Following up on the state Senate’s passage (14-6) of a 22.5% tax on oil and natural gas profits, Alaska Gov. Frank Murkowski launched a campaign Tuesday to influence the state House to roll back the tax to his “20-20” plan or risk jeopardizing the deal he has made with major producers to build a $25 billion natural gas pipeline from the North Slope to the Lower 48.

Regardless of the House action, Murkowski told a press briefing he would release the long-promised contract with producers to build the pipeline on May 10 at the start of a special legislative session to consider and ratify that contract. The governor made it clear that the natural gas contract and the oil and gas tax legislation are a package. The House was expected to take the bill up Wednesday.

“We have negotiated a fair contract, and it’s been accepted,” the governor said, noting that he had completed his part of the deal and the rest is up to the legislature. “You tinker with it at your peril… For the first time in Alaska we have a gas project. We’ve been saying ‘wouldn’t it be great to market our gas?’ Well, it finally happened.” If the state can’t complete the deal, they can just “keep putting the gas back in the ground.”

Murkowski originally offered a tax package with a tax on wellhead production, after subtraction of production costs, of 20%, and a tax credit incentive of 20% for capital exploration and development expenses. The bill passed by the Senate late Monday calls for a 22.5% tax and a 25% incentive. Murkowski told reporters the 25% incentive loaded too much risk onto the state in the event oil prices go down.

Raising the tax and increasing the tax credit “is not a realistic offset,” the governor said. “It gambles too much on oil prices being high.” And, it threatens the viability of the gas pipeline contract if producers think the tax is too high.

He outlined a scenario where with low oil prices the companies wouldn’t make much profit to be taxed, but could still claim a tax credit which would mean no state revenues from oil and gas. He pointed out that the capital investment to produce the heavy oil remaining on the North Slope would be large, and increasing the tax credit would mean the state would take on an unacceptable risk. North Slope oil production is declining rapidly, Murkowski said, and 8.5 Bcf/d of natural gas is being reinjected for lack of an outlet.

Murkowski refused to say whether he would veto the final oil tax legislation if does not include the rates he proposed. But he said the gas pipeline contract would be released on May 10 regardless. That will be followed by debate in the legislature and a “road team” traveling the state to expound on the deal. The special session of the legislature runs for 30 days, but Murkowski said they could extend the time if necessary.

When questioned whether rumors were true that the gas contract with the three major North Slope producers, BP, ConocoPhillips and ExxonMobil, had not actually been completed, Murkowski said there still are some issues that have not been finalized, but they have been addressed “in general” and “within parameters that are resolvable.”

When also questioned why the legislature was being asked to vote on the production tax, which is an element of the gas contract, without seeing the contract, Murkowski said that legislators who had signed a pledge of confidentiality had been kept abreast of the negotiations, although they had not seen the formal pact. He said it was 300 pages.

Senate Democrats Monday said they could not vote for the tax measure without first seeing the governor’s agreement with producers on the natural gas pipeline. Sen. Hollis French, D-Anchorage, also said he could not vote for the bill because it is a profits tax, rather than a straight-forward production tax. French is concerned the large multinational companies will be able to “shift profits and costs up and down the line,” noting the difficulty of determining true costs and true profits (see Daily GPI, April 25).

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