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AK Lawmakers Get Breather Before Returning to Producer Tax Debate

Alaska Gov. Frank Murkowski said Friday that he would meet with legislative leaders in the next few weeks before calling a second special session for lawmakers to consider an overhaul of the state's petroleum production tax (PPT), the way the state taxes oil and gas producers.

Last Thursday lawmakers failed to agree on an overhaul of the state's oil taxes in the final minutes of a special session that expired at midnight. A Senate-House committee produced a final rate for the tax on producer net profits of 22.8%. This is 0.7% lower than a rate that had previously passed the House, 23.5%. The rate is 0.3% higher than what had previously passed the Senate, 22.5%.

The tax plan the committee produced also includes an escalator of 0.00175%/dollar for each dollar oil is selling for more than $50/bbl.

The governor is standing firm with his plan to tax producer profits at a rate of 20% and provide a 20% credit for investment in Alaska.

The new taxing mechanism for oil and gas producers is a cornerstone of the governor's draft fiscal contract with a trio of producers to develop the Alaska Highway Natural Gas Pipeline. The governor also has sought changes to the Alaska Stranded Gas Development Act (see NGI, June 5).

Revising the state's oil taxing mechanism is key to a draft agreement the governor has made with BP, Exxon Mobil and ConocoPhillips for development of the Alaska Natural Gas Pipeline, Murkowski maintains. During the special session, lawmakers heard presentations on the provisions of the gas contract. Public meetings also have been held.

The House had approved a bill to tax oil company profits in Alaska at 23.5%. Members also approved an escalator that would tax profits at a higher rate when North Slope crude is above $50/bbl on the West Coast. This version of the bill, which passed 28-12, would tax the producers at a rate higher than most of the legislation previously considered, including a version that passed recently in the Senate with a rate of 22.5%. Murkowski wants a lower tax rate -- 20% -- and he wants to give producers a 20% credit for in-state investment (see NGI, May 29). Wednesday Murkowski warned lawmakers there would be consequences for a higher tax.

"The House PPT plan puts the gas pipeline project and producer investment in Alaska oil and gas development in jeopardy," he wrote in letters to House and Senate leaders. "The 23.5% tax rate and aggressive progressivity would triple Alaska's oil production tax rate at current oil prices. At 60%, Alaska's government take would be the highest in North America and make us uncompetitive with other international projects."

The governor wants to roll the tax provisions into his draft contract with the producers that sets the fiscal terms for the natural gas pipeline to bring North Slope supplies down through Canada and ultimately to the Lower 48 states. Among the terms of the contract, Alaska would become a 20% owner of the gas pipeline, and it would take its royalties from producers in kind rather than in cash. This would put the state in the gas marketing business (see NGI, May 15).

Murkowski and the producers who would develop the pipeline claim the tax freeze, which would last for decades, is necessary to create the fiscal certainty needed for development of the $20 billion-plus pipeline project.

"It would be counterproductive to try to keep [lawmakers] in Juneau," Murkowski said Friday. "I believe that the education that legislators received on the gas pipeline contract during the special session will lay the groundwork for later action."

The governor also expressed his disappointment that the overhaul of producer taxes didn't pass. "Under the Stranded Gas Act, the administration was given the authority by the Legislature to negotiate a deal. We had a deal at 20-20, which was accepted by the producers. They accepted the doubling of the production tax, but not nearly tripling it, which is what the House bill would have done at today's high oil prices. While the conference committee bill drew that rate down, it appeared that the producers viewed the bill as still too high, and many legislators agreed."

Three other bills, introduced by Murkowski to pave the way for the advancement of his natural gas pipeline fiscal contract with producers, moved forward during the special session and work that remains can be completed at a later date, the governor said. These bills deal with amending the Stranded Gas Development Act, establishing the Supreme Court as the court of original jurisdiction for challenges to the pipeline contract, and establishing a state corporation to finance, operate and manage the state's part of the gas pipeline project (see NGI, June 5).

Public meetings on the gas pipeline contract will continue around the state over the next several weeks, Murkowski said.

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