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Vol. 11, No. 44 Week of October 29, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Boyd on gas tax

Former state oil and gas director says reserves tax built on false premise

Kristen Nelson

Petroleum News

Ken Boyd, former director of the Alaska Division of Oil and Gas, told Petroleum News Oct. 17 that the gas reserves tax is “a bad idea … built on a false premise.”

You hear a lot about a gas line being a dream for 30 years, he said, “which is just nonsense.”

When the gas cap was discovered at Prudhoe Bay, it “surprised the original lessees.” BP ended up with the flank acreage and a lot of the oil while ARCO and Exxon ended up with a lot of the gas, and of course they would have liked to have sold that gas early on, Boyd said. But the trans-Alaska oil pipeline was difficult enough, requiring a tie-breaking vote by Vice President Spiro Agnew to get North Slope oil to market.

And 30 years ago, gas “was not the commodity of choice that it is today. … Gas has become a fuel of choice.”

But in the 1970s, 1980s and through much of the 1990s, gas was $2 or less per thousand cubic feet. Building the pipeline wasn’t going to work at that price, he said.

“Gas prices have not been high enough to even consider doing this until … relatively recently,” he said.

Dream a few years old

Boyd said he thinks the real “dream of a gas line” is just a few years old. He dates it from the state’s first Brooks Range Foothills areawide lease sale in 2001 when EnCana, then Alberta Energy, and Anadarko leased in the Foothills, known to be a gas-prone province. “This was for gas, this was not an oil play,” Boyd said.

The state took in $9.8 million in bonus bids and a number of players took multi-million-dollar positions, including Petro-Canada (56 tracts, $2.47 million); Anadarko and Alberta Energy, now EnCana (36 tracts, $2.19 million), Burlington Resources (32 tracts, $1.99 million) and Unocal (18 tracts at $3 million).

“And I could see — anybody could see — that the future here is gas. And it is.

“But the past wasn’t gas.”

The premise of the gas reserves tax, that “we’ve waited for so long and the companies are dragging their feet,” is “just plain false,” Boyd said, “a false foundation on which to build a really bad piece of public policy.”

Then there is the claim that the tax is an incentive.

“It’s not an incentive. It’s obviously a barrier,” Boyd said.

“It will immediately generate lawsuits. And it should because it’s unfair in the way it’s applied and I think ultimately the outcome is just more delay.”

AOGCC studying gas sale

The Alaska Oil and Gas Conservation Commission is studying the Prudhoe Bay reservoir to see what the result would be of an early gas sale on the amount of oil that can be recovered. “If you blow down — or if you sell the gas out of Prudhoe — how much oil is left behind?” The commission can’t look at economics, Boyd said, but only at how much oil would physically be left behind or “wasted” by a gas sale. Gas is recycled at Prudhoe to maintain reservoir pressure and allow the production of more oil, an estimated 3 billion barrels to date.

“What I don’t know is, what is the threshold for that decision, in other words, how much oil will the AOGCC say you can leave behind?” If they’re not considering economics, will they say you can you leave any oil behind?

AOGCC will talk in terms of volumes, Boyd said, but “I think it may be up to some other agency,” perhaps the Division of Oil and Gas, to make an economic determination.

And the solution may be to start with gas from some other reservoir.

“Maybe you shouldn’t do Prudhoe gas first” but perhaps the 8 trillion cubic feet at Point Thomson or maybe undiscovered and undeveloped gas in the Foothills, he said. That would give Prudhoe the time to recycle its gas to produce oil.

The proposed tax presents a timing issue, Boyd said. You could have the AOGCC saying “you can’t sell gas from Prudhoe because we say so, and the state passes a law that says if you don’t produce gas right now we’re going to tax you on it. … It seems to me you create a train wreck and how does the industry — or how does any reasonable company — react to a state that is that schizophrenic?”

And where does a reserves tax lead? “When do you start taxing Foothills gas in the ground? If you have no pipeline, do you tax it anyway, just because you can?” And if companies aren’t producing acreage, would the state take that acreage away?

“Where does it lead? It’s not a good thing. It’s a terrible precedent. It’s just not a good thing to do.”

But, he said, having a reserves tax as a tool, “as something the state is allowed to do, for future use, might not be inappropriate.” If at some point in the future companies “really were holding back on doing something that was absolutely clearly economic,” a reserves tax might be a good tool for the state to have.

