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February 2004

Vol. 9, No. 9 Week of February 29, 2004

Alaska gas reserves tax on the table

Legislator says tax is good way to force North Slope gas line construction

Larry Persily

Petroleum News Government Affairs Editor

None of Anchorage Rep. Eric Croft’s 39 colleagues have stepped forward to co-sponsor his bill to impose a state property tax on North Slope natural gas reserves.

Croft for the third time in five years has introduced legislation to put a gas reserves tax on the books. And although this latest effort is just as likely to fail as the first two, the legislator believes the tax is needed to push leaseholders into moving the gas to market.

The leaseholders, principally ConocoPhillips, ExxonMobil and BP Exploration (Alaska), could avoid the annual property tax, at 2 cents per thousand cubic feet, if they either build a pipeline to carry the gas to market or sell the gas to another project developer.

“This is a tax that is never meant to be collected,” Croft said in announcing his bill Feb. 16. “This measure is intended to produce a pipeline.”

Croft is one of the loudest critics in the Legislature of the producers’ caution in committing to a $20 billion gas pipeline from the North Slope to mid-America markets. He also is a strong supporter of the separate effort to build a state-owned line to Valdez and a liquefied natural gas terminal to compete in the LNG export market.

Legislative approval not likely

Regardless that few Alaskans would argue with the goal of getting a gas line built — and royalty and tax revenues into the state treasury — the tax-it-into-existence tactic is not likely to win legislative approval.

The bill’s first committee of referral is House Oil and Gas, where the chairman has never supported a reserves tax. Other legislative leaders and the North Slope producers are on record opposing such a tax to force development of a gas pipeline, arguing that the threat doesn’t help in any way to lower the multibillion-dollar risk of the largest private construction project in the nation’s history.

Under the four-term Democrat’s proposal, House Bill 482 would impose the tax on all proven North Slope gas reserves except those needed for reinjection into a reservoir for enhanced oil recovery operations. The Department of Revenue would estimate the amount of proven reserves subject to the tax each year, with leaseholders given the opportunity to appeal the assessment.

If all of the 35 trillion cubic feet of gas reserves on the slope were considered taxable, Croft’s legislation would hold over the heads of leaseholders an annual property tax bill of $700 million.

Surrendering leases would stop the tax

The first tax payments would be due in 2008 unless the companies agree by Dec. 31, 2007, to sell gas on a 20-year contract at not less than $1 per mcf at the wellhead. Gas deliveries would have to begin by Dec. 31, 2011. The escape clause would apply if the producers built the line and sold the gas on their own, or if another company built the line and the producers sold gas for the project.

Another option under Croft’s bill to avoid the tax would be for the producers to surrender their leases back to the state by Dec. 31, 2007, although the legislator acknowledged that could present problems if a company is producing oil but not gas from the lease.

“I would like to flesh out how you return a gas lease while producing oil,” he said, adding he expects to continue working on the bill and likely will offer a revised version later in the session.

One other section of the bill states that any Alaska voter could go to court after Jan. 1, 2008, to require that the Department of Revenue commissioner enforce the gas reserves tax.





Want to know more?

If you’d like to read more about a gas reserves tax, go to Petroleum News’ Web site archives. These are a few of the articles published over the last two years in which a gas reserves tax was either featured or mentioned.

Web site: www.PetroleumNews.com

2004

• Jan. 25 Alaska legislators want action on gas pipeline

2003

• Nov. 2 Gas reserves tax unlikely from legislators

• Oct. 5 Alaska LNG backers propose reserves tax

2002

• March 17 Today’s gas price no reason to postpone pipeline

• March 17 Condon: No to gas reserves tax

• Feb. 24 Gasline commercial now; time to get tough with producers


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