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With PPT oil tax passed, what’s next? Administration needs to satisfy Alaska Legislature to move gas contract; industry concerned about tax rate, contract, regulations By Kristen Nelson Petroleum News
The Alaska Legislature passed — and Gov. Frank Murkowski was scheduled to sign Aug. 19 — a major revision of the state’s oil and gas production tax. The bill passed Aug. 10 was higher than the 20 percent tax on net production profits the governor asked for when he introduced the tax bill in February, calling fiscal certainty on oil a necessary step in getting a natural gas pipeline from the North Slope.
The gas fiscal contract between the state, BP, ConocoPhillips and ExxonMobil, unveiled in May, was to have rolled in the new oil tax for the period of the contract.
Legislators, however, have been concerned about a number of things in the contract, in particular the inclusion of oil taxes, and they have not passed amendments the governor needs to the Stranded Gas Development Act to cover terms negotiated in the contract. The latest version included a compromise on taxes: oil taxes would not be fixed until a gas pipeline is funded; they would be fixed during construction and during a period long enough to pay back the cost of the pipeline; and after that, economic balance is required — tax rates can be changed, but the state would then have to negotiate changes elsewhere so the effect on the companies is the same.
The amendments bill that passed the Senate — and never got to a vote on the House floor in the special session which ended Aug. 10 — had only one provision: it would have increased the time the commissioner of Revenue has to prepare a final fiscal finding from 30 days to 120 days after the close of public comments. Administration looking at deadline Asked about the Aug. 23 deadline for the commissioner to complete his work (30 days after public comments closed), Jim Clark, the governor’s chief of staff, told reporters Aug. 11 that from a public policy point of view the administration needs to take the time to do it right and make sure it has properly assessed what Alaskans want from the public comments received. That language then has to be put into the contract and negotiated with the gas pipeline project sponsors. It’s “too important to get ourselves stuck on Aug. 23,” Clark said.
The administration won’t break the law, he said, but wants to find out what its options are.
Clark repeated what administration officials have said in the past: they want to get the contract before the Legislature in another special session before the November general election. Magnitude of changes? As to the magnitude of changes possible in the contract, Clark said the administration is looking at the changes voted on in the Senate Special Committee on Natural Gas Development in early August. Based on what the administration heard from legislators, there are important changes required. But the administration also had its work cut out for it on the tax change, he said.
Clark said the message he got from legislators was that the administration shouldn’t come back until it has the LLC and a renegotiated contract.
Members of the committee wanted a prohibition against an over-the-top pipeline route, one that would run down through Canada rather than down through Alaska, included in the contract.
They also wanted surety that the project would move ahead.
Senate President Ben Stevens, R-Anchorage, proposed adding a $1.5 billion up-front fund that would be available to the state if the companies didn’t progress the project.
Dave Van Tuyl, BP’s commercial manager for the Alaska gas group, told the committee BP did not support the up-front fund and said it could increase costs since the companies have said they wanted to get to project sanction for $1 billion and the proposal would require payment of $1.5 billion to reach that point. He said BP also fears that the $1.5 billion, which was tied to a specific sanction date, would “encourage schedule-driven behaviors,” behaviors which have been proved to be tied to cost overruns and failed projects (see story on Independent Project Analysis in June 4 issue of Petroleum News).
Sen. Gary Wilken, R-Fairbanks, said he won’t accept a “trust-me contract.” He said he was concerned that four years from now — the estimated time to project sanction — that one of the companies involved would say it wasn’t ready to go ahead.
Wilken pushed a change to the payment-in-lieu-of-taxes, or PILT, which replaces property taxes under the contract. The majority of the PILT would go to the North Slope Borough, where most facilities are located; Wilken wants the PILT distributed on a per-capita basis, and told the committee the people of Alaska take equal risk in the venture and should get equal returns. Wilken wanted a provision which would give control of how PILT is distributed to the Legislature.
Dan Dickinson, former head of the Tax Division and now consulting with the Department of Revenue, said the PILT is based on the mil rate allowed to municipalities, over which the Legislature has control, and said the administration believes Wilken’s proposal would be superfluous because the Legislature already had the ability to change the mil rate. Industry disappointed, looking forward Industry was disappointed at the 22.5 percent tax rate passed by the Legislature, but is focused forward on regulations and the gas line.
The Alaska Oil and Gas Association supported a “balanced tax” at 20 percent tax and 20 percent credit, AOGA Executive Director Judy Brady told Petroleum News, “but with the passage of the tax legislation, the time for that policy debate is over.”
“Each company is working through the language to understand how this legislation will impact their tax rate and investment decisions,” she said, while AOGA is “now focusing on the regulation process.” With the first true-up under the legislation (balance between monthly payments and annual tax bill) due March 2007, “regulations have to be in place this year.”
“We are aligned with the administration’s goal to adopt regulations that are clear to administer and to comply with. The worst nightmare would be stumble-worded regulations that are a brier patch for disputes and lawsuits,” she said. AOGA wants to see a “tax process so clear that the transition from the present tax system to the new tax system is seamless.”
“We are very disappointed with the oil tax terms adopted by the Legislature,” said BP Exploration (Alaska) spokesman Daren Beaudo. He said that at current prices the bill represents a $2 billion increase in state taxes.
“We continue to believe the long-term benefits of a gas pipeline far outweigh an unsustainable increase in oil taxes,” Beaudo said, adding that BP “will continue to work with the Legislature towards a balanced fiscal contract that will allow a gas project to advance.”
ConocoPhillips Alaska spokeswoman Dawn Patience said ConocoPhillips is “disappointed at the size of the production tax increase passed last week by Alaska legislators.” The State of Alaska has said this will be a tax increase of $1.6 billion per year more than the previous production tax regime.
“This will place Alaska at the highest tax rate in the U.S. and Canada,” Patience said. ConocoPhillips “has been an advocate for a change in the Economic Limit Factor, ELF, system but we are concerned that the new tax represents such a deviation from government tax takes in the Lower 48 and Canada,” she said.
Susan Reeves, Houston-based spokeswoman for Exxon Mobil Corp., said “ExxonMobil is disappointed the Legislature passed a bill that results in oil taxes higher than the Governor’s 20/20 proposal.”
“We are hopeful that oil taxes and the other issues raised during the public comment period can be addressed to the satisfaction of all parties such that the Legislature will provide authority for the Governor to execute the fiscal contract so that we can move forward with the gas pipeline project,” she said.
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