Alaska Gov. Frank Murkowski, who is continuing confidential negotiations with three North Slope producers about building a $20 billion natural gas pipeline, is apparently readying a separate package as part of the discussions to overhaul the state's oilfield tax system.

The proposed legislation is expected to be issued once a draft pipeline contract is completed by the state and BP plc, ExxonMobil Corp. and ConocoPhillips. There was no indication when Murkowski and his staff would complete the gas line negotiations.

In October, seven Alaska administrators involved in the pipeline negotiations resigned following concerns about the legality of potential concessions to producers by Murkowski (see Daily GPI, Oct. 31). The staffers who resigned, including Alaska Oil and Gas Director Mark Myers and Alaska Natural Resources Commissioner Tom Irwin, said the state might be offering too many concessions to the producers to build the pipeline.

In response, a commentary by Murkowski, published in Thursday's Anchorage Daily News, explained negotiations for the gas line involved "policy calls within my discretion, not legal issues." He acknowledged the negotiations included a separate package of legislation to revise the state's oilfield taxation system.

"Critics know the only way to stop the gas pipeline is to kill the contract before I can make it public," said Murkowski. "I will not let this happen, despite the political theatrics of its opponents." He explained the producers want assurances "that if fiscal certainty on gas is achieved under this contract, the state will not use its taxing authority to change the fiscal terms on oil."

Among other things, the governor wants to overhaul the state's severance tax, now the number two source of oil revenue after royalties. In the last budget year, Alaska collected about $800 million in severance taxes. However, Murkowski said the severance tax system is flawed. He noted the Economic Limit Factor (ELF), which is an adjustment which now offers tax breaks for smaller oilfields, will result in only 19% of North Slope barrels paying any severance tax in 15 years.

Under his proposal, Alaska would drop the ELF and adopt a net oil production tax, which would tax producer profits after costs are subtracted. The net oil production tax "will cover all North Slope oil being produced now and in the future," Murkowski wrote. "It will tie state revenues to the price of oil, which means that the state will get more money when oil prices rise. This will be an incentive for exploration and development. We are currently negotiating these details with the producers."

The revised system would give Alaska more revenue when commodity prices are high, but the state would collect less if oil prices fell below a certain level. However, more taxes would be recouped by enacting changes to encourage more exploration on the Slope by smaller operators.

Once the draft pipeline contract is completed, the governor's staff is then expected to seek a ruling from the Alaska Supreme Court about whether future legislators may be held to uphold revisions in the state's oilfield tax system. Staff also is expected to propose a system of gas and oil credits for producers to buy and sell to encourage North Slope exploration for smaller oil and gas deposits.

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