist for ConocoPhillips, said several of the bill's provisions favor new investors over established companies.

"We think it's inappropriate for the state to come in and take away a portion of that profit," Kah said. "We expect something much more stable." She told legislators they should take into account the higher cost of doing business in Alaska when determining the tax rate.

However, Anadarko's chief Alaska executive Mark Hanley, testified his company would pay about $13 million less a year in taxes under the proposed tax overhaul.

"We've heard others say they reluctantly support it," Hanley told legislators. "We're a little more enthusiastic about it." He said the tax credit portion of the proposal would spur exploration and development. "This would mean some of our prospects are more likely to get drilled than under the system as it is."

Pat Foley, manager of Alaska operations for Pioneer Natural Resources, also expressed support for the tax credit changes. The tax breaks and incentives, when taken together, nearly offset the 20% tax Pioneer would have to pay under the proposal.

Pioneer, which began exploring Alaska in early 2003, has paid little in production taxes because it explores small and marginal fields, Foley noted. With a tax exemption, there would be an "investment climate" consistent with the one that attracted the producer to Alaska in the first place.

Another obstacle stands in the way of the pipe -- and it became apparent during Thursday's testimony. Calgary-based TransCanada claims it holds rights of way to any pipeline from Alaska under Canada's Northern Pipeline Act of the 1970s. Tony Palmer, vice president of Alaska business development for TransCanada, said during testimony that his company will fight for the right to build the Canadian portion of the pipeline.

"TransCanada does not want to obstruct this project, but at the end of the day we have the sole right to construct this project," Palmer told legislators. However, he said BP, Conoco and Exxon have refused to talk with TransCanada until the Alaska negotiations are completed. A dispute between the producers and TransCanada centers on which entity will control the pipe.

"TransCanada seeks collaboration and alignment with the producers to get the project done quickly," Palmer said. TransCanada estimates it will take seven years to complete the 1,000-mile Canadian portion of the line to Alberta, where it would then feed into existing systems for delivery to the Lower 48.

Murkowski spokeswoman Becky Hultberg said a special legislative session to consider the proposed $25 billion gas pipeline will likely be called for this spring or in early summer if the tax bill is approved.

"The governor does intend to call a special session, but the timing is going to depend on when the administrative details of the gas line contract are finalized and when the legislature acts on oil taxation," she told the Fairbanks Daily News-Miner.

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