Alaska on Tuesday announced an agreement with the three major North Slope producers — BP plc, ConocoPhillps and ExxonMobil Corp. — to build a new natural gas pipeline to transport as much as 4.5 Bcf/d of new supplies to the Lower 48. The agreement, tied to a proposed new oil and gas tax system, still has to be approved by the state legislature, which could balk at attempts by Gov. Frank Murkowski to give the 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, called the agreement “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.”

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