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Bill separates oil, gas in Alaska tax Senate Finance Committee begins work on SB 305, result of work on what happens with progressivity when gas is added to tax base Kristen Nelson Petroleum News
The Alaska Senate’s Finance Committee started hearings March 9 on Senate Bill 305, a bill which would separate oil from gas for purposes of calculating the state’s oil and gas production tax.
The bill was one of a pair introduced in the Senate, and Sen. Bert Stedman, R-Sitka, the committee’s co-chair, said March 9 that two versions were finalized and Finance Committee members decided unanimously that they wanted to work on SB 305, which removes progressivity on gas, rather than on the longer bill. The discussion was part of an exchange on the bill at the Senate bipartisan working group weekly press availability.
Stedman has been leading the charge in the Alaska Legislature to make a change in how natural gas is taxed before the beginning of the first open season for Alaska North Slope gas, scheduled to begin April 30.
The state’s hydrocarbon production tax, Alaska’s Clear and Equitable Share or ACES, calculates tax on the combined value of oil and gas. Gas is converted to barrels of oil equivalent on a Btu basis for the calculation, and because the value of gas is so much lower than the value of oil, the volume of gas expected for a North Slope to market pipeline dilutes the value from which progressivity is calculated.
Progressivity is a feature of the state’s production tax which gives the state a larger share of profits from production as the price of oil — and the profits — rise.
As the price of oil and the price of natural gas diverge, the value of the combined resources drops below the point at which progressivity is triggered.
SB 305 would remove natural gas from the progressivity calculation, so the progressivity trigger would not be diluted by the addition of gas.
The process, the title Senate President Gary Stevens, R-Kodiak, said normally such a bill would go first to the Resources Committee and then to Finance. Because of the relatively short time remaining in the session, which ends April 18, Stevens said he asked the co-chairs of Senate Resources if instead of the Resources committee hearing the bill, they would participate in the Finance work on the bill.
House Minority Leader Beth Kerttula, D-Juneau, said earlier March 9 at the House minority press availability that she was concerned that the bill’s title was so broad that once it reached the House provisions could be added to the bill which would lower the current tax on crude oil, a subject currently under discussion in House Resources.
Asked about this concern, Stedman said the title of the bill would be focused down before it leaves Senate Finance.
The urgency behind this bill is that the Alaska Gasline Inducement Act or AGIA provides an incentive to those committing to ship gas in the first open season for an AGIA-licensed line. The gas tax in place at the beginning of such an open season, scheduled for April 30, will be the tax in place for the first 10 years of gas shipment for those quantities of gas committed in the upcoming open season.
The concern expressed by Stedman is that if the current tax system is locked in, the state could actually face reduced income from its oil tax because of the diluting effect of gas on progressivity.
The value calculations Senate Finance began consideration of the bill March 9.
Roger Marks, working with Chuck Logsdon of Logsdon and Associates under a contract with the Legislative Budget & Audit Committee, told the committee that a cubic foot of North Slope gas will have about 1,100 Btu.
Looking at 4.5 billion cubic feet per day of natural gas — the amount frequently discussed for a North Slope gas pipeline to markets in the Lower 48 — that’s the equivalent of 900,000 barrels of oil, he said.
When a gas line is in place and shipping North Slope gas, 10 or more years from now, the production forecast for ANS crude oil is 500,000 barrels per day. Adding in natural gas, that’s 1.4 million BOE.
When you combine the two, as ACES does, the lower-value gas is weighting down the higher-priced oil.
If the West Coast price for ANS crude oil was $80 a barrel and the market price for North Slope gas was $6 per million Btu, oil would be worth nearly 10 times as much as gas, Marks said.
In addition to the price difference, the relative cost of transportation for oil is a lot less than it is for natural gas. At $80 a barrel, Marks estimated, the wellhead value of oil is $73.75 after you subtract the trans-Alaska oil pipeline tariff ($4.18) and the marine shipping cost ($2.07) per barrel.
Natural gas, however, could end up with a gross value of only $1.37 per million Btu (estimating the Alaska tariff at $3.54, the Alberta hub at 24 cents and the tariff from Alberta to the Lower 48 at 85 cents). Multiply the gross value of the gas times 5.5 to get the equivalent on a BOE basis, and the gas comes in at $7.54 compared to $73.75 for oil, Marks said.
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