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State gas tax discussion continues in Senate Stedman wants gas tax under ACES re-evaluated; administration doesn’t see need to change, barring receipt new info from producers, pipeline; McGuire suggests study of issue in interim Kristen Nelson Petroleum News
Barring new information the Palin administration believes that Alaska’s existing production tax system works for natural gas as well as for oil.
Legislators, however, aren’t so sure.
Commissioner of Revenue Pat Galvin told Senate Resources March 11 that the administration has found the state’s fiscal system under ACES as related to gas to be “entirely sound” and said it is “a structure that would support the development of our natural gas resources. It is crafted to protect the state’s revenue both before and after gas commercialization.”
Senate Resources Committee co-Chair Lesil McGuire, R-Anchorage, said she and co-Chair Bill Wielechowski, D-Anchorage, have talked with other members of the committee about discussing fiscal terms for natural gas in this session.
The Legislature revised the state’s production tax system with passage of ACES, Alaska’s Clear and Equitable Share, in late 2007.
Sen. Bert Stedman, R-Sitka, who was involved in both recent rewrites of the production tax, said he guessed they were agreeing to disagree. The Legislature has not signed off on ACES as a gas tax system, he said. Gas was removed from the first production tax rewrite done in the Murkowski administration, which “concentrated on dealing with the oil tax,” and ACES had the same focus on oil, he said.
Stedman said a gas fiscal system needs to be addressed before open seasons for the gas pipeline, the first of which is scheduled for the summer of 2010.
Galvin said ACES provides incentives for developing the state’s natural gas and “because the system provides that flexibility between a system where there is no gas production and one where there is gas production, we believe it provides the stable system that provides the durability that the companies are looking for in a fiscal system so that they have the confidence to move forward with gas commercialization under our current system.”
Dueling models The Alaska Legislature has committed not to change the gas tax regime after an open season — when natural gas is committed to a gas pipeline — but North Slope producers, who hold leases for known natural gas reserves on the North Slope, have consistently argued that ACES does not meet their need for stability in gas fiscal terms over the life of a gas pipeline project, and have said they need to negotiate a gas fiscal system with the state.
Another objection to applying ACES to major North Slope gas sales was raised in December.
Dan Dickinson, a former Tax Division director working as a consultant for the Legislative Budget and Audit Committee, told legislators because gas has a lower value than oil, and ACES rolls the two into a single tax, the low value of gas would pull down the value of oil, reducing state revenues.
Using numbers from September, when Alaska North Slope crude oil was selling for around $80 a barrel and the Henry Hub spot price for natural gas was just above $6 per thousand cubic feet — and current volumes of oil and estimates of gas sales — Dickinson said the state would earn less revenue from sales of both oil and gas than it would from oil alone.
But Rich Ruggiero of Gaffney, Cline & Associates, a consulting firm which helped the state design ACES, told Senate Resources in early February that the numbers Dickinson chose to do the calculations were not typical of the price difference between oil and gas. He also said the current crude oil production volume Dickinson used in his calculation is about twice what the producers estimate it will be when natural gas begins to flow from the North Slope.
Ruggiero said the numbers in Dickinson’s example would produce a temporary drop in revenues, but the relationship between oil and gas prices in that example have occurred only some 4 percent of the time in recent years.
It’s an anomaly, Ruggiero said, and just one of tens of thousands of scenarios which could be run.
Ruggiero was back in Senate Resources March 11 to review how ACES works and the kind of results the administration expects when gas sales begin.
Always an oil and gas system Galvin said ACES was built as an oil and gas system, a single system for both oil and gas. There was discussion, Galvin said, about separate systems for taxing oil and gas, and about the “the complications that that would create in regard to allocation of costs and other things that were seen as detrimental to a stable system if we were going to separate” oil and gas in the taxation system. With oil and gas taxed separately, costs would have to be allocated to either oil or gas and there is concern that this would provide opportunity to game the system and would complicate the state’s auditing of tax returns.
Galvin said that how ACES would work when both oil and gas were being taxed “is not something that we ignored” during ACES consideration, but he acknowledged that how ACES would work when both oil and gas were being taxed “wasn’t part of the public discussion” when ACES was passed.
Galvin said the administration recognized “it would be part of the discussion ... closer to gas commercialization.”
When the administration analyzed ACES as part of the Alaska Gasline Inducement Act analysis, it found ACES “is a very robust system” and would work when the state was taxing a mixture of oil and gas.
When discussion? Open seasons are planned by both proposed pipelines — TransCanada Alaska and Denali, the BP-ConocoPhillips joint venture — in 2010. Since the state has committed to honor the tax in place at the time of the first binding open season for the first 10 years of gas sales, Galvin said that if legislators are going to consider changes to the fiscal system for gas, those would need to be put in place during next year’s legislative session, before the open seasons.
If the administration were to propose changes, he said, it would need to present them to the Legislature at or before the beginning of the session.
He reiterated that the administration’s view is that — barring unexpected new information from the shippers or the pipeline — no changes are needed in ACES to accommodate natural gas taxation.
Asked when new cost information would be available, Galvin said TransCanada Alaska will include its new cost information in its open season applications to the Federal Energy Regulatory Commission, expected to be submitted early next year.
That information would provide the administration with the most up-to-date information on tariff cost estimates, Galvin said, adding that the administration hasn’t received any information to date that cost estimates used during the AGIA special session last year need to be revisited. He said information they are hearing anecdotally indicates last year’s costs “may be too high because of the environment that we were in at that point vs. the environment that we’re in right now.”
Wielechowski said he was concerned about project economics, with the credit crunch and Lower 48 supplies of shale gas.
Galvin said shale gas and liquefied natural gas issues, as well as the current credit crunch, “are all short-term issues over the next four to five years.” He said the administration’s energy consultants told him early in March that current changes in the gas market are short-term effects and that the long-term expectations for both gas prices and gas supply, as well as credit issues, remain those from the AGIA process last summer.
Committee may propose changes Members of the committee were clearly looking at changing the gas fiscal regime.
Stedman said it took the Legislature years to deal with changes in the oil production tax. Changes were proposed and finally passed under the Murkowski administration in a special session after months of discussion and debate; further changes were made with ACES in another special session during the Palin administration.
“We can’t do it in 90 days,” he said.
Denali’s open season is scheduled for July 2010, and Stedman said he was sure it would take time for the Legislature to work out its own differences of opinion, as well as differences of opinion with the administration over a gas fiscal system, and said if agreement can’t be reached in next year’s 90-day session, the Legislature could add risk to the open season.
McGuire said the number one priority for Senate Resources — set at the beginning of the session — was to look at the gas tax structure so that legislators don’t run up against dealing with it in next year’s 90-day session just prior to an open season.
The committee has talked about introducing legislation on a gas fiscal system, “and we’re not ruling that out,” she said.
The committee would like to continue discussing the gas fiscal regime with the administration, McGuire told Galvin, and said “the interim might be an opportunity to really tackle some of the big issues surrounding this kind of a major change in the fiscal system.”
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