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AK Senate Passes Production Tax; Pipeline Pact To Be Revealed May 10

The Alaska governor and major producers were continuing to press the legislature to return to the governor's proposed tax "20-20" petroleum production tax plan, saying the higher rate approved by the Alaska Senate would cut future oil production and jeopardize the pact the governor has made with producers to build the $25 billion Alaska natural gas pipeline to the Lower 48.

The state Senate passed, by a final vote of 14-4, a 22.5% tax on oil and a 7.5% tax on natural gas profits last Wednesday and sent the measure on to the Alaska House, where it is expected to come up Monday. The tax bill passed by the Senate also would increase the tax on oil profits to 0.02 percentage points for every dollar the price of oil goes above $50, and it would provide a 25% tax credit for capital investments in Alaska. The tax on Cook Inlet oil would be 5%.

The governor had proposed a 20% tax on profits and a 20% tax credit.

Following Senate passage Gov. Frank Murkowski promptly held a press briefing to influence the state House to roll back the tax to his original proposal or risk jeopardizing the deal he has made with North Slope producers, Bp, ExxonMobil and ConocoPhillips for the gas pipeline. The tax and the pipeline are inextricably linked, Murkowski made clear and said he would reveal the pipeline pact on May 10 at the start of a special legislature session to review it.

In the meantime, an injunction request has been filed in the state superior court for an injunction to force Murkowski to reveal the pipeline contract the governor says he signed last February with the North Slope producers, before the legislature completes action on the tax measure. State Sen. Hollis French, D-Anchorage, said legislators should not have to vote on the tax bill while they remain in the dark on the deal for construction of the natural gas pipeline. The tax provisions are due to be rolled into the pipeline contract for a 30-year term.

Legislative committees late in the week were working on a bill to prohibit the judiciary from acting before the production tax bill is complete.

"We're being asked to make a huge policy decision without knowing the basics," French told NGI. The Anchorage Democrat said he could understand how preliminary negotiations should remain confidential, "but Gov. Murkowski announced in February he had a deal and nothing has been released" (see Daily GPI, Feb.23).

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, which the governor had been authorized to negotiate under the state's Stranded Gas Act..

"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."

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 it 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."

Meanwhile the governor, recently returned from a marketing and trade trip to Europe, told the news briefing Royal Dutch Shell was interested in marketing the state's share of North Slope gas, which would include both the state's 12.5% royalty gas share and gas taken in-kind as a substitute for taxes. While selecting marketers for the Alaska's gas will be competitive, Murkowski said discussions with the oil major indicated "the state will have an opportunity to market its gas without any difficulty."

Shell had indicated it would be submitting a proposal to market Alaska's gas in the near future, according to an announcement Murkowski issued following his meeting April 11 with Malcolm Brinded, executive director of Exploration & Production for Royal Dutch Shell.

Murkowski also referred at the briefing to discussions with Shell about the possibility of a syngas project to be constructed on the Alaska Peninsula across the inlet from the nitrogen chemical plant and the LNG gasification plant on the Kenai Peninsula. Coal from the immense reserves at Beluga would be gasified to feed into the Cook Inlet system, which is running low on gas to supply the two plants, initially built years ago to use cheap excess gas.

The gas is no longer cheap and during the peak winter period there is no longer much excess. A coal cogeneration project also could be built, which would produce electricity and free up the natural gas currently used in power production, Murkowski said. The byproduct CO2 could be reinjected into depleted wells. Eventually the process could be taken one step further to create synthetic petroleum products. "There are synergies here. If we put this all together, we might have a favorable economic opportunity," he said.

The governor said he had asked that Shell appoint a team of experts to join state representatives in evaluating the project. Currently the nitrogen plant is running at reduced capacity and the LNG facility contract expires in 2009. "If we are ever going to justify a lateral pipelne into Kenai, we need those two major facilities," Murkowski said, referring to a proposal to run a spur into Kenai and the Cook Inlet system off the proposed Alaska gas pipeline.

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