“So having a tool available in the future doesn’t bother me. But just applying this now sort of blindly is, to me, is absolutely inappropriate.”

Gas does need to move

Boyd said he doesn’t think the companies are stalling.

“On the other hand, I think the state has to be pretty careful in getting the gas moving because I really do believe … that LNG is going to become a real player in this country.”

There are places like Qatar with hundreds of times more gas at tidewater than Alaska has, “and of course they’re going to want to sell their gas and … they’re going to do it as LNG.” If the market for liquefied natural gas grows, that gas could tie up the market, creating a problem for Alaska gas.

“I think Alaska gas needs to get established into the Chicago, into the Midwest market, get the long-term contracts going. And I think that has to happen relatively soon,” Boyd said.

“And this tax won’t support that in any way, shape or form.”

It’s not your gas

Boyd said another thing he hears is that the gas is ours: “It’s my gas; I’ve heard that a thousand, thousand, thousand times.”

“And really: it’s not your gas.

“It was your land. And the gas and oil were underneath it. You chose, through your elected representatives, over time to lease that land so the companies could develop it for the oil and gas.

“And they’ve done so.”

The state does own roughly 12.5 percent of the gas, its royalty share from state leases, “so we can do what we want” with 12.5 percent, Boyd said. “But we said to the companies that they will do this work for us and the idea that … some people don’t think they’re doing a good job and we’re going to tax them and that will somehow benefit us is crazy,” he said.

Boyd said he thinks the state will have “to work hard to make a good deal for this project.” He said he thinks the state “has to take a hard look at the ownership of the pipeline” and whether the state really wants “to take all of its gas, both tax and royalty, in kind.”

The populist appeal

Boyd said he thinks “bringing some of these initiatives to the public … abrogates the responsibility of the representative government” that the people have “in a sense hired” by voting for them to represent us. Those elected representatives have the opportunity “to be briefed, be in these committee hearings and listen to all these things.” To then turn around, at the end of that, and say “well, I’m going back and ask the public” is “well and good, but that shouldn’t be binding on anything. Because quite frankly the people just don’t have the time to research all these issues.”

That, he said, is the job of the Legislature.

“To throw it in the laps of the people as though now the people have spoken has a populist ring to it, but in reality it’s failed public policy: it’s an abrogation of responsibility.”

Boyd said the state has important questions to address before a gas pipeline project can be approved, questions such as: should the state be a pipeline owner; should it take its royalty and tax gas in kind, rather than in value; and should contract provisions last for 30 years?

“And I don’t think a reserves tax is going to help answer the important questions to actually build a gas pipeline; it’s just going to stop the gas pipeline.”



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S U B S C R I B E




ISER: outcome of reserves tax ‘ambiguous and risky’

A study of the reserves tax ballot initiative by Professor of Economics Scott Goldsmith of the University of Alaska Anchorage Institute of Social and Economic Research concluded that the effects of the tax on stimulating natural gas production “are ambiguous and risky.”

The reserves tax burden “would fall on both oil and gas production — present and future,” Goldsmith said in the study, published Oct. 23 and funded by the Harold E. Pomeroy Public Policy Research Endowment.

The reserves tax provides a “modest” incentive, “particularly considering the limited capacity of individual leaseholders to influence a project timeline. At the same time, the financial burden that it adds to the production of North Slope oil and gas could be several billion dollars. There is great potential risk that it would not work as proposed by supporters.”

Goldsmith said the objective of the initiative, to move North Slope gas to market as quickly as possible, would be better served by “(a) policy that helps reduce project cost and uncertainty without adversely impacting other elements of North Slope petroleum economics,” especially since “both the economy and state revenues will continue to be highly dependent on an economically healthy petroleum industry for many years to come.”

The analysis suggested “the initiative is likely to be a cost burden without speeding up development” and could “also have other unintended consequences, not quantifiable in dollars.”

There are also issues that haven’t been adequately addressed, including: how the terms of the initiative will be interpreted; how will individual leaseholders respond; how are court fights likely to turn out and how long are they likely to take; how would the initiative affect Alaska’s business environment; and how would the state budget be affected y unpredictable revenues from the initiative?

The study is available online at http://www.iser.uaa.alaska.edu/.

—Kristen Nelson