In the final hours of their second special session Alaska lawmakers Thursday night passed the biggest rewrite of the state’s oil and gas taxes in decades, giving Gov. Frank Murkowski the tax on net profits that he wanted but with a higher rate. Revision of the state’s oil and gas tax regime is a crucial step to moving forward with plans for a $20 billion gas pipeline to bring Alaska gas to the Lower 48. However, the gasline still is far from certain.

The bill, which a Murkowski spokesman said the governor did not plan to veto, would tax producing companies at a rate of 22.5% of profits derived from Alaska operations. The rate would increase by 0.25% for every $1 that oil prices are greater than $55/bbl. At current oil prices, the tax works out to about 28%. According to Alaska’s Department of Revenue, the tax is expected to bring the state $2.4 billion with oil at $60/bbl, about $1.3 billion more than the current production tax generates at similar prices.

Murkowski had been lobbying for a 20% rate (see Daily GPI, June 26).

The Senate passed the bill 14-5, but the key was House approval of Senate changes 26-14. This followed on an earlier 20-19 defeat, and was facilitated by the return to the floor of an ailing member and flip-flop by other members. Passage also possibly was spurred by BP’s announcement a few days before the vote that it was shutting down its oil pipeline for repairs. Oil exports through the pipeline generate the bulk of Alaska government revenue. While that revenue will return when the pipe repair is complete, it served as a reminder to lawmakers that oil production is declining, and it might be a good idea to get started on a replacement revenue stream from natural gas. A week ago the odds makers were predicting the measure wouldn’t pass.

Bill detractors say that more revenue for the state is not a slam-dunk as producers will get tax credits and deductions for their investments in Alaska. They also say the bill is fuzzy on defining producer costs suitable for deduction. “I think we’re saying we’re going to get all this revenue, when those of us who have kind of read this whole package know that we’re going to take that revenue away,” Sen. Gretchen Guess (D-Anchorage) was quoted by the Anchorage Daily News.

Murkowski, however, touted the legislature’s passage of the net profits tax, something his administration has been fighting for since Feb. 20 when a draft agreement was reached with BP plc, ConocoPhillips and Exxon Mobil Corp. for development of the gas line. That agreement, which hinged on passage of the tax reform, is not out of the woods.

“The net profit tax system will get us the substantial investment necessary to arrest the annual decline in oil production and oil flow through the Trans Alaska Pipeline System. …[T]he state will greatly increase the tax rate, and then give back some of it to the oil producers in the form of a credit if they engage in the oil and gas exploration and development we want,” said Murkowski. “This is similar to the net tax system that has worked so well in bringing oil and gas investment to Norway.

“Getting to a resolution of the PPT [petroleum production tax] means we have taken the next crucial step toward the gas pipeline.”

The final hours of the special session also saw a setback for the governor’s gas line plans that casts doubt on the future of his draft contact with the trio of producers who would develop the state’s gas reserves.

House Democrats defeated a bill that would have given Murkowski’s administration more time to summarize public comment on the draft gas line contract, suggest revisions and complete supporting documentation. The bill would have given Murkowski’s camp 120 days to wrap up work instead of the 30 days currently prescribed by the state’s Stranded Gas Development Act (SGDA). The SGDA is the law under which Murkowski negotiated the draft contract with the producer trio to develop the state’s North Slop gas reserves.

A Murkowski spokesman told the Fairbanks Daily News-Miner that the governor has no plans to call lawmakers back for a third special session until after the state’s Aug. 22 primary election in which Murkowski will face two Republican challengers.

Pushing his gasline contract through the legislature has been a frustrating process for Murkowski. Aug. 3 the Alaska Senate Special Committee for Natural Gas Development rejected amendments to the Stranded Gas Development Act proposed by the governor (see Daily GPI, Aug. 7). The amendments would have given the governor the authority to legitimize the draft pipeline contract. Friday, Aug. 4, Murkowski held a press conference in which he criticized lawmakers for thwarting his gasline plans.

“It’s almost like they [the legislators] are deliberately trying to slow this thing down,” Murkowski said last week.

“It’s extraordinary to have a Republican legislature, a Republican governor, and we can’t seem to work together… This is the greatest opportunity ever to come by any of us. It would anchor the economy for 50 years.”

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