HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PAY HERE

Providing coverage of Alaska and northern Canada's oil and gas industry
July 2006

Vol. 11, No. 30 Week of July 23, 2006

Gas reserves tax not ring-fenced

Administration: Not only would ballot initiative be a deal-killer for gas contract, its application is statewide

Kristen Nelson

Petroleum News

North Slope gas owners aren’t the only ones who could wake up Nov. 8 with a huge new tax liability.

While sponsors of the gas reserves tax which will be on the ballot Nov. 7 have targeted Prudhoe Bay and Point Thomson gas, the Murkowski administration says the tax would not be limited to the North Slope or to gas already discovered: a big new gas discovery in Cook Inlet would also be taxed.

In a worst case scenario, Department of Revenue economist Roger Marks told the press July 19, the administration believes any large gas find prior to the first gas flowing through a pipeline from the North Slope could be subject to the tax, putting a damper on exploration until a gas pipeline starts up.

Jim Clark, Gov. Frank Murkowski’s chief of staff, said the administration believes the reserves tax will kill the gas project. That, he said, is why there is “a protection for the project in the contract” and why the special session is being held now so that the contract can be moved forward “to get that protection in place.”

Under the fiscal contract the state would reimburse the producers for a gas reserves’ tax.

Warehousing an issue

Marks said the producers have been accused over the years of “warehousing” Alaska North Slope gas because, “even though this gas was economic, they had better opportunities elsewhere.”

An attempt to send North Slope gas to Asia as liquefied natural gas failed because Alaska gas couldn’t compete with closer supplies at tidewater. The other problem was the demand growth in Asia: between 1977 and the present it averaged only 0.4 billion cubic feet a day, too little to fill a pipeline which needed to carry 4 bcf a day to be economic.

In North America, until recently, the price was the problem: until 2000 it was between $1 and $2 per million Btu.

“And if the cost to get it to North America is $2.50, we actually would have lost money had we built a pipeline to North America prior to 2000.”

Since the 1977 startup of the trans-Alaska oil pipeline, “the gas has been hard at work in Alaska,” he said.

The Alaska Oil and Gas Conservation Commission estimates that between 3 billion and 5 billion barrels of oil produced from Prudhoe Bay “are directly attributable to using gas to facilitate the oil development,” he said.

How reserves tax works

Starting Jan. 1, the reserves tax would collect 3 cents per thousand cubic feet for gas on state leases in units with more than 1 trillion cubic feet of gas — Point Thomson and Prudhoe Bay — until gas starts going into a pipeline. With 35 tcf of reserves that would be about $1 billion per year, Marks said.

The initiative sponsors have said no gas from new leases or new units would be subject to the gas, “but we’ve studied the language quite thoroughly … and we believe that the language of the act quite explicitly says that new leases would be subject to the tax.”

The bill specifies that gas is not taxable if it was not in a state-approved unit on Jan. 1, 2002, and Jan. 1 of the tax year. “So if you had a unit that was not in existence on Jan. 1, 2002, but was in existence on Jan. 1 of the tax year, be that in 2008 or 2019, whatever, you are not exempt,” he said. Several lawyers have looked at the language, and “it’s crystal clear to us that gas — after a lease is 10 years old — and you qualify by the trillion cubic feet qualification, then indeed you are subject to the tax.”

The implications — no one knows when first gas will flow — are that “any gas discovered prior to when the pipeline starts up could be subject to the tax. Accordingly, we believe that no one will explore for gas until the pipeline starts up.”

And because when you drill you don’t know whether you will find oil or gas — someone looking for oil could find gas — “and be subject to the tax. So we believe in addition all exploration for oil as well as gas could very well cease with this measure.”

The ballot initiative also does not ring fence the North Slope: “This applies to all gas in the state,” he said. If someone found a tcf in Cook Inlet, “ironically Cook Inlet gas would have to pay a reserves tax until a North Slope gas pipeline starts up.”

Devastating impact on investment climate

“The most important thing to recognize about this reserves’ tax, the way it’s set up, is it’s unavoidable, regardless of your behavior,” Marks said. Even if the producers guarantee a pipeline and a start date, you have to pay the tax. You pay more if you don’t do the project, “but you pay if you do do the project.”

The $1 billion in annual reserves’ tax is about what the companies are now investing on the North Slope, Marks said.

“These fields on the North Slope are not on autopilot. They’ve been investing a billion dollars a year and production’s declining 6 percent. We estimate they really need to spend about twice as much to keep production constant. But if they have to spend a billion dollars in reserves’ tax, there’s no money for capital spending. Then production on the North Slope goes into a freefall which hastens the oilfield shutdown and you end up with no gas line.”

Marks called it “unavoidable and irrevocable reduction in the value of the field.”






Petroleum News - Phone: 1-907 522-9469
[email protected] --- https://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)Š1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law.