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AK Lawmakers to Resume Producer Tax Debate July 12

Alaska Gov. Frank Murkowski will call lawmakers back for a second special session July 12 in the hope of finally changing the way the state taxes oil and gas production and nailing down terms of his draft fiscal contract with a trio of producers for development of the Alaska Natural Gas Pipeline.

Murkowski, who has made commercialization of Alaska's North Slope gas resource a cornerstone of his administration, is racing the clock to lock in his agenda before voters have the opportunity Nov. 7 to approve an initiative that would tax the three oil companies -- BP, Exxon Mobil, ConocoPhillips -- for not producing their North Slope gas reserves.

Murkowski has been fighting to revamp Alaska's tax on oil and gas from a tax on production to a tax on profits. So far, lawmakers have been unable to agree on what the rate should be. At the end of the last special session, 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% (see NGI, June 12).

Regardless, it wasn't the 20% rate that Murkowski is still swinging for in what he calls his "20-20" plan, which includes a 20% credit for investment in the state.

"I believe this ongoing tax debate is about whether you see Alaska's future as a glass half-full or a glass half-empty," Murkowski wrote in his letter to Senate President Ben Stevens calling the special session.... It is why the 20-20 plan's focus is on encouraging private investment to increase oil production, to grow the economy, and to fill the rest of the 'glass.'"

The governor also wants lawmakers to pass three bills to amend the state's Stranded Gas Act, which he introduced during the first special session to advance his contract with the producer trio (see NGI, June 5).

Murkowski Chief of Staff Jim Clark also said Friday that the governor wants lawmakers to list the changes they would make to his draft fiscal contract so he can take them back to the producers, negotiate and ultimately get the contract ratified by the legislature. Currently, the contract is out for public comment, which is scheduled to end July 24, nearly two weeks after the start of the second special session.

Should Murkowski fail to get his producer contract ratified, voters will have the opportunity to put a squeeze on the producers by passing an initiative that would tax the natural gas reserves for however long they remain unproduced. Backed by Rep. Eric Croft (D-Anchorage), a potential challenger to Murkowski come November (see NGI, June 5), the tax would put about $900 million/year into state coffers until the gas is produced (see NGI, Jan. 16). Once production began, producers would be able to recoup the money through a credit on severance taxes. It was a similar provision that is credited for spurring development of Alaska's famous oil pipeline during the 1970s.

"I don't care if they helicopter it out as long as they're producing it," Croft told NGI. "There's certainly no question that it's economical to produce Alaska's gas."

Croft has criticized Murkowski for "illegal" negotiations with the producers, to whom he says the draft fiscal contract is a giveaway that would allow them to determine how much tax they pay on gas produced in Alaska.

While Murkowski and the producer trio are a long way from getting Alaska's gas to market, last week did see legal setback for a pipeline project that would compete with Murkowski's

A federal judge dismissed an antitrust complaint against Exxon Mobil and BP that had been filed by the Alaska Gasline Port Authority (AGPA). The AGPA complaint charged Exxon Mobil and BP with conspiring to refuse to sell the North Slope gas they control. (see NGI, Dec. 26, 2005).

AGPA -- a tax-exempt consortium of the Fairbanks North Star Borough, the North Slope Borough and the City of Valdez -- is touting an 800-mile "All-Alaska" natural gas pipeline project that would run parallel to the existing trans-Alaska oil pipeline. The project is a competitor to The Alaska Gas Pipeline, a $20 billion-plus project touted by Murkowski that would deliver 4.5 Bcf/d from the North Slope to Lower 48 states. The Alaska Gas Pipeline is backed by Exxon Mobil, BP, and ConocoPhillips.

The AGPA suit in December followed an announcement by Murkowski that talks between the state and the three producers would be suspended until early this year. The state was in discussion with the trio to establish fiscal terms for the pipeline project. ConocoPhillips, which was not named in the lawsuit, is the only one of the three producers to agree on some base fiscal terms for a deal with the state. Since then, the state has established a draft contract for the fiscal terms of the pipeline project. It has yet to be ratified by the legislature. Lawmakers have been debating the terms of the contract, which also is out on a public comment road show.

Last Monday U.S. District Court Judge Ralph Beistline ruled AGPA failed to prove Exxon Mobil and BP broke the law when they joined together to negotiate a deal with the state.

BP Alaska spokesman Daren Beaudo told NGI that the company was pleased the court agreed that the Port Authority suit had no merit. "A gas pipeline can't be built on lawsuits, advertisements and PowerPoint presentations. It has to be based on good business," he said.

Beaudo said BP and the other producers are continuing to follow the procedures outlined in the Stranded Gas Act for the development of a gas pipeline from the North Slope. This includes numerous public meetings. "It's a challenge; there's no doubt about it," Beaudo said of the process. "This is a big, important, seminal moment for the state. It took three years, roughly, to negotiate the terms in the contract. There are provisions in there that are new to Alaska, long-term contractual terms...

"One of the issues that we're working hard to help articulate is the fact that these kind of contracts are very common internationally. Foreign governments all over the world, in order to attract the capital that's needed for mega-projects like this, enter into contracts like this."

In the lawsuit AGPA alleged that ExxonMobil and BP, "which together control a dominant share of the gas found on the North Slope, violated Sections One and Two of the Sherman Act and Section Seven of the Clayton Act by a series of illegal agreements, mergers and acquisitions that enabled them to jointly prevent the marketing of any natural gas from the North Slope. The result of their illegal conduct has been to artificially restrict the supply of natural gas and thereby artificially inflate the price of natural gas both in Alaska and in the Lower 48 states."

Former Alaska Gov. Walter J. Hickel, who also is a former secretary of the Interior, threw his support behind AGPA's complaint, saying, "This historic lawsuit reveals a story of extreme corporate greed that has abused Alaska and punished the American consumer. By opposing an all-Alaska pipeline, the producers have conspired for years to delay the export of Alaska LNG."

Last month, the AGPA said it would participate in the open season for expansion of Sempra LNG's Energia Costa Azul (ECA) LNG receipt terminal. The Port Authority also said it received a draft memorandum of understanding from a "world-scale shipper of LNG" that owns eight U.S.-built LNG tankers that would be compliant for shipping LNG from Alaska to the Lower 48. Jim Whitaker, chairman of the Port Authority, said, "This is an opportunity for Alaska's gas in LNG form to get into the West Coast market in 2012."

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